Vale S.A. (VALE) on Q3 2021 Results - Earnings Call Transcript
Operator: Good morning, ladies and gentlemen. Welcome to Vale's Conference Call to discuss the Third Quarter of 2021 results. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at the time. If you should require assistance during the call, And as a reminder, this conference is being recorded and the recording will be available on the Company's website at vale.com at investors link. This conference call is accompanied by a slide presentation, also available at Investors link at the Company's website, and is transmitted via Internet as well. In broadcasting in the Internet, both the audio and the has a 6 second delay in relation to the audio transmitted via phone. Before proceeding, let me mention the forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Actual performance could differ materially from that anticipated in any forward-looking comments as a result of macroeconomic conditions, market risks, and other factors. With us today are Mr. Eduardo De Salles Bartolomeo, Chief Executive Officer, Mr. Luciano Siani Pires Executive Vice President Finance and Investor Relations. Mr. Marcello Spinelli Executive Vice President, IRR, Mr. Mark Travers, Executive Vice President, Base Metal, and Mr. Alexandre D'Ambrosio, Executive Vice President, Legal and Tax. First, Mr. Eduardo Bartolomeo will proceed to the presentation Vale 's Third Quarter 2021 performance. And after that, he'll be available for questions and answers. It's now my pleasure to turn the call over to Mr. Eduardo Bartolomeo. Sir, you may now begin. Eduardo De Salles Bartolomeo: Thank you. Good morning, everyone. I hope you're all fine. Regarding COVID, vaccination of our employees is progressing very well in line with actions of the public healthcare system. We have already 90% of our own workforce with at least 1 vaccine shot in Brazil. We are gradually resuming activity in our office. Today, for example, we are almost altogether at the Company's headquarter for this conversation for the first time since the beginning of the pandemic. With our guard up, we're getting back to a normal routine, keeping our focus on safety and people. We continue to work with the authorities to implement the R$37.7 billion agreement for the integral reparation implementing signed in February this year. By the end of the Third Quarter, we had disbursed almost R$4 billion for our payable obligations and actions for environmental recovery. This expenditure should reach R$13 billion by the end of 2021. The individual damage compensation also continues, with have over 11,400 people covered by civil or labor indemnification agreements and We remain committed fair and quick way. We are also advancing on our ESG agenda. In our new backwards society, we renounced our mining rights in Agenus lands in Brazil. On the social front, we donated more than 600,000 food baskets to the families in a situation of food insecurity in Brazil an action in partnership with civil society entities and volunteers. By the end of the year, we must reach 1 million food baskets for over 200, 000 families. One of our purpose on the social front is to contribute to the strengthening of autonomous and resilient communities through education, health, and income generation programs. To do this, we are defining our new social ambition and redesigning our goals, as we did on our journey towards a low carbon mine. Our social agenda is increasing in its strength, and we expect to announce further details on the Vale date 2021. On the climate agenda, we are pleased to announce some important advances this quarter. In emissions reduction, we achieved some milestones. In July the , received the first our care with ROTCE sale system. And in August, our data terminal, received the first facile with air lubrication technology, which creates a carpet of air bubbles between the ship and the water. Both technologies increase energy efficiency by up to 8%. Still in August, we announced our partnership with the largest steel-maker in Latin America to develop de - carbonization solutions. Finally, in September, we announced the briquette, an innovative iron ore agglomerant, which can curb CO2 emissions of our steel making clients by more than 10%. The briquette is the result of years of research and developed by Vale. We already have 3 plants under construction, an investment of $185 million. We are assessing the feasibility of building another 5 plants for a potential production capacity of 50 million tons per year. With that, we are well-positioned to lead the way in reducing Scope 3 emissions. We have innovative technologies and a portfolio of high-quality products essential for the low carbon economy transition. Now focusing on our performance this quarter, we produced close to 90 million tons of iron ore, 18% higher than the previous quarter. In this nine months, we increased our production by 8% compared to 2020. On the resumption, we had an important progress in Vargem Grande complex with the operational stock top of the and the commissioning of the long-distance conveyor belt. With this release, we unlocked another 6 million tons of annual capacity. We continue to move forward with a safe operational resumption in a year is still marked by COVID-19 restrictions. Similarly, we will give you more details about our performance in iron ore soon. Well, in our performance was impacted by two important events. First, the labor disruption in South Debris. In August, we reached a five year collective bargaining agreement and we started operations in September. You know who had a longer maintenance due to COVID safety measures with production resumption by the end of September as well. We will continue to work towards great operational reliability particularly in the base metals business. Our entire management team is committed to this. And