淡水河谷 (VALE) 2010 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 second quarter 2010 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). As a reminder, this conference is being recorded. To access a replay, please dial 55-11-4688-6312, access code 47095. The file will also be available at the Company's website at www.vale.com at the Investors section.

This conference call and this live presentation are being transmitted via Internet, as well. You can access the webcast by logging on to the Company's website, www.vale.com, Investors section, or at www.crnewswire.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 are Mr. Roger Agnelli, President and Chief Executive Officer; Mr. Guilherme Cavalcanti, Chief Financial Officer; Mr. Jose Carlos Martins, Executive Officer of Marketing, Sales and Strategy; Mr. Tito Martins, Executive Officer of Basic Materials Operations; and Mr. Eduardo Bartolomeo, Executive Officer of Integrated Operations.

First, Mr. Cavalcanti 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. Cavalcanti. Sir, you may now begin.

Thank you. Good morning to you all and thank you very much for attending this conference. We will have a brief presentation about the results and perspectives and then we will go our Q&A session.

We believe that we delivered an outstanding performance in the second quarter 2010, reaching operating revenues of almost $10 billion, EBIT margin of almost 48% and EBITDA of $5.6 billion and net earnings of $3.7 billion, all significant increases from the previous quarters and also a very significant increase compared to the same previous-- same period of last year.

On the cost side, we presented savings in two quarters in a row, saving up to $500 million.

Adjusted EBITDA almost doubled, being driven by strong demand for minerals, reflected on the price various and representing a decrease on the revenue ratio from 2.4 to 1.8 gross debt-to-EBITDA and to 1.3 times net debt to EBITDA.

Our powerful cash generation also allowed us to increase our investment in 88% from $5.2 billion to almost $10 billion on the first half of 2010.

Now talking about short-term outlook, it appears that financial markets were predicting risks that did not happen. This trend was reflected on the commodity prices that now appear to be recovering, as we can see on page 12.

In core countries of Europe, recovery also remains strong and on page 14, following the history of US industrial production, we can see a pattern of moderate growth after strong recoveries.

On page 15, we see China continuing to grow at high rates. Although lower than previous quarters, we believe it is a more sustainable pace.

On page 16, we can see global carbon steel output returning to the peak reached before the crisis.

Despite short-term volatility, demand for iron ore remains strong. The quarterly pricing system is being consolidated with all our clients.

Nickel inventories have been dropping, while prices are hovering around $20,000. Therefore, we believe that markets already priced the end of the strike.

While stainless steel output could weaken due to seasonal factors, we believe the demand for nickel to non-stainless-steel applications will remain strong.

Our constraints to asset utilization and sales growth are being removed. For example, the end of the strike in Sudbury and our gradual recovery of Ponta da Madeira's shipping iron ore capacity.

Now talking about growth opportunities. This year we delivered three projects already -- an additional 20 million tons of iron ore, CSA steel mill, Bayovar phosphate rock mine -- and we have four projects to be delivered through the end of this year -- Oman pelletizing plant, Onca Puma nickel mine, Tres Valles copper mine, and Estreito hydroelectric power generation.

Those projects amounted to $7.7 billion in investments that now will start to generate value to our shareholders and there are many more to come from an exciting pipeline and, moreover, many growth options to feed this pipeline in the future, as we can see on page 23 and 24.

On slide 25, we have a summary of the Bayovar phosphate project that came on stream on time and on budget. And, as you know, we announced yesterday a public auction to acquire 100% of Paranapanema copper smelter, which can reach an investment of $1.1 billion, representing a belief in the Brazilian internal market and also a strategic fit to our copper mines.

With that, I'll turn now to the Q&A session, please. Okay, sorry. I'll turn now to our President and CEO, Mr. Roger Agnelli.

I wasn't supposed to speak, but I think it is good to say something about the results.

First of all, good morning, everybody. It is a pleasure to be with you today and it's-- I'm very happy to see that Guilherme Cavalcanti is recovering in Brazil (inaudible) or hot feet, because in his first presentation, he's showing a very good result in the second quarter.

What I would like to say is that everything is going well. The trend is very good in terms of revenues, in terms of costs, in terms of perspectives. We are very happy that we are in a very nice and very good year for Vale.

We have several projects that we are finalizing right now. We-- as you know, we have been investing heavily in the last three or four years and we have almost $15 billion, $16 billion in capital allocated to those investments without any revenue. And now we are going to see some return on those investments.

