淡水河谷 (VALE) 2007 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by and welcome to Vale's conference call to discuss fourth quarter 2007 earnings results. If you do not have a copy of the relevant press release, it is available at the Company's website at www.vale.com at the investors link.

(OPERATOR INSTRUCTIONS)

This conference call and the slide presentation are being transmitted via Internet as well. You can access the webcast by logging onto the Company's website, www.vale.com, investors section, or at www.prnnewswire.com.br.

Before proceeding, let me mention that 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 risk and other factors.

With us today in Rio de Janeiro are Mr. Roger Agnelli, Vale's CEO, and Mr. Fabio Barbosa, Vale's Chief Financial Officer.

First, Mr. Agnelli will make his opening remarks, and then Mr. Barbosa will proceed to the presentation. After that, we will open for questions and answers. It is now my pleasure to turn the call over to Mr. Agnelli.

Sir, you may now begin.

Thank you very much. Good morning, everybody. It's really a pleasure to be here with you today. First of all, I don't really to talk about the past, but let's talk a little bit about '07. '07 was a bumpy road year. We have a lot of problems, we have a lot of challenges to be overcome.

I think we were able to deliver a very good result. At the beginning of '07, the first quarter was a disaster in terms of performance. We had a lot of problems with rain, with such a movement stopping our roads and we have problems with cost, with supply, with a lot of things, et cetera, et cetera.

But, during the year, we improved our operations. The last quarter was really very strong. This first quarter of '08 is going to be much better than it was last year. I think we invested a lot of money in automation, improve our facilities, improve our personnel in terms of training, in terms of processes, et cetera, so '07 was a very nice and very good year in terms of results.

We achieved records in almost every single operation. In terms of results, the investments, we had some problems with our licenses, we had problems with permits, but, anyhow, we were able to deliver all the investments that we were supposed to realize. So I'm very happy with the results. I think the team worked very, very well. We finalized the acquisition of Inco in the first quarter of '07. The integration is going very well. Inco's result was very good and I think it's completely stable.

Of course, we had some problems, we faced some problems in Inco in terms of maintenance, in terms of the reliability of the operations, but we invested a lot and I think '08 is going to be much better than was '07.

In terms of market, the market is still very strong. It was very strong last year. I think toward '08 the demand is still very, very strong in China, in Japan, in Middle East, in Europe. Everything is going very well. Brazil is growing, the demand is growing here.

I think what I have in mind is concerning me right now is only the projects. We needed really to invest to pay attention about the costs, about the schedule of the investments, and you know that is not going to be -- is not easy, or it hasn't been easy to overcome all these challenges that we have to realize all the investments that we have in our pipeline.

But, anyhow, '07 was good. I think it was a record year. '07 was maybe worse than is going to be '08. I'm very optimistic that we are going to have or to realize a very nice and very sound year in '08.

I would like now to ask Fabio Barbosa to talk a little bit about the past and I'll be very happy to answer any questions you might have later on. Thank you.

Thank you, Roger. Good morning to all of you attending the conference. Thank you very much for that. Let's start with our performance in 2007. As we put there, we believe that the second vintage year for [2004] for Vale, that after a great year 2006, that we called vintage by then and now we are repeating the same label, because we do believe that it was a great year for our Company. It's an outstanding operational performance with nine production records, and of spending, financial performance, as you can see in the [sales] indicated that we put there.

As for iron ore, we would like to stress the fact that we are the only player with global reach, actually. We are in all five continents and last year we reached a record production of almost 296 million tons and shipments of 296.4 million tons. We are the largest supplier and leading supplier to China, which is the most dynamic market that we have today.

And, again, we were able to negotiate a very satisfactory price increase with our clients, both mines in the southeastern and southern systems and the high-quality ore of Carajas. So we are happy with the outcome. We believe that was a very satisfactory agreement between the parties and surely we are stressing again the long-term relationship with our clients, so that's a very important signal that we convey the markets.

As we look at our performance in the last five years, we did deliver a very strong result. Our net earnings grew average per year 66.2% and our EBIT margin jumped from 30.7% to 44.2%, despite the cost pressure that we have been facing associated in particular with the loan cycle, depreciation of the currencies and the inflation costs, as you would appreciate in our release.

Our operational margins are very strong, ferrous minerals, 47.9%, for nonferrous minerals, 47.1%, aluminum, 31.2% and logistics, 34.6%. So a very good performance across the board in our operations in 2007, making this as, again, as I mentioned before, a vintage year for our Company.

