淡水河谷 (VALE) 2008 Q2 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 the second quarter 2008 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 investor's link.

At this time all participants are in a listen-only mode. Later we will conduct the question-and-answer session and instructions will be given at that time.

(OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded. The replay will be available until August 13, 2008. To access the replay, please dial 55-11-46-88-6312, access code 574. The file will also be available at the Company's website at www.vale.com at the investors section.

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.prnewswire.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 risks and other factors.

With us today, in Rio de Janeiro are Mr. Roger Agnelli, Vale's Chief Executive Officer, Mr. Fabio Barbosa, Vale's Chief Financial Officer, Mr. Jose Carlos Martins, Executive Director of Ferrous Minerals and in Toronto is Mr. Murilo Ferreira, Executive Director of nickel business, marketing and sales of copper and aluminum. First, Mr. Barbosa will proceed to the presentation and after that, we will open for questions and answers. It is now my pleasure to turn the call over to Mr. Fabio Barbosa. Sir, you may now begin the conference.

Thank you very much. Good morning to you all. Thank you very much for attending this conference. We'll have a very brief presentation today. And I believe that's in the benefit of the best -- better understanding of our results and perspectives.

We'll have Mr. Agnelli's, Mr. Martins' and Mr. Ferreira's comments together with our presentation. So I'll try to be brief on the very presentation itself. First, our performance in the second quarter, we believe that we again delivered a very outstanding performance amidst a very challenging environment operationally wise.

We delivered record in outputs of nickel, iron ore pellets and coal. And the record shipment of iron ore pellets -- iron ore and pellets is 78.9 million tons. Record revenues, almost $11 billion. Net earnings, $5 billion and EBITDA $6.2 billion. And in the case of EBITDA as you can see in page 6, the major drivers were of course, the price variation of $2.1 billion. Again, in the first quarter of '08 volumes despite the occasional problems that we faced as we explained in our release.

Dividends 175, but a very important contribution of cost reduction associated with the increasing production of our (inaudible) and other elements in our cost structure. So it was a very impressive result I would say, considering the very sharp appreciation of the exchange rate, and also the massive effort in terms of research and development. So it's a very -- we are happy with what we could get, considering again the very challenging environment.

Another important point was the upgrade to BBB+ that we achieved in this quarter associated with the global offering as implemented last month of July. Again, Vale crossed the quality of its credit and also the quality of the strategic strength that it has in its pipeline. And we were able to attract a very important set of investors to buy our shares and there was a successful transaction achieved, again, in the most challenging financial environment of the last 20 years.

And after this transaction we were able to get the BBB+. It's the only company that is headquartered in Brazil with this rating, it's the only one which has proximity to the [A league], which want to get to as soon as possible.

And this of course is related to the very strong cash flow generation, a steady cash flow that will reduce volatility of all cash flows the limited leverage of balance sheet despite the acquisition that we made. And as far as our very comfortable debt profile reflected in the debt maturity above 10 years.

Returning to the A league, you promised me sooner than later.

That's right, that's right. So I have to deliver. That's right. So speaking of delivering, we delivered in the last six months six world class projects, four of them in Brazil, where we had the bulk of projects, at Fazendao, 15.8 million tons a run-of-the-mine and then Samarco, the third expansion of Samarco is 7.6 million tons, Paragominas, now being able to produce -- is able to produce, almost 10 million tons per year.

And the last expansion of Alunorte 1 is stage 6 and 7 and now Alunorte is producing 6.3 million tons per year, is the largest aluminum refinery in the world. And two very important investments in China, Zhuhai pelletizing plant with 1.2 million tons capacity and the nickel refineries in Dalian that we inaugurated in the first half of the year are also very important investments.

We invested almost $4 billion in the first half of '08, $2.7 billion in projects, $440 million in R&D and stay-in-business, $915 million. Looking forward, our basic view is what is in the beginning of this section, fundamentals remain strong. In our view there is this phenomenon of relative decoupling of emerging market economies is expected to continue.

We believe that the growth rate of the (inaudible) would be around 3.8% over the next five years and in 2012. So even above what we have said in the last 37 years ended in 2007, so this should continue and this rise would be determined by the major market economies, which have been absolutely key to the pyramid of the performance of the mining and metals industries over the last several years.

And you can see in chart 11 that out of the seaborne trade growth, over in eight years and in 2007, China represented 95% and in the other materials, steel, aluminum, copper, nickel, major contribution by (inaudible) market economies to the global construction growth. And this of course has to do with the structural changes that are associated with the growth of the emerging market economy.

So there is a massive effort in infrastructure building, industrialization, urbanization, and those are very much biased, those elements are very much biased towards mining metals. And increase naturally and structurally the demand for minerals and metals. So the UN estimates that the emerging market population in urban areas will increase by 1.2 billion people until 2025.

This is the double the combined population of the US and Europe in less than 20 years. And this is the number of people that will have to get urban infrastructure in place over the next several years. So it is a massive investment. Infrastructure investment is expected to reach almost $5 trillion over the next 10 years, and besides the increasing per capita income and the development of consumer and housing financing in emerging market economies also pointed to (inaudible) add associated demand for metals.

And finally, the varied response to the energy shortage that we cannot serve today also leads to a rising consumption of metals, particularly, copper and other materials. Our view about the cycle is that this is again a long cycle, that is very much comparable to what we observed after the second World War and the beginning of the 20th century. It's a long cycle.

And one of the key characteristics, has been put there for long, metal cycles is above trend growth of global steel output. Above trend refers to by the global GDP growth. So during the '50s and '60s driven by European and Japanese demand, global steel capacity grew 6.2%, 5.5% respectively while the global GDP was limited to 4.8%.

The same is happening now is that the Chinese -- emerging market cycle with steel capacity growing 6.7% average since 2000 has a global GDP growth again around 4%. So this is a major -- it's a major drive that should continue in our view, because they, in our view as well, are far from done as we mentioned before. A lot of infrastructure is still required, and they are in a way barely beginning.