we continue with our disciplined in capital allocation. Our cash-generation in addition to supporting the reparation, business safety, and the resumption of operations allow us to return value to our shareholders as our recent track record of dividend, payments makes clear. We ended the quarter with a strong cash generation of $7.8 billion, $1.2 billion higher than the second quarter. Sticking to our value over volume strategy, we will continue to create and share value with our shareholders. With consistency in dividend payout and with our buyback program almost a 100% complete, our Board of Directors has just approved a new buyback program. This time for up to 200 million shares, equivalent to 4.1% of outstanding shares. Our buyback program shows our confidence in Vale's potential to create value. To conclude, I want to reinforce that we're making progress. We fired derisking, reshaping and re-rating to build a better Vale. To recap into derisking, we're implementing the agreement for the integral reparation of with total payments of 13 billion riaIs expected by the end of 2021. We're executing our dam de -characterization program. We expect to eliminate one more structure by the end of this year, totaling seven completed structures. We continue to resume our production with the release of the long-distance conveyor belt, and this the top of three dams in garage and our next big delivery is brook 2 . The works of the total dam are advancing and the filtration plants have a fiscal progress higher than 80%, as you can in these pictures. Finally, we're committed to increase the reliability of our operations. Transforming the Base Metals business is one of our top priorities for 2022. In reshaping, we are moving towards divesting the collaboration with good prospects until the end of the year. In fact, in coal, we expect an important cash generation in the Fourth Quarter due to excellent market conditions. We also expect to complete the divestment of manganese assets. And as a result, we will move forward with the divestment of other non-core access. In the re-rating, we continue to implement our management model, the VPS. We continue to work hard on Vale's culture transformation. And we are moving forward with our agenda and commitments to transform ourselves into a more sustainable mining Company, and engaged in matters relevance to society. I would like to conclude by thanking Luciano for his excellent work in charge of Vale's Finance and Investor Relations areas since 2012. And I'm sure that he'll make a significant contribution for the future of the Company as our new Executive Vice President of Strategy and Business Transformation. I also would like to welcome Gustavo Pimenta our new Executive Vice President of Finance and Investor Relations. Gustavo brings his global experience and a renewed vision to our business. Now, I hand it over to Spinelli, who you give more details about the performance in iron ore. Thank you very much. Marcello Spinelli: Thank you Eduardo. Good morning. Good evening. I want to start my presentation giving you an update about the resumption plan. We had a chance to go in details in our last investor tour. If you need more information, you can find in our website. But, what Eduardo said is almost there, step-by-step 3 is now running. And the long distance conveyor belt just added 6 million tons of capacity. So we reached 341 million tons of capacity as we plan it. Now moving to production overview, in Q3 we produced almost 90 million tons due to the seasonality coming from the rainy season to the dry season improvement in northern system. Vargem Grande, as I mentioned, is in ramp up running really well, much more efficient, and we have the full operation in Fabrica. But I want to drag your attention to the Northern system. As we presented also in the last investor tour, we expect a smooth ramp up to reach the 240 million tons of production there. S11D is a brand new project, you know very well, trackless system, low OpEx. But you're still in a learning curve in S11D. We've been improving our border knowledge. We found more jest allied than we expected, jest allied is a very compact waste material and the system there, is less flexible than the conventional system. We need to crash this material in the mine site, so to address this small rocks we are installing the able crushers. We have one already installed now we have the other three. We are going to do this in the next quarters. And to solve bigger rocks, we need to stall a bigger crusher. There will be ready in 3 years, but still there, we're going to stockpile this rocks in the mine side. But we have good news from the northern system, several actions and assets are coming online such as the plus 10, the expansion Northern range, we have N3, N2, and N1, and East range. All of them together, will support the ramp up of 240 million tons. Probably, you may ask us about the gap between production and sales. Last year, we had the same problem. And you remember that we have -- and we will have a production seasonality comparing the Q2 and Q3. And we need to add the supply chain extension, the blending process time. Remember that we will have some volume adjustments, don't forget. As -- and an example, if you produce pellets, we reduce 10% of the mass. But all this together we could expect a gap of 8 to 9 million tons, but we had an additional 4 million tons. We decide to delay the sales of the stand alone high and blend with Carajas to form the B RBF later. That's the beauty of the supply chain flexibility we have in Vale. We can daily take decisions to maximize our margin. You also may ask about why margin for volume at this level of price. Don't forget we also have in -- this analysis the discount of the product totally related to the demand and the freight. In this case, this time of the year, we have this