In terms of EBITDA, excluding the effect of the non-cash adjustments of inventories, our EBITDA reached $60.8 billion and also a growth rate of around 57.7% per year over the last five years, a very strong performance. And the composition changed to reflect the acquisition of Inco and now nonferrous minerals are representing 43.2% of our total cash flow, ferrous minerals, 47.3%, aluminum, 5.8%. If we put together aluminum and nonferrous there, we would have almost an equal split between ferrous and all nonferrous materials that we have in our portfolio, so it's a very good balance, exposing the Company to the bulk and the more volatile LME markets in our products.

As for the evolution of our EBITDA, we have a growth of $4.5 billion compared to 2006, and of course prices were a major driver, volumes as well, given the increase in our production, and then we invested more in restructuring and development. We had some non-cash adjustments. We faced the challenge of coping with the cost inflation that has been observed in our operation, mining operations around the world, as you can see, and of course the appreciation of the currency that implies a major impact in our cash flow. Although, as we mentioned before, margins were up and reached a very sound figure in terms of consolidated margins.

Another point that we'd like to make, and this was a major challenge, that we acquired Inco in 2006, was the fact that were did deliver again what it promised in terms of deleveraging the Company and at the same time keeping the remuneration to our shareholders in line with expectations.

And so in 2006 we invested $20.6 billion. In 2007, we disbursed $11 billion in CapEx. At the same time, our dividend per share reached $0.39 -- an accumulated growth rate of 26.8%, in a period that Vale invested very heavily in the expansion of its operation and also had a very important acquisitions program.

So we are able to combine a very aggressive CapEx program with a dividend -- a sound dividend payment to our shareholders, at the same time with a very solid balance sheet. It's our total debt to EBITDA coming back at the same level it was in 2005, the first quarter in 2005, after the acquisition of Inco by the end of 2007 -- 2006.

So, after reaching two times EBITDA in 2006, our total debt-EBITDA is now 1.1, a very comfortable position that we are. And, at the same time, we took advantage of the very favorable markets and we are able to improve sharply the profile of our debt structure.

I believe that another important note would be on the capability to generate value through acquisition growth as we put there in page 13, and the fact that we did have a very successful integration of Vale Inco operations. It was a major challenge for our Company, considering that was a [feat], the first major international acquisition for a company that until then was basically a Brazilian company. We are able to combine operations, to keep the production in line with the budget and we delivered very strong results. At the same time, we enjoyed a much better environment that we anticipated by the time we made our offer.

So we are very happy, very fortunate to see this very good combination of good integration, a good integration and a much better-than-expected market for our products.

And I believe that this was a remarkable achievement for our Company. We feel that we delivered what our shareholders expected from us, with a record nickel production of 247,900 metric tons in 2006, with the new projects in the Sudbury Basin, for instance, starting the first project in the basin in the last 30 years, that increasing results in Sudbury with the Creighton Deep that we announced during our investor tour in May, last May, June, and the capability to explore the synergies in the Sudbury Basin, the global procurement in place and the mineral exploration that we now have a global mineral exploration office, let's say.

I think that the most emblematic aspect of this integration is the successful implementation of Goro, or the development of Goro. It was a very challenging project. Every single day we had some bad news in the press about the project, either with the communities or the government or the permits. The fact that the project disappeared from the press, not against the press, but it's just a fact.

So we were able to implement the project and in page 14 you have a comparison between December 2006 and 2007. It's amazing what we were able to achieve in just 12 months and the project is on track to track to reach the startup of the first autoclave in October and production will start by the end of 2008. So it's impressive, a very large project and, again, we are delivering to what we promised.

Finally, I would like to mention that in 2007, again, we ranked first as a global leader in terms of total shareholders returns, when we compared the last five years ended in 2007 with a 73.7% as TSR, it's understood that in the mining industry as in terms of total shareholder return.

We are very happy with the outcome, and if you look at the other ranks, comparing with the large-cap companies, we also performed extremely well. It means that the right strategy met the right environment and the right execution, so we are able to deliver value to our shareholders over all these years and I believe that our market cap is reflecting that at this stage.

A brief comment on the corporate social responsibility activities. We are very keen on building a safer place to work, so we have been working very hard. We are not happy yet, but we were able to sharply reduce our lost-time injury frequency rate by 31% decline -- by 31%, a sharp decline, but we are not happy yet. It's something that Roger is personally involved and is very focused on that and he keeps asking every single week about our performance.

So this is actually something that is in our daily agenda and our operations as well. And in terms of investments in corporate social responsibility, our social projects absorbed $251 million last year and environmental protection activities, $400 million. In the period between 2008 and 2012, we are going to invest almost $4.2 billion in both activities there, again, a record sum to be invested in those areas.