On the supply side, we -- on the other side of the supply, we face as we put the multiple headwinds. So as we perceive demand as a very strong one, the supply is not -- has not been able to catch up with this growth in demand and so a structural gap between supply and demand would continue in our view. Due to institutional barriers, we saw some of our competitors had difficulties in some African countries the last few days. And this is part of the game today.

We have to go to more complex geographies. And it's harder to find a stable situation and environment in everywhere that we dig, in everywhere that we operate. Resource and development, (inaudible) declining resource quality and shortages of water is a major issue for several operations. Bottlenecks in infrastructure, logistics, in power, and also the shortage of the skilled people to work in the expansions that we have and our competitors also have.

Higher CapEx costs, technological challenge -- altogether, the environment is not conducive to timely respond (inaudible) to this to the strength of the demand that we have been observing in the last several years. At this point, I'd like to turn the floor to Martins to comment on the iron ore perspectives and how he sees the markets and the iron ore business as a whole.

Good morning everybody. It's a pleasure to talk with you. As Fabio has stressed it, we continue to be very bullish about iron ore market, because we really believe that infrastructure is pending in new developing countries. We will continue to foster demand mainly for steel, which is the main material for infrastructure.

Much bigger influence than any other materials is steel for infrastructure. And behind steel you have iron ore, you have the nickel, and you have the manganese. So we believe that these infrastructure needs will continue to drive demand for steel and also for iron ore.

The current market condition is very tight, continues to be very tight. We are working very hard to cope with the demand. We continue to lag behind our commitment in terms of delivering what the customer are buying. So in this first half, we face a lot of difficulties. We had a big accident to one of our parts. We had a lot of landless people taking --

Blocking?

-- blocking our railroad four, three times.

Rain.

Rain is something that we normally have at this period, but this year it was a little bit stronger. So we are not able to deliver all the iron ore we produce. So we stockpiled a lot of iron ore, but now we are delivering because now the system is working better.

So early in July, we reached our record number in terms of shipment and August is going very well. So we expect a very stronger quarter. And we hope that we can recover parts of the volume that we lost in the first half based on these problems that we face.

So -- but the look in the market, we continues to be very bullish. So when we look at the sourcing of iron ore in China, we see a lot of is more miners, I would say hundreds of more miners, local miners, producing at a very high cost because the market is demanding, and is willing to pay a higher price to get this ore.

Even in the seaborne part, the number of, I would say, non-traditional suppliers appearing is a lot, which means that they are buying iron ore everywhere. Just in the next year from now, they are supplying iron ore from 34 sources.

In 2006 and 2005, it was around 28. And in the beginning of this decade, (inaudible) was around 10 to 11 suppliers. So they are looking for iron ore everywhere, not only domestically, but also outside, which means a pressure in cost, a pressure in price, and you see this going on in the spot market in China, which is a practice very strong and very high.

Also the situation in the freight market had to push the prices high. And we think that we are in a very good position because our best market price is a little below the delivered price in China nowadays when you consider the spot market. So we have -- we are seeing some upsize in price even during this current year based on the situation now.

So we do not see big changes in volume in this year. And for next year after all of this impacts of the Olympic Games, which is sure is bringing an impact on the steel production in China because many steel mills were shutdown because of the impact on environment. So we seek that after the Olympic Games the situation there will be even much stronger than what used to be.

So when you look forward, we see that the possibility of a local ore taking market share there is omitted because of quality constraints. We do not see more than 45% to 50% users of local ore because of quality, so. And the more they buy from China sources or India sources, they need the corrective ore and the more they need high-quality ore.

So we do not see any kind of problems in any market situation because of this quality constraints they have, and they also -- they -- always you need high-quality ore to correct the lower quality ore they are using from all of these different sources. So that's put us in a very strong position.

And with the strategy we are developing in the shipping side, we can strength even more on this quality advantages that we have, because -- for sure the long distance between Brazil and Asia is one of our weakness that we are now trying to correct by developing a fleet of vessels that will help us to keep this freight market a little bit -- last volume (inaudible) input has been in the last two or three years.

So marketwise we don't sell too much iron ore in the United States. We sell less than 3 million tons of iron ore in the United States, and we continue to sell even with this different situation in States. And in Europe the market is really stable. There is no big changes in the market, and the customers continue to ask you for the contract that they have before the volumes that they have. So, so far even in the Western world we do not see big changes.

In Brazil, the market is very strong there. We sell in Brazil near 50 million tons of iron ore and the markets continues to be very good in Brazil. And besides that we have the situation with pellets. With the current situation with met coke, the demand for high-quality ore and also for pellets is very strong because you can save cokes by using a better iron ore.

So, this is helping us a lot relating to the high-quality ore we have and also for pellets. So we see a very good position not only in the short-term, but also in the long-term for our products. So that is, generally speaking, how we see the situation nowadays.

On the investment side, we are speeding our programs of investment mainly in Carajas area, and we expect to reach -- increase our capacity 420 million tons up to 2,000 (inaudible). And this is our long-term investment there, and increase -- building a lot of pellet plants to improve our assets base in pellets production.

We believe that pellets is becoming more and more the most important ingredient for big iron production because of environmental impact, which is lower.

Energy.

Second, because you can save energy, you can use less coke, and also because pellets is very much used in RI production. And there is a big increase in the RI production in the Middle East using the natural gas they have. Also the demand for pellets is really bullish and we have a very strong pipeline of investments in this area.

We are finalizing the conclusion of investment in the (inaudible) project, which is a 7 million tons per year pellets plant in the South system. We are in the middle of investments in number 8 pelletizing plants in (inaudible), which is a Southeast system, and also we approved in our bond the investment in the new pelletizing plants in Oman in Middle East. Besides that, we are analyzing new investments in pelletizing plants in Brazil and also in the Southeast Asia where we see the steel production will grow very fast in that area also.