portrayed as a marginal product, we need to consider this port rate. And we are participants of this market, this port market, as if you put more pressure or last pressure, we can increase or decrease the impact for the whole portfolio value. So all this together we decide to delay this sales. We didn't decide yet due to the market condition to replenish this high silica standalone product, so we were not producing this yet. So that's the reason our production guidance is 315-335, we didn't change that, but we are in the lower than the middle of the range of the guidance. What we can expect for the production in 2022. So you always ask us about the guidance for next year. We are going to announce only in the Vale Day in the end of November, but what we can consider in our rationale to define this range for next year. Firstly, the resumption plan. The following increase of capacity will come more in the end of next year like will add more volume. But as Eduardo said, don't -- we need you to understand that the guidance is related to volumes, but we are increasing the quality to since the beginning of the year with the filtration in its EBITDA in Brucutu. But we're going to increase more volumes in the end of the year. We're going to run most part of the year with 343 billion tons of capacity second point, ease our mantra. So, if you have capacity and we don't have demand, you're not going to use the total capacity. One example is due to this market conditions today, we can reduce the production of the high silica stand alone that is still available. Every time we increase the quality -- the process to increase the quality, we're going to leave this product, but we have 12-15 million tons that we can reduce in our capacity introduced last year. That's an example. And third, we also consider buffers for some production setback. If you have any variation, any normal lean, our production we considered in our planning. So all of this together will be part of the definition of the production guidance for 2022. I'll stay here for further questions. That's now to Luciano Siani. Luciano Siani Pires: Okay. I'll start my commentary on the results by the elephant in the room, which is the wild variation EBITDA estimates from what we actually we posted. And this chart you see here, usually we bring this on our releases,but now we're bringing more detail. It shows the value realized prices compared to the average of the quarter. And there are 2 large red bars here that represent misses in revenue with a direct impact EBITDA. And why those large bars? Because we had an Impressident quarter in terms of price swings. Reminder, we started the quarter with $207 per ton prices. That was exactly what was provision for the sales which were open at the end of the second quarter, and we ended the third quarter with the same provisional prices for the sales open in the third quarter of 117. So it's a $90 swing in the space of 3 months. That creates those types of effects. The first effect, the minus 8.2 miss in miss in realized prices, relates exactly to the open sales. We bring the numbers here, 18 million tons, which were opened and provisioned at $207 per ton. They were actually realized at 176, so that difference of $30 was revenue and EBITDA that was recorded in the Second Quarter that shouldn't have been recorded. So the way to deal with that is you need to reduce revenues in the Third Quarter and give back those revenues and EBITDA when you account for this. The second big effect you read on the call on provisional prices in the current quarter, -$14.8 per ton, and a total effect which -- with -- of almost 1 billion U.S., absolute numbers, is exactly the 22 million tons that we have outstanding, so sales which were not yet settled. Provisions of $117 compared to the average of the quarter of $163. So this is, actually we can call it an opportunity cost. If I -- if we had sold those tons at the average price for the quarter, we would have realized 1 billion additional revenue, but that's not the case and some of you might have done the calculation with the entire volume sold by Vale at the average price for the quarter and as I just explained, part of this is provision at much lower prices. So that's the reason behind the important declining, maybe that compared to the -- when you look at the average prices for the quarter. Moving into cash flows, you saw that the cash conversion was actually more than 100%, which means we generated more cash than EBITDA which is also odd. And the reason for this is because of the cash collections of the open sales from the Second Quarter. And you might have noticed a variation of working capital above 3 billion U.S. About 2 billion of it, is explained by the change in accounts receivable. So we collected lot of sales from previous periods at very high prices, and the open sales for this period are recorded at much lower prices. And there's another 1billion actually, which is money for more clients that we still need to offset because of the decline in prices and these offsets are ongoing in the quarter and will continue in the fourth quarter. So about $1 billion of this positive release of working capital will be reversed in the fourth quarter as we -- due to settlements with our clients and give them back the excess invoices at much higher prices. To notice as well that this quarter will be heavy in terms of blue margin or cash outflows, Eduardo already mentioned that, 9 billion approximately. And also, first-quarter of 22 will also have a heavy bill to be paid in terms of cash taxes collection. So we -- if you notice the cash taxes, that there is a lag between cash taxes in the economic profit that we are generating, there's an annual settlement every First Quarter of the year, they should be paid then. Moving to Iron ore. The commentary on costs; you see costs going