[Turning] to Roger here and talking about the future, let's move to page 21, and I think this first chart is a very interesting one because it's positioned the reference there on July 1, 2007, and July is the month where let's say the major turbulences associated with the subprime started.

And, as you can see there, in the red line, Vale's shares clearly decoupled from the performance of the world equities and also the specific performance of our sector and the MSCI Metals & Mining, meaning that we are actually able to show markets and markets were able to perceive that we were in the midst of something of a different nature, but the Company had a very good -- has a very good -- strategic plan, has a very good environment to work with and was delivering the results in markets where expecting. And in '08, this price evolution indicated that markets didn't buy the perception that there would be a major deceleration in the growth of our economy with negative effects on our specific markets.

And if you turn to page 22, you see that this is something that is evidenced by the numbers, if we take in consideration previous episodes of deceleration of the global growth. That's the end of the '80s, early '90s, where we had a reduction for the world economy growth below 3% per year, and then in the late '80s, 1990, 1991, there was a clear decline in the metal prices, the combined metal prices. The same happened after the Asian crisis and with the deceleration that followed in 1988, 1989, and then there was the second large comparable in 2001, after September 11, as well.

So metals, they are a very sort of lead indicators -- metal prices are lead indicators of the deceleration of the economy, if we can say that. And page 23 is in more details the same argument. So we see the combination of page 22 and page 23, where the message here is there is no single sign of deceleration of the world economy that would affect in a meaningful way our markets. To the very contrary, prices are very steady. If we look at the latest figures for nickel, aluminum and copper, we see they are reaching record levels this week, this very week. Not for nickel, that reached a higher level last year, but really aluminum and copper are in a very, very high level.

And in the case of iron ore, even after the assessment of the benchmark price, the spot prices did not decline, so Indian iron ore has been trading at $215 per ton and the Chinese iron ore spot markets, $204 per ton.

The same goes for metallurgical coal, the coking coal, hard coking coal. Clearly the spot prices clearly decoupled from the contract prices, indicating a very strong market, and this is in a way a concern that we have due to the associated demand of hard coking coal and iron ore. So if there an absolute scarcity of hard coking coal, it would affect in '08 our iron ore sales, as hard coking coal is also used to produce steel.

This performance of the commodities is of course associated with the change in the world economy, particularly driven by the emerging market economies that are in a massive process of urbanization and industrialization. So this is what makes this cycle longer, stronger and different from previous shorter cycles that we saw in the last few years. So we don't believe that what's happening right now is a reversal of this trend. Actually, we believe that it's just a small adjustment, a short-term adjustment that would not change the long-term trend of very solid growth of the market and particularly of the economies, the emerging market economies.

And if you look at the chart on page 27, you see a very interesting comparison. As China is the major driver of this market today, as you may appreciate, we are trying to figure what would happen to the Chinese economy, considering what happened in the past, after the deceleration of the U.S. economy.

So we see that clearly small economies like Hong Kong, Singapore and Hong Kong, they were affected, sharply affected, by a deceleration of the U.S. economy that is more evident in 2001. But at the same time we see that the Chinese economy kept its steady growth rate and actually it increased the growth rate the following year. So it's not clear at all that a deceleration in the U.S. economy will be able to reverse a very strong set of macroeconomic policies that is put in place in China that is allowing the company to grow at the faster rates, as it's grown in the last few years.

And another aspect of this comment is that if you turn to page 28, the bulk of the growth, the Chinese GDP growth, is associated with the domestic demand. It's not export driven, so, of course, nobody in his or her right mind could say that will be unaffected, the economy would not be affected by the U.S. economy slowdown. But we have to measure this effect and not assume there will be a major change in an economy that has a different set of fundamentals in place. So if we look at the growth that took place in the last 30 years, we see that the bulk of the GDP growth in China is determined by domestic demand and this trend should continue, in our view.

And on page 29, we indicate our forecast for the next five years, saying that, okay, we may have a deceleration in 2008 where Chinese GDP growth would not grow 11.4%, but just 10.4%, but it is, again, an impressive figure by any standard. And we are indicating a deceleration of this growth rate to 8.6% by the end of the period in 2010. So, by any measure, it's a very solid environment and that's why we have this very strong pipeline of projects that we'll comment on later on.

As for the global GDP, of course, the weight of the U.S. economy should bring down the average growth rate of the world economy, so the world economy should grow 3.6% is our expectation, but look at this figure in [model] with the cumulative growth rate that we indicate there in the same chart from 1970 to 2006. It's coincident with the long-term growth rate of this period, a very long period.