And I think the most important thing is that the major parts of the projects are greenfield projects. And we have already prepared those [projects] to brownfield expansion and we are going straight in almost everything. In Bayovar, we are going to inaugurate that on the 5th, August the 5th, and we are going to announce that we are going straight for the expansion. We are going to finalize Mozambique and, again, we are going straight for the expansion.

We finalized, already, the CSA. Maybe in the end of the year we are going to decide if we are going to expand the project again or not. Other projects that we are finalizing next year, also, we are going straight to the expansion. Example, [Salubu].

So, of course, the greenfield projects, in the very beginning, the return is lower, but when we add additional capacity, we are going to increase the return on those investments.

So I think we have several options of growth, organic growth, as you saw in the presentation. We have several other projects that we are, right now, finalizing strategic planning, but our intention is to go ahead with those projects. We are confident that there is market for all the new capacity that we are adding to our systems in different areas. We are not concerned about that, because all those projects, they are very, very competitive, all of them.

Big resources, big reserves and we know that we can really be in the first or the second quartile of cost in all those projects. After the expansion, we'll be in the first quartile. So we are very, very confident that we are going to bring a lot of return to our shareholders.

What we are focused or at least I'm really focused today, is innovation. Innovation is something very important for the Company. As you know, any project will run for, at least, 20 years. And the world is changing. Everybody, the society, the global society, is concerned about the environment, is concerned about social development.

You know that we are right now investing heavily in Africa. Africa is a place that we need to pay attention about social development. We have to pay attention in sustainability. They need that. They deserve that and that's what we are creating some opportunities for the local people. It's really important for a mining company like us to be really very sensitive to this kind of issues.

And we understand that Africa, everybody feels is a risky continent, but we understand very well the needs that they have, the-- how we have to carry the investments there in Africa. So we don't see any problem there. We are very happy in Mozambique. We are very happy in Zambia, in Kenya. Everywhere that we are developing our projects, we are happy.

Of course, we needed to learn. They needed to learn. (inaudible) get-together and see-- show that we are competent. That we are going to respect the sustainability in our projects.

Of course, the issue is to create the mine of the future and we are working on all projects, considering that in 10 years nobody will accept the same ratio of water consumption that we have today. Nobody will accept the CO2 emissions that we have today. Everybody will ask for clean energy much better than we have today.

So in every single new project, we are delivering those projects and we are considering those projects as much more clean, much more sustainable projects. So this is a challenge for the next (inaudible) of the industry.

Mainly after the issue that the United States is facing in the Gulf of Mexico, that is polluting everything. So we have to really be careful with the projects. We need to bring today the mentality that we are going to face in 10 years. So it's really very important to be innovative, to be concerned about the environment, see how we can help the global governments to develop their communities, their social standards in every single country that we are present in.

I'm very confident that Vale is ahead of the other companies, of the other mining companies in terms of sustainability. I'm very confident and I'm very proud of the work that we are developing today in Vale.

As I said, the trend is good. We are prepared to take advantage of this very good moment in the global economy. Of course, there are some concerns about the near future but, again, we are here to look forward the next 20 years, not for the next quarter or the next year. We are confident that the market will be very strong, will be good for everybody and will be good for our operations in order to sell whatever we are going to produce.

Again, we are in a very strong position. I should say that we are in the best moment today in our history. We are in the best moment of our history. We adjusted the Company last year, heavily, in terms of cost. We train our people, we develop our assets a lot instead of just maintain them. We are facing issues, day-by-day issues. Like every year, we face them and we overcome all the difficulties that we have.

That's what I would like to say to you. I'm very confident that the trend is positive. The trend is really positive. Thank you very much.

Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Mr. Felipe Hirai from Merrill Lynch.

Hi, good morning, everyone. Guilherme, good luck on your new role at Vale.

So I have two questions here related to iron ore. So my first one is regarding prices. So if you could just give us some explanation of what happened to the realized prices? According to the formula, we were expecting prices closer or above $100 a ton. The average price came at $92. Maybe if you could talk on what happened with prices in May and June?

And also on that topic, if you could talk a little bit on where you expect to see prices in the third quarter? Again, according to the formula, we would expect to see prices going up by $30 in the third quarter. So that's my first question, thank you.

Okay, Felipe, Martins speaking. As far as the price system, it is rolling out very well. In the first quarter there was no problem to apply the new price system in the quarter. As you know, the spot market at that time was going below the formal price and in this quarter, the opposite, but the system is going well, very well, also.