So, we are moving very fast with our investments. We are trying to anticipate some production because the market needs it. And mainly in Carajas there, as we see a lot of opportunity to speed up production. Logistics wise, we solved the problems we faced in the first half of this year and the investments we are doing there is now coming upstream -- coming on-stream.

And the prospective is very good. We have a lot of iron ore in our mines available for shipping, and as we streamline the logistics system, as we include our part operation, we have a very good possibility for increasing volumes even above the production level because we have in our base a good volume of iron ore in the mines available for shipping.

So we see a very good situation operationally speaking and also in terms of long-term perspective for the markets. Cost-wise we had to be under strong pressure in cost because of a lack of a lot of inputs and lack of labor, a lack of suppliers and also the strengthening of Brazilian currency. But as far as we understand, we stopped the movement up and now we are working to bring the cost up.

It's not easy to bring cost down when we are trying to get an additional ton everyday -- every month. The marginal cost of producing these additional ton is higher than the previous one. But I'm very confident that now we stopped this long-term growth in our cost structure, which really happened from 2002 up to 2006.

There was a big growth in our cost structure. Because of this wave, we are producing -- trying to get additional tons from every mine, going deeper and moving quantities, higher distance. So this put a lot of pressure in our plants. And we hope that we did development of the new mines with this investment, we can even decrease our cost structure sharply. So that's our -- the main aspects of our iron ore business.

I would like to add another point, which is the manganese business, which (inaudible) tremendously well price-wise. And the product that two or three years ago for us was a question mark is now is running very well productivity wise, quality wise and also profit wise. It's now one of our main products and generating near $1 billion cash flow per year. And we expect to improve these numbers going forward.

As I told in the beginning of our discussions, we really believed that iron ore, met coke and manganese will continue to be very well supported by this long-term investment cycle in the infrastructure all over the world, mainly in the well-developed countries. Okay, that's it.

Thank you very much. I would like to ask Murilo to take up from there. Could you join Murilo, please?

Fabio, thank you very much. Good morning, good afternoon. I think that in the global growth deceleration is (inaudible) stainless steel industry output after contraction in 2007. In this regard, I would like to say some comments. After some improvements that we note down that we note in the first quarter, the stainless steel production growth has slowed down in the second quarter.

We know that the nickel price is starting to fall as the stainless steel production cuts were announced in May. In the inventory the stocking continue in 2008 as nickel prices fall, as the stainless steel buyers remained concerned to restock in slow economy. The nickel inventories are declining. It's -- this is very important. The stainless steel pricing contributes to increased volatility of the nickel price.

But we can note easily, in the page 20, that LME stocks at 11 days of conception, they fallen over 7,000 tons since the highest level in April. And Goro had, despite of the sharp price decline, nickel outlook is very promise. And the price volatility is characteristic of the nickel business. We know very well. It's mainly following the stainless steel industry, but the current price will force mainly the nickel pig iron producer to shut the operations. And I will do some comments, as you know these pig iron most of them they are very inefficient due to high-cost and strong pollution controls. And they struggle (inaudible) of the business.

In June and July, the estimate cost of the average blast furnace NPI rose above the market price. This is very important. Mainly this cost is due to what affected by the higher coke price and a strong Chinese currency. Then the blast furnace production represents roughly 7% of the capacity of the NPI and it was strongly affected.

About (inaudible) furnace production, I think that we need to understand that the lack of enough power in China. It's a big constrain. Then the challenge, I think that will continue in the short-term for the NPI, mainly associated with the coke price, and the risk of the increase of the electricity and the Chinese currency appreciation.

The demand for the nickel, knowing stainless steel application, it's much more stable and remains very robust. I'm talking about the non-ferrous alloys, alloy steel, foundry, all continue very strong and driving to the oil, gas, mining, energy, chemicals in our space. Then the combination of alloy stainless steel inventories and declining metal inventories can build an environment to a strong nickel price recovery in the next cycle.

I think that, as Marty said, that Fabio pointed out, the long run (inaudible) linkage to damage and (inaudible) we can stay very positive in the long-term basis to the nickel market. We know that we have huge reserves around the world, mainly in Canada, Indonesia and New Caledonia, Brazil.

You are increasing substantially our penetration as a supplier to the stainless steel industry through Goro and Onca Puma. We have good assets. We can meet the demand in Asia. And we are doing a big program in terms of the restored integrity of the assets in optimization looking for higher productivity and to try to maximize our high-end refinery nickel products. Thank you, Fabio.

Thank you, Murilo. And now I'll ask our CEO Agnelli to make his comments straight away.

Good morning, everybody. It is also a pleasure for me to be here with you today talking a little bit about the results and our future. But before I say some words, I would like you to invite (inaudible) who is our new managing executive director that was elected last month to be responsible for the engineering department.

Let me tell you a little bit what we are looking for with -- for this -- creation of this new area. As you know CapEx today is a big part of our business. It's a big part of our responsibility. And to push all the investments ahead, we needed to have people completely concentrating fully dedicate to deliver it on time, on budget, and the most important thing, bring a new generation of projects using new technologies, automation, using new rules to process and to produce materials.

So the (inaudible) responsibility is going to be the -- to implement the best practice in the Company, and I think we are sharing a lot of best practices with (inaudible) coal mines that we are having in Australia, India, iron ore mines. I think we are really learning and we are really improving our standards of production. Another point that Rio is going to be responsible is the automation. We need to upgrade our plant, and we are doing that intensively.

We needed to reduce cost -- production cost. We needed to give more reliability and stability to our plants and of course we have a good standard, but I would like to have excellent standard, in terms of reliability.

In terms of engineering, the goal or the main target of (inaudible) is going to be to reduce the OpEx. This is important. We are thinking that the new generation process or the new production that is going to come to the market, we don't know exactly how it's going to be, the market or the environment at that moment.