So, again, in the very year that we have the major adjustment determined by the surprise, what we will reach in terms of growth is a growth that is similar with the long-term trend of the world economy, well above the growth of the world population. So it's a benign environment anyway, addition it's maybe less benign this year, but it's a benign scenario this year and then the former years as well.

In our view, China has to remain as the major driver materials demand, indicated there in page 31 that China should represent 54% of the iron ore consumption, a [simple] rate, the nickel at 31%, aluminum at 41% and copper, 30%, and look for where they were in 2000. So it's a transformation that is taking place in an economy that will actually change the world.

If the demand is so strong, we do have some issues on the supply side, and this is part of the equation that we must discuss, is the fact that we have no doubt that the markets will remain very strong for the next few years, but there are a lot of uncertainties associated with the supply side. So if you look at the pipeline of projects of several players, you see that in some cases there a lack of large scale world class projects in specific markets, making it difficult to adjust the supply in the short term. The so-called easy discoveries are gone, so we have to look now for more challenging resources that involve higher costs of operation, higher CapEx cost as well.

Natural resources nationally, this is a phenomenon that's of course logical to happen in an environment where commodities are benefiting from this long cycle, so it's natural to have more discussions and debate about this, but this has an effect on the availability of resources to be explored and developed.

The same goes for environmental permits. That's a worldwide phenomenon in terms of getting tougher to get those permits, delaying projects in some cases, making some projects impossible to develop in some cases, so it's an issue that's faced by every single mining company today.

Higher CapEx costs and shortages, of course the skilled labor and technological charges. So it's not evident that supply will be able to catch up with demand over the next few years. And, on page 33, you have our pipeline of projects and we have 30 major projects that span our production over the next few years, in the several business areas that we operate. I will not comment in each one of them, but I just call your attention that the size of the pipeline -- so we do have a great option in pursuing organic growth companies.

And in this year, 2008, we are going to deliver seven major projects. Just at reminder, the last five years, we delivered 20 large projects. In this year, we will deliver seven large projects. Iron ore, Fazendao, with 15.8 million tons per year, two pelletizing plants, Itabiritos and the former [ADR] and now Samarco, as well, 7.6 million tons. The Goro project, which is 60,000 tons of nickel and 4,600 tons of cobalt. The second stage of Paragominas, with an additional 4.5 million tons per year. Alumina, Alunorte, 1.9 million tons per year of addition and of additional production. And copper, the high metallurgical plant, the plant of copper in Carajas that will test this technology, that will enable us possibly to explore other deposits in [that] region, with a 10,000 tons per year capacity.

So, again, we are delivering what we promised on time, sometimes with not very on budget, but we are delivering what we actually promised you a few years ago. And if you look at the next page, page 35, you see that we were early believers in the duration and the strength of the cycle. So that's why we are able to deliver the value, the TSR that we commented on a few minutes ago.

We have been growing our production at an 11.6 average rate in the period 2003-2007, one of the most, if not the most, dynamic players in the metals and mining industry. And our strategic plan will allow us to keep the same pattern, with the growth of our production in both greenfield and brownfield projects of almost 11% per year.

So we should reach 2008 a capacity of 325 million tons in iron ore, 41.8 million tons in pellets, nickel, 280,000 tons, copper, 300,000 tons, alumina, 5.3 million tons and coal, 5.6 million tons, a remarkable growth rate for the volumes. And, finally, on page 37, you see our production profile in 2012, with the production by the end of 2012 of 450 million tons of iron ore. In 2012, we should produce 422, pellets, 55 million tons, nickel, 507,000 tons, doubling our capacity for last year's production. The same goes for copper. We are doubling our capacity in 2012, alumina, 8.2 million tons and, finally, coal, with 50 million tons.

So it's a very strong pipeline of projects and growth that is embedded in our strategy. Thank you very much and myself and Roger Agnelli will be at your disposal to answer any questions you may have. Thank you.

Thanks. Before that, I would like to make some comments about M&As. I think everybody is curious about what we are doing or what we have been doing. We always have been saying that our priority is organic growth, and it's going to continue to be organic growth our priority.

Of course, we believe that the cycle, and you saw that Vale is really bullish about the future of our industry and include myself in this point of view. I am really bullish about the market in the coming years. And, of course, we can't close our eyes to what's going on in the industry in terms of consolidation, in terms of M&A transactions.

You remember that we have been buying a lot of companies in the last five, six years and we tried to acquire other assets and we couldn't be successful in two or three transactions. But, anyhow, we are always open and we are always analyzing opportunities. You remember that three years ago or four years ago, we were talking with Noranda guys regarding to the Falconbridge asset.