We shipped every ton in this first month and we have all the ships nominated for the next month and we don't believe we're going to have any kind of problems. Customers are fulfilling their obligations, as far as the price system, also as far the quantity.

So the system, in itself, is doing very well. The difference you see on the price realization in the second quarter against your forecast, based on the market situation, probably you did that looking the average of the market when you make your assessment.

We have two points that puts our price a little bit down. The first was the carry-over, because, as you know, we faced some problems in delivering our volumes in the first quarter. So that we have the heavy rain and other issues that we already talked about last time.

So we have a carry-over volume that we had to deliver with the former price. This is a contractual obligation. That's the way we work. And we're never ashamed to actually agree with our customers if it is in the contract.

So we have to face this situation and we deliver nearly 10 million tons in the third-- in the second quarter based on the price of the first quarter. So that is one of the problems.

Another issue you have to consider is that we sell part of our sales in the domestic market. And for domestic market, we take out the logistics that we don't use. So, for the sales in domestic price, the price is a little bit because we're not FOB based on the port, on the ship. So then there is a small discount based on it, because we don't spend the money on the logistics, so we don't charge the customers.

And the third point is that probably you assumed 66% all over our sales and it's not true, but 66% is only in Carajas. So in the southeast system, we have something around 65% and the south system is around 64%.

So if you take all of those factors, that's the reason we have this difference in price.

Going forward, you know the index, how much the prices are increasing this quarter and that's going on, also. But I also needed to make this point that some carry-over we'll have from the second quarter to the third quarter. So we expect in this quarter to finish all the carry over, because the operation is performing better now. We don't have the impact of the rain. So third quarter, also, is the best quarter in our track record, if you look at other quarters in the past, you'll see that the third is always the best. So we believe that we can finish the carry over.

So as price is concerned, things are moving very well and we are very optimistic about the new system and the market was following up the same system and so I think it was a case of success and, again, is a good demonstration of Vale as the leader in this market. So I don't see any kind of problems, going forward.

But even with this big, throughout this quarter, based on the spot was much lower than the average we are using for contracts, customers are committed and they are behaving like we expected. So that's the point I hope I was able to explain your question.

Okay. Thank you, Martins. My second question is related to the production and the logistics issues that you had in the first and second quarters. Can you just explain to us what is going on now at Ponta da Madeira and the other port? How-- when do you think that you're going to be able to resume your full production if those issues have been solved? And then how should we think about production and shipments for the next two quarters? Thank you.

First, Eduardo talked about and I think we made a big change in our structure and I hope now that you have the mine, as well as the port, under the same direction, I think we're going to have a much more smooth operation, because those areas will be much more together and I think that will bring a lot of improvement in the performance as far as the integration between mine, railway and port. And so Eduardo will talk about this point.

Okay, Felipe, first of all, you should try to separate what is-- from behind. Behind is we had the (inaudible) of the fourth line in Ponta da Madeira. It started in November with the fourth dumper, then it's really catching up, the number of the yards, the reclaimer, the stackers. And now it's all finished, I think.

Look at June, for instance. We did the best year in-- the best month this year. And we are looking very positive. You can say, as Martin's already mentioned, June 1st (inaudible) added to the normal problems that we face in day-to-day operations on pallets of equipment. Of course, they heard it a little bit more on Ponta da Madeira. Core technicians worked very well. It's already strong.

So we had the rainy season that, in the case of the North goes a little bit further than through June. So-- but, anyway, if you look at the second semester, the ramping of the fourth line is ready and going-- and is going well. The rainy season, of course, is well over, as Martins has already mentioned.

So we're looking at the normal problems that we have the day-to-day operations. We've been tackling them and solving them and we're very, very close and (inaudible) to our budgets, even some-- I mean, I'm very optimistic about the second semester.

And, Felipe, this is Roger. Of course, it's very important to mention that we are preparing all the systems in the Company for the coming production. So you know that we are expanding production in the north system, in the south system and we needed to prepare the ports for this new capacity requirements.

So Eduardo mentioned about the north, the Ponta da Madeira. I consider that nothing, it's not a problem. It's something that you have to face in the (inaudible) and, as you know, 2007, 2008, 2009 equipment, old equipment that was reduced in this time. Some of them created some quality issues.