sideways or a slight increase from 17.8 to 18.1. You are observing in the industry, a lot of inflationary pressures. Specifically in Brazil, the price index reached 2 digits in the past 12 months in the quarter. And many of the contracts that were expiring being renewed were subject to renewal pressures from those indexes. So that's flowing through higher costs in the quarter. Another effect is that the cost of goods sold in this quarter is also tied to the production costs of the second quarter, which were -- production was of a smaller, volume, less cost dilution. It takes some time -- a couple of months for that -- those production costs to flow through and become cost of goods sold. Therefore, that explains why costs haven't yet decreased due to cost dilution. That will happen in the next quarter, so we continue to expect because again of the large 90 million ton production in the Third Quarter, we expect cost dilution to pour over into the Fourth Quarter and still bring us about $1.5 per ton reduction in cost. There is a headwind, which is the collective bargaining in Brazil. Whatever number we settle will be high because of high inflation, that goes -- that has one-off effects in terms of provisions for -- especially for profit sharing. But also we have tailwinds. The exchange rate is more depreciated in Brazil than we initially expected when we made that provision. Those effects may offset each other. Another important cost component is freight. You saw the increase from 17.7-20.6. That obviously was because of the increasing bunker prices and the dramatic increase in spot freight rates. But as you can see, our sensitivity to those variables is nowhere near the market rate. So it shows how assertive is our strategy of having those very large ore carriers contracted for the long run. For the Fourth Quarter, you should expect a small increase in other dollar per ton. Basically, because the average spot rates should be higher in the Fourth Quarter than in the third, however as Spinelli mentioned, we're taking some high silica material from the market from now on. Therefore, we will be less exposed to spot than we initially envisioned. And so that compensates this slightly. My last comment is on coal. First performance and then a comment on the impairment. In terms of performance, September we generated $43 million of EBITDA. In addition to that, we had a negative impact of 27 million because of thermal coal hedge. You can see that number in the foot notes to the financial statements. So therefore, if it wasn't for the hedge, we would have generated $70 million of EBITDA in just one single month. And also if you look in the release, coal is very much influenced by lag prices. We have on average, thermal and metallurgical coal above $35 prices lower in September than we should have had because of those lag prices. So we could have had another $30 million of EBITDA in the month if we had the proper prices which will come down in October. I'm saying all of this just to highlight that the business is running at $100 million per month run rates at today's prices. So the question might be, so why impaire the assets? The issue here is that no potential buyer will buy the coal assets based on today's prices nor -- it will buy the coal assets based on the business plan that we have not yet delivered. This asset under normalized conditions, requires 12 to 13 million tons of production in order to break-even, and we haven't achieved that. We expect most of the proceeds and economic value from a potential sale to come from a contingent economic value, based on volumes and on prices. So, probably the upfront value to be received will be smaller because we will not be able to, even if we do a sale with contingent receivables based on volume and on price to record those as assets. But the good practices in accounting recommend us to impair the assets, and it wouldn't make sense to take out $2.3 billion U.S. and try to find out exactly how much we would receive up front. We don't know that because we haven't yet received the binding offer, so we decided to be conservative and go all the way down to 0, but the consequences will be a probably we'll have a sale for economic value. And part of it will not, as I said, be recorded because there will be contingent. So we're almost at the half hour, we will be opening now for questions and answers. Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. If you have a question, . If at anytime you would like to remove yourself from the questioning queue Our first question comes from Carlos De Alba from Morgan Stanley, Mr. Carlos, your audio is available. Carlos De Alba : Good morning. Thank you very much. Luciano it has been great working with you as CFO. All the best in your new position. The question I have firstly is, if you could comment maybe on an update or how you see the delay in your payment of schedule in the coming quarters that will be quite useful as the Income Statement, as well as the Cash Flow? And second, Manager Spinelli if you could clarify or maybe expand a little bit more. Maybe I missed it, but if you could explain the dynamics between iron-ore production and shipments that you see for the Fourth Quarter and perhaps for the First and the Second Quarter in light of the ramp-up in production but also the reduction in the steel production in China that is taking place right now? Thank you very much. Luciano Siani Pires: Thanks very much for your kind comments. The cash outflows for Brumadinho I believe in one of our prior presentations, which is on our website, there is an estimate that we haven't been updating because it's still current. I don't have the numbers top of my mind, I -- but the numbers we will still be very high in 2022, similar to this year, which I believe are going to be close to $2.5 billion. So there will be a lot because, although