We couldn't reach an agreement at that time, but right after that we bought Inco, which is a much better asset than Falconbridge. And of course Falconbridge is a very nice asset also, but Inco for us, in terms of value, in terms of results, it seems to be much better than that.

Later on last year, we bid for [Auca]. Rio Tinto bought it. Great, congratulations for them, but we don't regret because we have limits to what we are able to pay and we reached our limit an that's it. So I don't regret about that, so it's done.

Right now, we think that Xstrata is a very nice fit for our future strategy. They have a very nice asset. We are bullish on the copper market, we are bullish on the medical market, chemical also. Nickel, we are really bullish. We are bullish about iron ore.

So, if we can, or if we could, combine these assets, we are going to create a very strong, very nice and very growth oriented company. Because we have a huge pipeline of projects. This is our priority, to deliver all these projects in the right time.

So Xstrata is in the press, everybody is talking about that. Of course, we are interested, we are hoping to continue to analyze the possibility. We made an [indicative] proposal. Of course, there are three parties involved in this negotiation. One is Glencore, which has 35% of the Xstrata shares. Another one is Xstrata, and another one is Vale.

Glencore, we have a very good relationship. I am a very close friend of Ivan and we have been discussing that for a while now. They are very good, they are traders, they are successful. Ivan has a very nice and very good strategic orientation. He knows exactly what he's looking for. The same thing for Mick Davis. He is the CEO, the Xstrata CEO. I admire him very much. He's very good.

He has been doing a very good job to put together several assets and created this very strong company and Xstrata, they have a very good team, very good people there. They have knowledge, they have a very good operation. It's not a high-cost operation, so for us, Vale, it seems to be a very nice and very good and very sound fit and that can really strengthen our position in the mining industry.

We have been discussing that. We have limits. We achieved our limits. The problem is that Glencore must -- or can agree with that or not. We depend on the Glencore's position to continue to discuss, just to continue to build this transaction. Xstrata, of course, depends on the Glencore's position to go ahead with the transaction.

But, anyhow, we are right now in a position that we achieved our limits. We are very disciplined, we are not in a rush or to buy or to acquire any assets. But if it makes sense, if it's good for our growth strategy, if it's good to strengthen our position in the market, we are always open to buy new, good [programs] to solve in the future. We have a very strong pipeline of projects, so this is our priority. We are really focused. We have really committed to realize to delivery all these projects, so we are not in a rush to buy anything. Only if it makes sense, only if we can add value for our shareholders.

I will always -- I discuss with my team that we must be really very disciplined. We can't just jump in a very exciting period of M&As. We need it to be disciplined because we are a long-term mining company. We are not a short-term mining company, so what we wanted to buy was asset quality, people quality, knowledge and technology and market position. So Xstrata, if we become successful to realize this transaction, good. If not, it's good also.

I can tell you that it's really very difficult to overcome all the issues that we have there, but we keep trying to solve that or to clean up all the issues, all the obstacles we have problems with, antitrust, that we have been investing a lot of time to see how we can overcome all these issues.

But, okay, we are open. We have enough energy to continue to discuss, if they want. If they don't want, it's okay also. But it's in their area, in their positions to say if they want to go ahead or not.

But, again, this is not our single option. We are keeping analyzing other options. I told you that we are bullish on copper, we are bullish on coal. We are bullish on nickel. This is our core business. We are a mining company. We are focused on asset quality. We continue to be very disciplined to give a priority to the organic growth, and that's what we are going to do.

Okay, I'm ready to answer any questions you may have.

Thank you.

(OPERATOR INSTRUCTIONS)

Our first question comes from Felipe Hirai from Merrill Lynch. Please go ahead.

Hi, good morning, everyone, and thanks for the clarification on Xstrata and the great outlook on the metal prices. My first question is regarding the cost, as we saw a significant cost increase in the quarter. Can you comment on how you're managing to control your costs and if you're increasing your hedging activities as aside from the payroll in Brazil that we saw that for the first time you announced that you were somehow hedging your costs. And what kind of cost increase can we expect for 2008?

I think -- Thanks, Felipe, for your questions. But I think we did have an effect in cost, both in SG&A and in the cost of goods sold of salaries, but this is associated with a very improve change in our relationship with the Brazilian workers here that corresponds to about 75% of our labor force. It's that we are now able for the first time -- a Brazilian company was able to settle an agreement with the labor force for two years.

So, if you recall, we postponed. Previously, our labor agreement used to end in July, so last year, 2006, we extended it to November, so it was 15 months, or 16 months. And now we settle for 24 months.