The only thing that we know and we need to be sure that we are -- we'll be able to deliver is to have a low-cost production. That's what we are looking for.

So the -- even the investment in iron ore in Carajas is going to be -- that the -- different from the old ones. We wanted to hire less people, even though people today is really a constraint for everybody.

It is not easy to find out skills or to develop or to train people in our days mainly in the north of Brazil. There is like Africa, or even there is Indonesia, et cetera we are facing the same problem, so the skills is really -- let's say our bottlenecks, so we needed to reduce the number of people that will be dedicated to our future operations.

If I may, I'd like to invite Bill that is -- I think he is --

Connected.

-- online, connected, to say a few words about his -- of his charges and Bill, you are welcome.

Thank you, Roger. Good morning, and good afternoon, everyone. I think, Roger, you've summed the position up very well there.

I think in recognizing our very ambitious growth program over the next couple of years, we recognize that in executing that, we need to have a very good governance structure, very good risk management approach to ensure success for the future and I think Roger has mentioned the areas we want to ensure that in our growth projects we employ global best practices.

We may use our technology, automation, to ensure lower production cost for the future, and make sure that all the resources required for our ambitious program is managed and coordinated in a responsible way to ensure that we can be on time with these deliveries of these large projects.

And we also have got to make sure that we utilize the best technical competence in our governance of the execution program and that basically sums it up. The key is for us to ensure an absolutely maintainable operation for the future and a very cost-effective operation for the future in a very responsible growth rate.

Okay, Bill, thank you very, very much. Let's give you some ideas about our concerns or what we are really dedicating ourselves to deliver for the Company. I think the -- one point that this has been (inaudible) I think of course is the management of the Company, our global company.

Yesterday, we had the rollout of the (inaudible) system in Inco. And Murilo if you can make some comments, because this is really very important to have a company completely and fully integrated. So today we have Vale group completely integrated (inaudible) that give us the visibility of what's going on (inaudible) in the real time.

This is very important to (inaudible). Murilo, could you please make some comments about that?

Yes, Roger for sure. We are very proud to say that to have a (inaudible) start that's working a common platform, in the whole Vale -- including Vale Inco. It's based in the Oracle system.

We are -- we spent a lot of time, a lot of people, good professional, with dedication demonstrated by everyone, both directly and indirectly, and the result I believe at this point of time, it's very early to say, but we are very confident that the scope and the complexity was higher than expected, but we stay with the project working very well at this stage, in two days of the working.

And in -- on budget is one thing that is very important as well. I think that working very well with a unit platform will bring a huge merit for us in procurement, in financial process, in the whole Vale Group, and I think that it's part of to have a governance model which will bring a huge merit for the whole company.

Very good, Murilo. So this was one of our goals, and we delivered that yesterday. Of course, we needed to follow into to fix any problem that certainly is going to appear, but we are working with it, and we are on time, we are on budget, and this was a very important step for the Company.

Let's talk a little bit about our past here. I think, of course, cost is a very important issue for everybody and we have worked -- we have been working hard to reduce or to keep the cost under control.

I think the worst part of the inflation -- the cost inflation that we face, I think, is part of the past right now. Of course, we need you to pay attention on what's going to happen in the future, but I think today we are much more prepared, and this part of the whole work to reduce cost I think we have always done.

Of course, always we have a more space, more room to improve and we are working to improve all our operation. In terms of performance, our first quarter was good, but not very good, because we had as much information, several issues in our operations, and in the second quarter of '08, I think we overcome this part of those issues, so the second quarter was better than the first one, but it wasn't really an excellent performance.

I feel that in third quarter we are going to have our normal, let's see -- speed and normal performance in terms of our operations. I'm very optimistic that we are going to have a very good and very strong second part of the year.

In terms of our marketing -- the market is still very strong, is very good. What we needed to do is to deliver our production. Our client -- they need that, they count on us to deliver everything that we have promised and we have in terms of contract.

I think we will be able to do that without any problem. Of course everybody today is concerned about the slowdown in the economy, the market economy (inaudible). I think this is a reasonable concern due to the problems that we saw and is happening right now in the next stage, mainly in the financial area that is spreading up out of the consequences of this financial crisis, or this (inaudible).

But what I can tell is that we are not safe or we are not feeling any big movement in the market. Of course, if we analyze today, China is on vacation, Europe is on vacation. China is going to be back to business in more -- 30 days, so we are going to face the economy recovering again in the normal speed. Europe, I think the consequences of the crisis is -- there are some countries that are feeling that, but I think this is not really dramatic, but here in Latin America -- the Latin America is growing, and we have big part of our market here in Latin America.

So certainly -- I'm not pessimist about the near future and I'm optimistic about the long-term, about the medium-term market for our sector.

So what we needed to do right now is to be -- to concentrate, to analyze all the opportunities that we have, opportunities to grow, and we are deeply analyzing each possible project that we can develop, and I can tell you that we have a huge pipeline of projects that we are right now implementing, but you have new ones that we are finalizing the feasibility studies, and I think soon we are going to announce new projects new organic growth.

As I -- it has been mentioned to you that we have of course, two -- three areas that we would like to grow or increase our presence in the market.

Of course, nickel and iron ore we will always working to strength our leader position in the market, but copper and coal, mainly coke and coal is our two main focus to -- because we feel that we have a room to grow with a higher speed, and that's what we are looking for.

What I am saying with higher speed, is that we clearly and you must understand that we need everything to make an exercise to balance just to see, or to actually figure out which is better for us.

These are going to go (inaudible). This is part of our day by day business, our day by day job. So that's what we have been doing, and we continue to do that, analyze the return that we will be able to get from the organic growth, and the return that we will be able to get from any possible acquisition.