there's a heavy concentration of payments for the obligations to pay this year, next year, we will have less obligations to pay, but there will be an acceleration of the obligations to perform. The projects will start to come from design to execution. So we will have those sorts of payments. And then we have for '23, then we start to decline. Also another heavy year, but significant release of outflows just from '24 onwards. Marcello Spinelli: Carlos, thank you for a question. Dynamics between production and sales for -- for next part of Q4. We believe we will be like the last year, the same level of production and We don't see any gap and even in the First Quarter. The supply-demand, considering what's going on in China, we need to -- we understand that we have a slowdown in China due to the disruption in energy rationing and also property. But the industry is healthy, we have good margins, we have a good price for steal, but they are tracking to go after the target of energy consumption. In the beginning of the next year, definitely there is another event that is the Olympics that can -- can make some pressure in the downstream demand and also the CSP production. But we see a rebound after that. And the point we must check, not only our volumes, production, and sales, but also the supply that we see in the market. In China we have dynamics, but in the other part of the world, the ex-China, we have a very heated market going really well today in terms of production and demand. And our check should be related to the seaborne coming from other parts of the world. Like in Brazil, we expect to sell more in Brazil less year than this year. That's the trend we see in India, that's the trend we're see in CIS, and even supply coming from Australia in a lower level than this year. That's the balance we can see in China that will be important for you. We have a number of reduction, 40 million tons of iron ore next year in the supply of the market. So that's the point, but our GAAP will be zero in terms of production and sales. Operator: Our next question comes from Jonathan Brandis from HSBC. Mr Jonathan, your audio is available. Jonathan Brandis: Hi, good morning. Good afternoon. Luciano, I'd just like to echo the comments. It's been great working with you and best of luck in your new role. Spinelli, I'm hoping you can maybe elaborate a little bit more on Chinese demands next year. Obviously it's going through a bit of a tough time now given the Olympics and the energy issues. But what are you seeing next year? What gives you the confidence to say that in Chinese steel production will pick up in 2022 rather than trend along at current levels? I guess that's my first question and then my -- my second question it's -- it's a generic one. I mean, obviously you've had a lot of disruptions in your operations. Whether it's iron or Base Metals and I'm not necessarily talking about the labor issues in Canada, but more with the disruptions in Brazil from the licensing issues that forces you to go to the courts and things like that. So obviously, you react to each situation, but it certainly takes a lot of management time and effort. And I know that there's ambition to be a more stable and sustainable mining Company. So I'm hoping you can maybe touch upon what you can do to proactively minimize these disruptions and prevent them from happening going forward. Thank you. Marcello Spinelli: Thank you, Jonathan. Spinelli here. Well, let me clarify what was just mentioned to Carlos. We see definitely a slow down in China, a smooth low down I think more now this year, that they already achieved the goals for the five-year plan. COVID is okay, GDP is okay, Energy conception is not okay yet now, better than the last quarter. So they need to reduce that. That's the point that I was mentioning. What I see for next year -- for these year, we see the goal to -- of CSP, probably less, or equal, or less than last year 1 billion, 65 or less. That way we can consider a gap here -- a ranch here of 10-15 million tons less already to peak in consider it the same of last year. And for next year, will be above 1 billion by the less than this year probably. What I'm saying that we can have a seasonality with more -- without rebound after all this pressure coming in the short-term that can bring more volatility to this moment but can be more in place -- there's a demand in place after the first quarter or in the end of the first quarter. What I was saying that despite China is slowing down. We have ex-China growing the CSP that we see for next year, they're coming from 900 million tons of CSP. They can go to 940, 950. And the other point is that the balance of supply demand. When we see the seaborn that can supply China, we see some other forces coming when you have the domestic market of many of these producers, like Brazil, or India, or other places. They are consuming the iron ore in their domestic market. So that's our view. Supply, demand that were more balanced after the first quarter. But definitely there will be a reduction in China, but growth in ex - China. Eduardo De Salles Bartolomeo: Thanks, Spinelli. Jonathan, thanks for your question. I think is very appropriate because it's in the core -- this is loud speaking, okay? Is in the core of what we're doing here since I arrived and I think your question is extremely relevant to ask. I would put the situation in two sides, one exogenous and one endogenous, if the word is right in English. Something that is up to us and not something that is currently out of our control, in quotes. When you see that the disruption in the licensing of actually is a discussion between conditions in the license that we had believed are fulfilled. And that's a minor issue and didn't impact, by the way, any moment and also from a production. So I don't think it's a relevant issue here. I'm