So this was associated with the salary increase, the nominal salary increase in the range of 7%, and I believe that what that gives us, it's a very satisfactory arrangement that will increase the predictability of our disbursement in this very important item of our cost. So there was in a way a specific cost associated with that discussion.

Also, as you know, we changed our brand, and so the branding effort consumed $50 million, roughly, at the end of the fourth quarter of '07 and effectively that's SG&A.

In terms of outsourced services, we did have an increase associated with change of tracks in some of our railroads, particularly Carajas railroads, the poor quality of the tracks that we have to replace, they are not resisting the volume that we are transporting. So we spent a little bit more.

The furnace in [Obrand] that we had to replace, some issues at the potash operations. Also, I would like to highlight the fact that we consolidated [TNIC], a Taiwanese subsidiary that was not under U.S. GAAP consolidation procedures. We reconsolidated it in the fourth quarter of '07. And this brought, of course, costs that were not included previously. We had in terms of other expenditures, I would like to point out the establishment of our shared service center that's a major change in the way we manage our companies. It may represent an additional cost now, but we believe that the cost per transaction at the shared service center will be much lower than the current structure. So it will be able to support the operations worldwide on a global basis and we do hope that this will represent a structural reduction in our cost moving forward.

So I would say that roughly -- of course, the exchange rate also affected our costs, but I would say that we are able -- we are not happy yet wit the costs that we face. We are fighting every single day to reduce that. We are changing, for instance, from our costs to insource some services that we have previously in the market. We are very active in this area. We are not simply waiting for the results. But we have to recognize as well it's a very tough environment, because not only the currency is appreciating, but our competitors are searching for the same services, contractors, equipment, and things are more expensive. Things are more expensive. So this is a challenge that we will continue to face over the next few quarters.

If I may, I would like to add some comments about energy. Energy is going to be and is a very tough issue in the industry and for everybody, consumers worldwide. The price is going up and I feel that it's going to be a major problem for everybody in the industry.

You know that we have been building several hydropower plants. We are going to invest in thermal fired, in thermal power plants, also, to have a hedge in terms of cost for us. So I think we have a small part of our consumption hedged by our own operations. Of course, we are making a lot of cash in our hydropower plants right now

For the future, you know that we bought several areas here in Brazil to explore gas. Gas maybe is going to be another alternative for us in the future to supply our needs of energy. Another cost that went up sharply and is still growing is oil, diesel. The oil price in the market is going up. Yesterday it was $102 per barrel, so oil and diesel is really an issue for us, so we are, as you know, we developed a technological center in [San Jepstin], was in Sao Paulo state, to find out new processes or new ways to produce cheap energy and clean energy also, so we are working hard to solve this problem for the long term, not only for the short term, but for the long term.

Another issue is the spare parts and everything that is related to steel. The steel price went up last year sharply and is still growing due to mainly the cost and the demands that the market has today. So we feel that steel affected almost everything in terms of cost. We got the spare parts mainly is made by steel. So, anyhow, last year we invested roughly $60 million in automation. I think that in '08 we are going to repay all the investments that we made last year.

In Inco operation, we have a sharp cost increase due to the upgrade of several plants that we see and we feel that we needed to bring to the level that we are confident, that we are comfortable with, and some facilities, some plants, weren't in a very good shape, so we invest a lot of money, including automation [cost], and we continued to invest this year in automation.

What I would like to say is that our target is to be or to become a benchmark in terms of cost in two years. And we are spending, we are investing, we are even increasing some costs to realize or to delivery or to be the benchmark in terms of cost. I think we are able to do that. We have continued to work. I feel that to our competitors or to compare with other industries, I think we are in a very good shape. We are in a very good shape, but it's not enough. We need to be the benchmark in terms of cost in two years. This is our goal.

Thanks, Roger, and if I may add another question here, I mentioned about all these issues that you have to overcome with the negotiation with Xstrata? Can you comment with that what are the main issues? Is it the financing, is that you're going to have to pay with PNA shares with no tagalong rights, or is it the marketing rights on the metals?

Ivan is a tough negotiator and Mick also is a very tough negotiator. I like that. I like that. Of course, they have their point of view, we have our point of view. If we saw some let's say principle issues, I think we are going to be in a position to close the deal.

In terms of the past issues, really, I think we solved everything -- financing, concern about the rating, concerns about everything that we could have. I think we solved everything. We overcame all the big issues that we have. In terms of issuance of preference shares, it's not really an issue. Our shareholders, they are very comfortable, they are supporting us very much.