To be clear and better objective, we are not considering to making any major movement or major acquisition. This is a possibility, but is not probable. What we are looking for is a maybe visualize some small acquisition to speed up our pipeline of projects and to make more consistent our organic growth. This is our main strategy right now.

What I can tell is that up to now we have been analyzing several projects, several resources, several reserves, several new possibilities of investments, and I feel that the organic growth seems to be more a deadweight for us to push ahead our investments.

So I think the main question that everybody has in mind is what we are going to do with the money that we raised recently. First of all I would like to say thank you very much for the shareholder's support, and today we finalize the third transaction we are left with.

Fabio Barbosa has a very strong cash right now, and he needs to be responsible, he needs to take care of it. And he's doing a very good job to hold the money, in cash.

But the point is, today we have all the options open for Vale, all the options. If there is some opportunity or something that we want you to take advantage of the moment, we can jump immediately, immediately, to stir up this organic growth or maybe just acquire some small medium-size operations that can strengthen our position in the market.

So again -- and we have been saying that, and we are very -- and we are well disciplined, and we are -- continue to go well disciplined on this. The name of the game for us is return, profitability, and good assets.

That's what we are looking for. This is our obligation, this is our duty, the duty to be sure that everything that we are going to develop or everything that we are going to do respect the value creation, respect profitability, respect very good assets.

We are not going to make any movements just to be big. We want it to be big, but we want it to be a great company. We want it to have excellence in terms of operational standard and asset's value.

So very soon, maybe in one or two months we are going to finalize our studies and turnover studies, and we are conveying our clear strategy to you all. I'm very optimistic that we are in the right track. We have lot of works to do internally and we are doing that. We needed to be very focused in the investments because it's a huge investment and we are, of course, developing a very strong and very open and transparent relationship with our suppliers and with our construction company that is working with us.

We need to extract from that the best synergies among other process that we are developing here in Brazil and outside of Brazil, and Brazil I think is going to give us a very good answer, or is going to give us a very good delivery in those projects.

Another point of that today is that for me as the CEO is a point of concern, is the relationship with the stakeholders. Of course, if I remain so disciplined and concerned about how to develop a new project, respecting the environment, and the -- everything to minimize the interference or the -- affect the environment, this is part of our concern, and I'm very, very disciplined and this is one of my priorities.

Another thing that is very important in the current environment that we are going through is the relationship with community, with government, that is becoming every day much more sensitive worldwide. This is an issue for all the big natural resource companies in the world, and I can tell you I think Vale is very well positioned in these kind of environment.

First, because we understand very well complex environments. You know that Brazil, to survive (inaudible) to survive in the past it wasn't really a easy task. Today it's much better, but even though we learned a lot, and we can deal, we can manage tough or complex situations very well.

I think an example of that is (inaudible) the good project I think right now it is moot. The relationship with the community, with the government, with the workers there, the relationship in Indonesia is going very well.

In Africa, although the country is dead, we are present, we are developing a very strong relationship with the community, the government. And here in Brazil, you know that we are a very important company and we -- this is our home and we understand very well the environment here and we are doing well.

So now what I'd like to be open for questions or any -- or probably the (inaudible) at your disposal to answer any questions. Thank you very much.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. (OPERATOR INSTRUCTIONS) Please restrict your questions to two at a time.

Our first question comes from Mr. Felipe Hirai from Merrill Lynch.

Hi, good morning everyone. I have two questions. The first one is regarding potential acquisitions. So we're seeing that there is a major sell-off in the stock market currently, and some of your competitors here are using the sell-off as an opportunity to make acquisitions. So how did you see the sell-off? Isn't these one of these opportunities, Roger, that you mentioned that could arise and eventually could go out and make some acquisitions?

And also if you could comment also on the -- as now your -- after your upgrade to BBB+, how's the current situation of the credit market for you, and what is the potential impact on cost?

And as -- my second question is regarding iron ore prices. We saw some kind of a softness in the iron ore spot price over that last two weeks. So if you comment a little bit on the main reasons why you think that that happened, and if you see if there is any possibility that iron ore prices could go down in 2009 rather than going up? Thank you.

Hello, Felipe, how are you?

Very well, thank you.

In terms of iron ore price, we don't have any -- we don't see any room for price decrease. If there is a room, it's for price increase.

Due to the current situation of the market, we don't need to see the market to be more -- to be stronger, to give us the ability to deal with, to discuss with our clients a price increase. So for me, the climb is upward. It's not downwards. At least let's say a small price increase, but the trend is upwards.

The first question that you made about M&A or acquisitions, et cetera. Felipe, we will be very disciplined. We don't want to -- aspire to invest, just to invest. As you know we have been negotiating some very important offers that we believe that could be very good for us, and fits very well to our strategy. All those discussions is part of the fact, so as you know (inaudible) could be a very nice movement, but we'll think about it, great, good deal for them.

We analyzed the Xstrata, Xstrata right now is just announced that they want to buy or to acquire a platinum company, which isn't -- which is not in our strategic, let's say, work. Of course there are other opportunities in the market that we are analyzing. As you know, maybe and probably the number of M&As, or the number of acquisitions maybe is going to rise a little bit.

I think the market is very excited, the market is very strong. But with the peso increase that we just finished, I think we -- one objective, one goal, I think we achieved, the upgrading that is going to help us to reduce our cost of (inaudible), the -- to -- for our investments or for any possible or -- not possible, probable movement to an acquisition.

The second one is to gain flexibility, to be ready for very possible number of opportunities that appear in the market. So I think we are right now in a position that again is a very strong and very good position to be. We have money and cash projects to be developed, and of course the market right now is going in our favor, why that? Because the number of buyers were reduced by the current -- present question (inaudible). So again, these (inaudible) our position to be a very important player in the -- in any market, in any market.

Thank you.

Okay. Roger, thank you. If I can just clarify one point here, I thought that during your speech -- during the call you mentioned that acquisitions were possible, but not probable, but I had the impression that now you said that acquisitions are probable. So could you just clarify to me that point, please?