much more concerned about the endogenous issues that are related to our operational stability, as you pointed out. When we go, for instance, for the fire in Salobo mine and the problems that we have with mine movement during the year goes to the core of what we call -- and I've mentioned that in my speech about our management model that were implemented or was implemented with extremely success in the railways of Vale. We have 1 of the best railways in the world, and it's there where we can manage to see what means stability, OpenEdge stability means. So that's what we're trying to bring. We assessed that we have levels of maturity for each of the dimension of this model. It's not from Vale, so it's who other business have similar, and the obvious one is the TPS. TPS is the father of the minimum model Sisma. who is acquainted with that, we will assemble I'm trying to say. And obviously, the maturity level when you look at the technical dimension, or the leadership, or the method at Vale as a whole is still very low. And when you go to this excellence aisles that we have inside Vale, you see there is high, so I'm pretty comfortable that the work that we're doing together with our culture transformation and safety is the same as production. We say here, that in Vale, there is no production before safety because there's no production really without it. So being stable, being able to control the process, have the people engaged in the right manner to do what is expected from him from that process we resolved will result in adequate results and instability, and with last year's raptures, as we do have in the railway, for instance, as I have mentioned. We are pretty comfortable even in Base Metals business, I've just been in Long Harbour. We're hitting the record in production for Long Harbour and we're going to see what they've been doing there, right people, right process, safety, and production. So, it's not rocket science, but takes people, takes engagements, So that's what I -- I believe and I -- my team is commit to a -- fully committed with that. We understand that we have a gap with -- between our competitors that is, by the way, translated in our opportunities on our C1s. Even in iron ore, with less, I think iron ore has had a good year in its stability, I believe. All our plans that we were supposed to resume we resumed or how we had planned. But anyhow, as I mentioned in my speech, initially a phase matters a big focus, but we're very confident there we're doing the right thing and we'll get there for sure. Thanks for your question. Operator: Ladies and gentlemen. . . Our next question comes from Andreas Bokkenheuser from UBS. Mr. Andreas your audio is available. Andreas Bokkenheuser : Thank you very much and thank you for taking my question. Also, echoing my appreciation to you Luciano. Thank you very much for all your time and availability over the years and especially your patience with us going through the numbers, so thank you very much for that. Seems very fitting that -- that I direct my first question to you. This is something we've been talking about over the last 6 - 8 quarters. I think it's just the longer-term cost or unit cost outlook for Vale, Management has been saying that you still intend to get back to the early '30s levels overall where it's where it used to be pre . Does that change now because you've obviously talked about maybe you're going to be producing less iron ore than you have capacity for. And if you don't produce as much iron ore, does that mean that your cost dilution effectively at some being smaller and then your unit costs end up being high? Is that how to think about it or does it still drop because you're taking high cost production offline? Is that the way to think about -- that's the first question. Thank you. Luciano Siani Pires: Andreas, very much appreciate your kind words. Same for, Jonathan. Thank you very much and has been a pleasure all these years as well. There's a number of effects playing right in our current cost position. First effect is procyclical increasing costs which you're seeing across the entire industry. We see this, for example, in higher oil costs, higher freight costs, higher royalties. In the case of Vale, higher purchase price for third-party ores, which although the volume is small because the prices are so high, it makes a difference for the C1 base. This concerns as last because it's easily reversible over the long term. The second theme is about what you just mentioned: normalized production. When it normalizes, what to expect. We continue to believe that there's about a $5 gap that we can bridge just by bringing production to normalized levels and that has a number of effect. The first one is obviously diluting costs. You have operations, for example, which -- take Brucutu example, which could be operating at 30 million tons. You have everything there to do it, all the fixed costs and you're still producing just 12, and now with the high silica products in the past quarter 15, so cost dilution is an important driver. The second thing is the elimination of distortions in the way we produce. Again, take Brucutu for example, instead of using a pipeline to deposit tailings on the dam, we are basically tracking the tailings and sometimes with more than one operation. So you've put the tailings on a particular price that then you load it again and you truck it again and you deposited by truck. So this creates all sorts of additional costs. And finally, third, even the -- if you look at the release and you have that credit for quality, even that is being Jeopardized by the way we're producing today. Spinelli mentioned, for example, that when the filtrations come in, we're going to improve substantially the quality of the production that we already have, and therefore, we will improve price realization, and that will