The press always is saying that we are facing problems here with the government. I can tell you, we didn't have any interference, any issue with the government. None. No one, no issue regarding that. All our shareholders are supporting that, but they know and always they remind us that we need to be very disciplined, and we are very disciplined. I think we proved that or we have proved that to the market that we have been very disciplined.

So I should say that from our side we don't have any problems to conclude the deal. The problem is there are some principles that we don't want to abandon. I think we are very [stick] to this. Marketing is something very important for us. We like to have a very good and very open and straight relationship with our clients. Of course, we can't accommodate things we can't really let's say compromise things, but there are some principles that we don't and we will not abandon.

So let's see what's going on. I can tell you, it's not an easy test. It's not an easy transaction. It's very complex and it's very difficult to realize. But let's be optimistic.

Thank you and good luck.

Thank you for your question, Mr. Hirai. (OPERATOR INSTRUCTIONS)

Our next question comes from Jorge Beristain from Deutsche Bank. Please go ahead.

Good morning, gentlemen. It's Jorge Beristain, Deutsche Bank. My question is one more strategic, talking about energy, you detail in your press release that you're investing in certain electric generation projects in Brazil, and as well in Indonesia, but collectively those are going to add about one gigawatt of capacity, which would increase your energy self sufficiency by 4.4%. You're looking at increasing your volume output by probably 12% in 2008.

So I just wanted to understand how these relatively small investments in energy will shorten, or actually increase your energy integration overall, as they don't seem to be keeping pace with the growth in your volume projections. And if maybe Roger could talk to that point a little bit to is energy becoming a missing component in Vale's overall portfolio?

No, it's not really a concern for us. The point is we are growing, mainly in iron ore operations, and iron ore is not really intensive in terms of energy, so we are not concerned about iron ore. We have long-term contracts to supply the other operations. Nickel will be either in Brazil or in Canada. We are very well positioned there. Indonesia, I think we are going to be self-sufficient with the number-three hydropower plant that is under construction right now, with the thermal power plants that we are going to build in each one. We are looking for three coal-fired power plants, each with 600 megawatts capacity. So we are able to grow a lot in this area.

The problem is for iron ore, we don't have any problem. For nickel here in Brazil, we have the contracts, long-term contracts with that. We don't have any constraints in terms of growth. If we talk about copper also we don't have any constraints to keep growing in the copper business.

The big issue is the aluminum business. This is really a big issue. In this specific area, we have constraints. We don't have enough energy supply to build a new smelter in Brazil. That's why we are looking in other countries to build or to have energy supply guaranteed for the long term. I can include Colombia in this area. There are some potentials to develop new hydropower plants there in Colombia and we are talking with the government. I went there one month ago and I had a very good and very let's say open discussion with Uribe, President Uribe. It was really very good.

We are looking for some areas in the Middle East that we can't have access to gas and to build a thermal power plant there. So for aluminum I can tell you, it's something that we need to carefully analyze how to expand our smelting capacity. The problem, or let's say the benefit, is we have a huge bauxite deposit that we can really grow very much in this area.

Alumina, we are building, we are launching alumina, so smelting capacity is something that we needed to really focus. For the other operations, we don't have any problem. We are right now building the [Stratu] project. We are going to add a lot of megawatts to our portfolio. But mainly what we are looking for is the possibility to find out new areas to build new capacity, and we are working on it. We are working on it.

And, sorry, just the second part of my question is do you view that energy is becoming a strategically more important part, potentially, of Vale's overall portfolio?

No, no. We are not looking for self sufficiency or we are not looking to increase very much the investments in energy, as I think it's clear that energy for us we are looking for a hedge in terms of cost. I believe that for the next years, the price of energy continues to go up. We have a very good contract signed with the distribution companies here in Brazil.

In Canada, Indonesia, in China, in Australia, so it's not really something that we need to rush, we need to be really concerned about the supply of energy. It's just a matter of [de-weight] our portfolio in terms of hedge and cost and how to control a little bit the booming of the cost for energy, so it's not going to be really a major investment for us.

You know that we are in the gas exploration right now, together with Petrobras. We have several areas and maybe if we are lucky, we are going to find out new gas deposits. I'm really optimistic about that. But if we put together the hydropower plants, the thermal power plants, the coal that we are going to produce or in Australia or in Mozambique's project, and if we put together the gas, of course if we call it as energy, the energy portfolio as a whole is going to grow in terms of representatives in our [order]. But only if we consider gas, coal and our hydro and thermal power plants as a single entity.

Okay, thanks very much, Roger.

Thank you for your question, Mr. Beristain.

Our next question comes from Carlos de Alba from Morgan Stanley. Please go ahead.