Okay. The acquisitions are possible, it's not probable.

Okay. Thank you.

Just to -- if appears any opportunity, this is our job to analyze all of them, but it's possible, it's not probable.

Okay. Thank you.

Thank you.

Excuse me. Our next question comes from Mr. Roger Downey from Credit Suisse.

Good morning, everyone. Good afternoon to those in the other side of the world. I'd like to focus on the market issues that would've been discussed, but I think it's one of the most important I think misunderstandings in the -- today. And perhaps Martins, maybe -- could you elaborate a little bit more on the qualitative aspect of the market today.

In other words, there may be even some slack in low-grade material, but certainly not in high-grade material and just some more views on that, and maybe even if you could elaborate more on the value and use. What sort of value and use does the high-grade products that you guys have, what sort of advantage do you get from that? And if that is -- would be a starting point in the forthcoming negotiations? In other words, would you be starting from a point where your value and use differential sustains a higher price in Asia?

And secondly, on a more quantitative aspect to declining demand of iron ore going forward, we -- you guys pointed out some difficulties in bringing on new projects, projects in West Africa, and your own as well. I think in the press release there was a comment that Carajas' brownfield expansion -- we're not even talking about [Zhuhai] here yet. We're talking about the brownfield expansion to 130 could be delayed. So that's necessarily less tons in 2009, is that correct?

You made a lot of questions, Roger. The first one is about this qualitative aspects of the iron ore markets, okay. So if you look (inaudible) in the spot markets in China it's clear that this high price in the spot market in China attracted a lot of iron ore. A lot of I say, not iron ore, but a lot of iron units, okay.

So a lot of iron ore was brought to the market, sure, but many part of them are not -- can be called the real good iron ore for iron making. So the only way to use this iron ore is to mix this with high quality iron ore, otherwise you have a very low productivity, you have a very high consumption of coke, energy. And the results, at the end of the day the cost of this iron can be higher.

So it's very interesting to note this nowadays that the highest price possible -- the highest price for iron ore in the spot market in China is for Carajas ore. So they are paying almost $40 above the normal iron ore from Carajas in the spot market in China.

So -- and we have some of our customers that take their (inaudible) with them, because we don't operate in the spot market. And they take our iron, they resell in the spot. So this is a big demonstration of the value in use of Carajas. And when you look going forward, the quality of the project that we developed not only in Australia, but in -- even in Brazil, everywhere all of them are not high quality ore, which means that the hidden value of Carajas is increasing.

Our task going forward, now talking a little bit about the next price negotiation, is to bring this hidden value to our company, to our shareholders. Historically, Australian ore was sold with discount because of the logistics. They are closer to Asia. And Brazilian ore was sold with discount, because of the high quality that was not charged.

So it seems that now the Australians are looking for this freight advantage, and we are looking for the quality advantage of our ore. So that is probably in the next round of price negotiations. We would drive the players in that direction. And we are very confident that not only Carajas ore, but even Southern system ore we have a very high quality ore in the Southern system that we can better price in such a market.

So as far as the quality of the market and also the trend for price negotiations, I think it's clear that things will go in that way. As far as the Carajas, that's that's 130, it's sure that we have some difficulties in developing the -- to get the permits and the approval. But on the other hand, we (inaudible) all of the things that we have to (inaudible). So we procured all the equipments that we will need for this project, and we made a lot of changes in our project in order to get this additional 130 million tons available by end of 2009.

So we are sure we have some difficulties in this permit, but we are doing all the measures to offset any delays that we got relating to that. Quantity wise, what we see is no big impact of this sort of prime situation in the market. For sure, there will be some adjustments. And as you look China now is -- for two or three months they will reduce -- a lot of blast furnaces were shut down during this period.

So this period there will not be so high consumption of iron ore. But all the basic information that we get, all the economic information we get from China are very positive. And their projects are going on. Their investments infrastructure is going on. A lot of our projects are being developed all over the country. We have now a 130 million tons of new steel production being constructed in China that (inaudible) entering operation in the next two or three years, and many other projects are on the strings to be announced very soon.

So we do not see any big problem in China besides these adjustments, because everybody has to convey. Last year we sold iron ore almost 40% below the spot price in China on a delivered basis. So this market was really very strong. And now such accommodation is coming. But our price today is even below what the price will be.

We have some movements in this -- in spot markets in China, but only today freight rates to China went down $10. So I think any kind of decline in the spot prices in China will be followed by the freight rates also. And at the end of the day we continue to have space for further price increase on a FOB basis.

I'm talking about the normal ore, not talking about the high quality ore that we have that surely will price better in the next price negotiation. So we are not concerned about the market. And we are not concerned about the volumes that we are going to deliver. Although we are facing a lot of difficulties these days I think Roger stressed this point, a lot of bottlenecks in equipments, in suppliers, in engineering, and everybody is struggling. All the big and minor company are struggling in this respect and are facing difficulties.

You can imagine the newcomers, okay, because we have a long tradition with suppliers, and we have a kind of preference when we negotiate with them. So all of these here projects are facing a lot of difficulties, and I would say much bigger than ours. We can talk a little bit about one project in Brazil that everything is there and it's not delivering, okay.

If you look to the figures, they are not delivering. And they have the railway, they have the port, they have the mines, everything, and they are not delivering the volumes. So that means the difficulty that the newcomer can face when going to market for equipments, for engineering and for supplies. So this is also affecting everybody in the industry, but much more -- in a more extensive way, the newcomers.

So we are -- continues to be on the bullish side in the iron ore market in the Mexico markets, and in the manganese markets, because we believe that the steel industry will continue to grow.

In the western world today if you look at the Americas only we have near 40 million tons of steel that's being imported from Asia. So we are standing near 200 million tons of iron ore to Asia. And part of these come back to the Americas to supply local steel consumption. So there is a lot of opportunity also for increase in steel production in the Americas, not only talking about Brazil, but also about state. We nowadays see some movement in the state to develop steel production on a blast furnace (inaudible) basis.