help bridge part of those $5. So with all of this, if you do the math and try to normalize, we still believe it's appropriate to target about $35 per ton all-in costs and including sustaining capital, which again is distorted as well because we are spending a lot of money to build for example, the filtration plants I -- I just mentioned. So everything is tied into these recovery of our entire production system. Specifically, on your point about Okay, we're going to be producing less, so there will be less cost dilution. We intend to run the best mines at their full capacity. What eventually we may do is if you were just production, is remove it from the less competitive mines. So therefore, we don't expect this to be, let's say, a drag in the overall cost performance. So we're targeting $35 per ton and we want to be there as soon as we reach normality in our operations. Operator: Our next question comes from John Tumazos, from John Tumazos Independent Research, Mr. John, your audio is available. John Tumazos: Thank you. And once again, all love and congratulations to Luciano, has been a tremendous joy to talk to over the years. My question concerns end-market diversification for iron ore. I'm a little shocked at the 0.8 million ton per day 5 months fall in Chinese steel output, or 292 million tons crude steel annualized, or almost 15% of world output. I think that's a biggest non-recessionary decline in steel output in any country history of the world. There's a lot of explanations, reasons. It's not my business, but it raises the question as to the desirability of China as a customer and the benefit of moving more iron ore to Europe or the Mid East or DRI feeds or RHBI feeds, pellets, and other products that have their own markets aside from China. Excuse me for my question if it's a little difficult. Marcello Spinelli: Thank you, John. Spinelli here. You're right. There is a trend that is -- now is -- there's no return. That the quality trend to this new world of zero-carbon. So that's the trend, we have a delay. If you compare China with the other parts of the world, as you mentioned, Europe and Middle East. And the key point here is we need to have high-quality ores to compete, and we are the most important player in the world shoe to supply this trend. So how can you do that? We are returning with the filtration, the full capacity of and also Brucutu. And the end of the year, we have dam in Brucutu that we can finally have back our valid feed production. We are bringing back the capacity of pallets, coming from 30 million tonnes to 60 million tonnes. Direct reduction is a key point here. We are already developing the briquette as a part of our strategy to replace where -- in this transition, the next 10 years. We still have less furnace, so we need to improve the efficiency in the last firms -- substitute the center with the briquettes, with high-quality flexibility to develop this kind of product. that we will be really helpful for Europe and also Middle East. In China, we see the trend of quality. Despite the market can reduce, as you mentioned, there is a big market. There's 2 big market there. We're talking about 1billion of production of steel. But if you can see that the increase of quality, Vale is in a really good shape to compete. We see the trend in China. We are really close to them to also develop the briquette there, kind of just finds in the doors of Brazil is a key product today. You can see the gap today, the premiums encourage us funds, even the RBF. So For this whole transition we seen in China, even in the rest of the world, quality is a key -- is the key point here. And we're really prepared in developing, not only aim or use to understand what they read, but we are already investing in new products to compete. Operator: Our next question comes from Alex Hacking, from Citi Alex, your audio is available. Alex Hacking : Okay. Yeah. Thank you. And let me add my thanks to Luciano. You've been a great leader of Vale for some very difficult times and I think all the shareholders and analysts appreciates it. With regards to freight costs, obviously it's been pretty volatile recently. Do you think there's anything structural there where you'll be concerned that freight could be higher going forward or you think this is just a period of volatility and then will settle down to more normalized freight rates again? Marcello Spinelli: Thank you, Alex. Spinelli here. What happened in the market dynamics in freight, early this year, we saw the supply chain disruption in all the markets like container and fetching the Capesizes business. But what happened after that? It was a combination of other factors that we see a one-off effect. We don't see it as a structural problem that can see in the future. First one is related to the efficiency in China to discharge vessels, waiting lines 2 to 3 times more than the average. It was related to the Australia and China tensions and all the problems to discharge the coal and also the iron ore vessels in all the ports. And the other point is related to the energy crisis. So we had a huge mess in this market with thermal coal going to Europe, going to China, also met coal, without the production in China can -- now, they're catching up, the production there, in stabilizing the demand. So we see now a movement that can organize better this market with the impact of the call. And the last one that I can mention Alex, is the seaborne market for iron ore for next year. We see last product coming from every place, from Brazil, from Australia, from ship -- from India, going to China, because we see this markets improve in the consumption of iron ore and their domestic market. So they will relieve the freight market for the first and second quarter of next year. Luciano Siani Pires: Alex and John, let me express here my appreciation for your comments. I