Yes, good morning. Two questions. The first one would be regarding the rapid increase, or the sharp increase that we saw in the depreciation expense in the fourth quarter vis--vis the fourth quarter of '07. And the second question would be, generally speaking, on M&A strategy, obviously, Xstrata is a diversified producer. Is this the like of acquisition that you would like to pursue not only in this case or generally going forward, or would you be looking at also single commodity companies in order to expenditure your growth in either coal, copper or aluminum.

Carlos, this is Fabio. Thank you for the question. I'll answer the first one. The depreciation in the fourth quarter is reflecting the effect of the appreciation of the currency, the increase in asset base, but also a one-off adjustment in Vale Inco plans. So it's basically an adjustment of around $100 million or so that was a different procedure that was adopted in the fourth quarter. It was adjusted. It should not have a recurrent nature going forward.

And now I'll give the floor to Roger for the second question.

Carlos, you know that it's not easy in our days to acquire or to find out new or good reserves. It's not easy. The cost is very high in our days to develop greenfields. For us, it is not easy. Of course, to develop a brownfield project is easier and cheaper and that's what we are doing in Vale. So we are really speeding up all the investments in brownfield projects, greenfield projects.

We and everybody's facing problems with cost. It's always changing, always changing. Maybe one day it's better, you develop a greenfield project, and another, in the very next day, it's better that you acquire assets.

The problem is, again, quality. We are looking for high-quality deposits. We are looking for high-quality mines. That's what we are looking for. If we have in a combined company everything together as we have in Xstrata, okay, let's go for it. If we find out a company that has a very strong asset base and high-quality asset base and is able or is open to discuss or to sell or to do something with together [reverse], okay, we are going to.

Our main areas are copper. We are bullish. Coal, we are bullish about the market. Of course, something in aluminum business is something that is interesting. I'm not saying that we are discussing or we are looking forward to acquire any company in this area. I think that it is more feasible to develop the greenfield projects and attach it to the energy supplies. This is very important. Cost of energy for aluminum is really very important, and there is nothing really good or really nice in the market right now that we need or we must pay attention. There is nothing really available ready in the market right now.

I think we need to develop these areas. So, again, if there are some companies, very good companies in the market, but everybody's full of cash, everybody's making a lot of money, everybody's bullish about the future, so price is not easy to negotiate. The cost is not easy to negotiate. And what we are doing, again, our main priority is organic growth, so we are not in a rush.

If someone wants to exchange some ideas or [dating] with us, I think we are open to dating, but I don't think that we are able to marry at first.

Thank you.

Thank you, Mr. de Alba for your question. Our next question comes from Gaurav Bana from AllianceBernstein. Please go ahead.

Thank you, good morning. This is Gaurav Bana from AllianceBernstein. A couple of questions. One, how should we think about any time constraints that you may have in your current round of discussions with Xstrata?

We don't have any time constraints.

Okay, so you're willing to wait as long as it takes.

No, I think everybody must be fair. We don't have time to be spent in one thing that is not feasible. So, again, I don't know. Let's see what's going to happen. They needed to move, they needed to do something. If they don't do it, okay, I'm really concerned about our project. What I'm going to do next week is just start to travel again to visit all our operations and to analyze how it's going, our projects around the world. That's it. This is not really a priority for us.

Okay, thank you. A follow-up question. Under what circumstances would you sacrifice your investment grade rating?

I think we have a very strong balance sheet and we are doing everything and we are building all the solutions for any acquisition, any acquisition, in order not to jeopardize our investment grade status. We don't want to jeopardize that and we are comfortable that even if we go for a major acquisition, we are able to go around or to avoid any downgrade in our status right now. So including these conversations with Xstrata, we are really very careful to build a solution that is not going to jeopardize our current status.

Thank you for your question, Mr. Bana. This concludes today's question and answer sessions.

Mr. Barbosa, at this time, you may proceed with any closing statements.

Just to thank you all for attending this conference, and as usual ourselves and our teams will be available for any further questions you may have. Thank you very much.

I would like to thank you very much for your support, for your time with us today and I can tell you, we are working hard to keep under control the costs. We are working hard to increase our production. We believe that for the next two, three years, we are not going to see any problem in terms of demand in the market.

Let's see what's going to happen in four or five years, because there are some greenfield projects, newcomers entering in several different interests and even if the demand stays like it is today, I don't feel any problem to absorb all the new production in the market. Again, I think you can trust on us that we are not going to do anything that can jeopardize our growth strategy, our TSR and we are very disciplined to that.

Thank you very much for your support.

Thank you.

That does conclude our Vale's fourth quarter 2007 earnings conference for today. Thank you very much for your participation. You may now disconnect.