So I think there is a lot of good news in the market, and not talking about China that in our most pessimistic case will continues to grow around 6 or 7% per year fostering steel -- investment in infrastructure and the steel consumption.

So we continue to work very hard, and our main problem nowadays is to deliver the project that we have, to deliver the iron ore that the customers are buying, and to control the cost, that are our main task nowadays. And we struggle every day in this respect, how to deliver our project sooner, how to deliver more to our customers, and how to control our cost in such environments.

And Roger, I would like to add that in terms of investment, investment for opening new mines I think Vale was in the very beginning of the cycle, so before a lot of people. And then we have been facing a lot of hurdles and headaches to the first orders or to delivering orders present. And there are today a lot of new projects in the market everybody is saying that they are going to delivery X million tons by 2010, 2011, 2012 et cetera, et cetera. I should say that this is possible, that all the projects will deliver everything that they are promising. But I can tell you it's not probable that they are going to deliver everything that they are promising.

Okay. Thank you very much. I'm glad that I'm not alone in the -- on this side of the fence.

Excuse me. Our next question comes from Mr. Jorge Beristain from Deutsche Bank.

Good morning gentlemen, and congratulations on solid results. My question is -- just maybe taking things down to the micro level within the Company itself quoting that on figure eight of your presentation that you just delivered two major iron projects Samarco III and Fazendao, half-line that should probably contribute about 22 million tons of iron ore to your second half results.

I just wanted to understand when are we going to start seeing the contribution of those volumes, and based on first half trends or through the second quarter it does look like you're annualizing closer right now to 330 million tons versus your 325 guidance. So I just wanted to understand if you really believe that these projects will kick in in the second half and allow you to meet your guidance. That's my first question.

The first one to talk is about the Samarco pelletizing plant's expansion. It's now in operation. But there was a delay in the project, not only in the pelletizing plant, but mainly in the concentration plant. And to some extent this project is linked with the Fazendao project, because the Fazendao project was developed to supply run-of-the-mine for the Samarco concentration plant. So they are both linked.

So if you are not getting the impact of this in our results at this point in time it's because the project had these delays. Now, the pelletizing plant is operating almost full capacity. But we continue to have some difficulty to operate the concentration plant's full capacity. So we need both operating in full capacity to have the real results. But I think that -- it's sure that in the second half we are going to get the impact of the Fazendao and Samarco projects in our results.

Okay --

(inaudible) guidance, it sounds good --

Referring to the -- this year's production what's been going on, as we face some problems in the logistical system, as I told in my speech, we reduced our production, because it does not makes sense to mine and to keep big inventories in the mine if you are not able to ship. So the shipments, we lost in the first half.

We are going also to lose the [introduction], because we didn't mine at these volumes. We kept [that] and we only mine what we can shift. That is the idea to kind of pipeline from the mine to the port. So you'd be -- you will ship from the railway, and you ship from the port. And we always avoid to produce more in the mine if you're not able to ship in the railway, or to ship in the port. So this situation bring about almost 5 million cost reduction because of this.

But on the good side, I can tell you that if you can get a better performance in the logistic system, we can ship even more, because we have big inventories in the mines, nearly 20 million tons that are there. If you can get a better performance -- and it's really going on very well, the performance in the logistic system is improving.

So we have a good space to deliver more. And I think at the end of the day what is more important is how much you deliver than how much you produce. Long term, things have to be the same, but in the short term it's more important to deliver than to produce. The best place to -- we have a saying in the mining industry, which means that the best place to -- where to keep inventories is in situ, which is in the mining -- in the mine itself. So you don't mine -- if you don't -- can't ship, you don't mine.

But Martins, I think we are running today at 330 million tons per year -- only July and August.

July and August, [it's normal], because this quarter is the best quarter, normally because it's dry, and you have one day more, but considering the July number, we run above the 28 million ton shipments, domestic markets and exports. So we are running now above our target, okay. In a monthly base, we are running more than our target. But we needed to keep it, cannot take only one month as a reference.

July was very good, August is going very well, and probably will be very good also. So we are now up to date, and the logistic system is prepared to ship now more than 350 million tons. So if you don't have any kind of disturbance in the system with line delays and things that normally happen, some equipment that -- this is normal in the business, okay. We are in a very good position to increase our shipments. We have (inaudible) and we have the logistics system in place.

Okay, thank you. And sorry, my second question, and you answered that actually, was partially on the inventory situation. So it does sound like you have, as you said, once you open up the logistic bottleneck, the ability to sell more. But my other question was how is this new production going to affect your unit cost per ton profile?

This has been a trend we've now seen for several years, every quarter, year-on-year, quarter-on-quarter, this incessant increase in unit cost. At what point do you see this new production coming in at lower cost, and helping turn the tide and stabilizing your unit production cost?

Could you sort of quantify what Samarco -- or sorry, a Fazendao would be kind of contributing in terms of unit cost versus your $25 average, so we can get an idea as you bleed more of your new production into your overall mix, what we could expect to see in costs for 2009?

Fazendao is -- the project Fazendao is a run-off-the-mine project, okay. We don't sell processed ore, we sell what we get from the mining site. So it's a very low cost operation. And -- but cannot be considered as a reference for the whole thing. For instance, (inaudible) speaking, [Brucatu] production for instance is running near 40% below the average cost of the Southern system, okay -- and Southeastern system. Brucatu is a new mine.

And in Carajas area, these new projects that we are developing that are -- expect to enter in operation by the end of 2009, the cost of this project will be nearly 50% below the average cost. The very question is when you -- in mining, when you produce more in the same mine, normally the margin of cost is higher.