hope to be together in the future as well, maybe welcoming both of you in our operations here in Brazil. Operator: Our next question comes from Andreas Bokkenheuser from UBS. Mr. Andreas, your audio is available. Andreas Bokkenheuser : Thank you. I just had a follow-up on the inventory strategy. So obviously in Q3, you built some inventory. Can you just talk us through quickly what the thinking is there? I understand it's obviously high silica product and you weren't heavy with the price, but just thinking on where we are in the price cycle. I mean, iron ore still above $100 a ton. Historically a very high level. Arguably, iron ore price fundamentals are somewhat challenging, inventories arising, China's cutting steel production. I'm just -- I guess I'm just worried that is there a chance here that you basically need to de -stock this inventory at a later date at a lower price, why not just sell it now that when prices are still relatively high? Marcello Spinelli: Thank you, Andreas. Sorry about the second question that we missed it in the first round. Well, we see, again, the high silica product is not a common product that we already have in our -- in our operations. When we increase the filtration and all the products, we will reduce the exposure of high silica products. But that's a marginal product. We just sold independently these product because the market was really good. But what kind of impact we have? Not only the level of the price, but the discount, we need to count on that. And the other point was the freight. As a marginal cost, we are considering that we need the spot freight to move from Brazil to China. And the level of the spot freight was pressuring the margins there. So wait to sell as a BRBF in the negative margin with the standalone high silica was a better solution for that. But that's the reason we decide not to produce more high silica stand alone without Carajas to blend as BRBF. But again, that's a very dynamic decision. And this quarter, we are already assessing every day this. If you have a chance to go to the market, we just can't -- we have the flexibility to sell from BRBF to sales as individual product. Every day we can do this. But that was the problem last month when we had the reduction in the level of the spot freight was really high. That was the decision in the last quarter. But -- we can't change these every day and we're already assessing the possibilities to make this happen this quarter. Operator: This concludes today's question and answer session. Mr. Eduardo Bartolomeo, at this time you may proceed with your closing statements. Eduardo De Salles Bartolomeo: Okay. Thank you. First of all, I would like to reinforce the congratulations to Luciano and just remind everyone who is still with us and is making -- we'll make a huge contribution in our future. And again, thanks a lot Luciano. You know what I'm going to comment back to you. It's the same every quarter but we had something. Last quarter or last 6 months, I was asked about super-cycle. Now we're talking China As a mining Company we have to be ready for any cycle. So the question is being answered is by the risking, by the by the reshaping, and by the re-rating. The de -risking bring us to the level of the game. We need to repair Brumadinho. We need to get back to our structure to produce what is needed to attend the market embedded in our ESG practice in our daily routine. Our capital discipline is untouchable. So this is not done, but it's really I'm going. Our reshaping has a lot of merits. We got out of VNC. We're going to get -- we're going to hit Mozambique. We're going to focus on what we know to do in order to do good. And when we reiterate, the Company is going to exactly the question that was asked before is around being a stable, being a reliable, be a safe operator. That's when interruption are not coming and you're going to reward us as a C1 in the first quartile or Iron ore, or Nickel, or Copper any commodities that we will be in. So again. I will like to thank you a for your attention, for your interest in our call. And I hope to see either in Vale Day or in the next call. Thanks a lot. Keep safe. Operator: That does conclude Vale's conference call for today. Thank you very much for your participation. You may now disconnect.VALE Ratings Summary
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Vale Upgraded to Outperform at RBC Capital
RBC Capital analysts upgraded Vale S.A. (NYSE:VALE) to Outperform from Sector Perform, setting a new price target of $15.00 (previously $13.00). The firm anticipates a further decline in iron ore prices to reach cost support levels of $75-$80/t in the upcoming years.
Despite the unfavorable impact on Vale and its iron solutions business, the analysts mentioned that the current price reflects a long-term iron ore value of approximately $75/t. Given its recent underperformance, Vale is well-positioned to benefit from a potential sector rebound driven by stimulus expectations. Additionally, the analysts noted that the sale of its base metals stake could initiate a series of positive catalysts.
Vale S.A. Upgraded to Sector Perform at RBC Capital
The company's weak Q3 results reported in Nov 1 and Vale Day guidance saw Vale S.A. (NYSE:VALE) shares sell off and consensus earnings fall, but the rally in iron ore prices has since provided some support.
Analysts at RBC Capital increased their long-term iron ore price forecasts to $75/t from $65/t. This and a weaker BRL assumption helps to increase their NAV estimate by 39% to $20.49/share. The analysts believe Brazil risks, its EM link, and concentration in iron ore will continue to see shares discounted, however, the stock should be more resilient into future iron ore downturns. The analysts upgraded the company to sector perform from underperform, raising their price target to $17 from $12.50.