So in order to curb this cost structure, we really needed to bring in operation a huge amount of new mines that would drive the average cost down. So I think Serra Sul will be a very important project in this regard. [Serra Lasich] is another project in the Carajas' iron ore, greenfield project, will be very important in this respect, because the new mines can really drive cost down. If you take more from old mines, you don't have such impact. Normally, when you take more from old mines, your cost goes up, not down, so that's the situation.

Again, Jorge, just to complement, it's important to bear in mind that margins are hard despite the recent cost pressures and we managed to keep them under control. And reality is that we managed to increase margins even in these very challenging times.

Precisely, correct.

Thank you very much.

Thank you.

Excuse me. Our next question comes from Mr. Guy Rodwell from Rothschild.

Hello.

Excuse me, Mr. Rodwell, your line is open.

Yes, my question has been answered, I apologize, thank you.

Hi Guy, how are you?

Our next question comes from Mr. Carlos de Alba from Morgan Stanley.

Yes, good morning gentlemen. I have two questions. The first one relating -- regarding the organic growth project. Is there any update on your $59 billion budget given what has happened with currency and with the sharp increases in the steel prices? And is there any way that you can accelerate your growth rate and how so? That would be my first question.

Hey Carlos, thank you very much. We haven't reviewed the figures for the $59 billion as Roger mentioned. We are reviewing this element, but also the scope of the pipeline of projects with the idea of increasing the scope of what we presented to the markets now. So what we should expect at our next announcement as an indicator in the next one or two months is a review of CapEx figure that will encompass an update on the currency effect, but also a major adjustment of this growth and production targets.

Okay, thank you. And my second question, Fabio, is related to prices for iron ore and coal. Iron ore, what was the reason that you couldn't implement all the price increase as per the latest negotiations in the second quarter.

And then in -- on coking coal, realized price came a little bit below what we were expecting. So maybe that is in relation to the product mix that you have. If you can give us some information, I would really appreciate it.

Carlos, this is normal delay in discussing with our clients, the terms of our contracts. And this is an important point that you made that's -- we have the adjustments already in our screen let's say, but it was not accounted for as we didn't sign the formal adjustment with our clients. It is a matter of time, and we hope to see them reflected sooner rather than later. Consider that it's $553 million for iron ore, and some $80 million for coal.

It's a bureaucratic --

It's a bureaucratic matter.

-- issue, not the --

So about $630 million will flow directly to the bottom line in the next few months.

If we conclude the bureaucratic procedures, yes.

-- that conclude.

Yes.

-- also conclude.

Yes --

-- we are going to have everything in (inaudible).

The question was raised that -- because of the (inaudible) you can only account it when you have a formal agreement from the customer, so sometimes it takes time.

That's right.

Thank you, Carlos.

Thank you.

Excuse me. Our next question comes from Mr. [Birhallo Bidoa] from Fidelity Investments.

Hi, I have a two-part question. One is like what was the available liquidity at June '08, and second, are there any funding needs this year?

We have the kind of concluded the operation of the offering and we have a very strong position by the end of -- the June 2008.

So we are very comfortable liquidity-wise. We find that fits correctly what you asked. So we have no intention to go to the market at this stage.

We're free to go fast, and we'll just do the same, please.

And like how much of your $59 billion CapEx program you intend to fund, like what is the debt equity mix you are looking for? Or is it entire internal accrual?

We have -- the bulk of our CapEx program will be financed through our cash flow, and as we commented before, we are reviewing the scope and volume of CapEx that we are going to present very soon to the market and considering what we are reporting, we believe that the bulk of the funding will come from cash flow plus the recent operation that we concluded.

And as a reference, we would like ours to work with a low leverage in our balance sheet. This is a concept that we will adjust according to specific market circumstances.

All right. Thank you.

Excuse me. Our next question comes from Mr. [Marcello Bisach] from [Itau] Securities.

Hi, good afternoon. Just a quick clarification on nickel. I believe your guidance was for 8% growth in nickel production. However, as I look at nickel sales at the first half of the year, they're actually down 4%.

And you said there was a difference between production and sales, because you actually sell third-party nickel, so that might account for the difference, so I guess it is two questions here.

First one, why are you reducing third-party sales? okay, you have production, but why are you still not selling to third parties? Is it not worth doing that anymore, or why are you stopping that?

And second, if you can give a guidance for your total nickel sales for 2008, I would really appreciate it. Thank you.

[Murilo], will you take that?

I think that's the main reason about the number that you have mentioned, because you have already started in Dalian -- it's a important utility nickel, but we needed to build the inventories and we are working related to the full production for the year, we are working absolutely in line with the budget.

Okay, and why are you reducing the third-party nickel sales?

I think that it's one specific issue mainly in Canada that we are working in Sudbury. We need this to be well aligned with the demand of our customer.

Okay, so I can expect you in the full year you'll still sell 625,000 tons of nickel, which was your original guidance?

Again, we are working absolutely in line with the budget.

Great, thank you very much.

But Marcello -- this is Roger. Of course we are looking at the -- we are looking at the markets right now, and we are not going to force sales in, for example, in the (inaudible) area.

So we are going to be very disciplined, because there are some rationales and there are some level that we needed to respect. So we are not really going out there to beat all the records in terms of nickel sales. What we want to do to have is profitability.

Okay, so in that case and as I said, the best inventories are kept to the ground, so in that case you could eventually kind of miss your production targets that will be a deliberate miss, just slowing down production to oversupply the market, right?

Yes, sir.

Perfect. Thank you very much.

Excuse me, ladies and gentlemen. This concludes today's question-and-answer session.

Mr. Fabio Barbosa, at this time you may proceed with your closing statement, sir.

I would like to thank you all for attending this conference and our colleagues in the respective boards and we will be of course available for any other issues that you want to raise and discuss with us. Thank you very much for the attendance.

That does conclude our Vale's second quarter 2008 earnings conference call for today. Thank you very much for your participation and have a good day.