So everybody's facing this kind of thing. So they were [impacting]. Instead of take like three months, it took like three and a half, four months. So this is natural. You are going to see in the third quarter that the Guaiba Port here in Sepetiba Bay was stopped for two, three weeks, just to prepare the port to receive the new car dumper--

Ship loader.

The new ship loader, sorry, the new ship loader. So what we are doing is the work that is necessary to do to prepare the system to increase capacity in the near term.

And to consume all the iron ore that is produced in the mines. That is the most important thing. So we're going to move it through the ships.

And, Felipe, as far as the price issue is concerned, I would like to add another point that I forgot to say. When you make your calculations and you use our deliveries, which is in wet basis and the pricing system is in the dry basis. So this brings something $5 or $6 difference, okay? Because your calculations are (inaudible) and then we price on dry days. So this is another point that you have to consider when you assess the average price that we are realizing.

In the first and the second quarter, the ore was really wet because it rained a lot.

Excuse me. (Operator Instructions). Our next question comes from Mr. Ivan Fadel from Credit Suisse.

Good morning, everyone. Good morning, Roger, Guilherme, Martins, Tito, Bartolomeo.

My first question is regarding the projects, the CapEx. When I compared the CapEx budget in the first and second quarter releases, I noticed some changes in Carajas plus-30 project, also in Vargem Grande Itabiritos, Moatize and Tres Valles. Could you go over them briefly to explain why the CapEx increased in most of them and why, particularly in Carajas plus-30, you have now a lower budget specifically for 2010?

And my second question would be related to Vale's growth prospects and M&A. So Vale's generating very strong cash flows in the next few quarters and, perhaps, years on very high iron ore prices expected and every once in a while I noticed that there are concern from market participants, from investors, that Vale might undergo large acquisitions in the future, perhaps taking lower returns. How do you see this going forward? Is it something that Vale's planning, for larger acquisitions, given that you get very strong cash flows ahead? Or do you keep discipline and, perhaps, focus on organic growth? Thank you.

Thank you, Ivan. Beginning with the second question, first of all, remember that Vale is the only mining company who can double the capacity only with organic investments. So our focus, really, organic growth.

So there's a lot to do, in a sense, and, again, big acquisitions has also today not only for Vale, but also for the mining industry as a whole, restricted from the financing capacity of the banking system today. So that's not our focus today.

If I can go over the projects, when you look at the (inaudible), sorry, the Carajas 30 that you asked, it's because of moving target of the startup date, because due to environmental license that we face problems to take them for presentation and, et cetera.

When you look at specifically each one of the projects like Moatize, Moatize added some logistics on it, so we had to readjust the budget to take that in account. We're going to move to track access. We're going to have to make a solution on beta port. So that's basically adjustments, normal adjustments, on the budgets.

Conceicao and Itabiritos, too, they're on a FEL 2 and FEL 3 studies, both things that as Jose already mentioned are being challenged and discussed, anyhow. That's the best number we have now. But they are normal adjustments that we have over the projects.

And, Felipe-- Ivan, this is Roger. How long have you been working with this list or covering Vale?

Sorry? Say it again?

How long have you been working, covering Vale?

For eight years, eight years.

Eight years? Okay, so you know very well that in the last 10 years we are following strictly the strategy plan that we announced there in second 2001, as soon as I took over as CEO here.

Everything that we made in terms of M&A was opportunistic approach and, of course, there some assets that we would like to own, we would like to acquire, but they are not at our disposition. So if someone decides to sell, we are prepared to buy, if it fits to our strategic strength, our position in the market, if it brings a lot of synergies for our company.

I don't believe that much in synergies, et cetera. The issue is quality. If the asset is very good, we are going after that. That's the reality. If things offer leverage, we are going to spend the money.

We have our commitment to grow the Company, to speed up the implementation of some projects or we can delay some projects. So we can adjust our CapEx if we want to adjust or if it is not time to adjust. Last year, we postponed some projects because we said, look, we are analyzing a little bit more how is going to be the economic environment in the world. And as soon as we saw that was good, okay, we started to do some investments. And that's what we are doing.

Regarding Paranapanema, these assets we were discussing, looking around that, for more-- we had been looking for more than three years. Right now there is an opportunity and we feel that we are growing strongly in copper. Copper, as we mentioned many, many times is something that we believe that is going to be very good, the market is good. We are bullish about copper and we are going-- we are going to double or triple our content-rate production.

So it's time to have those assets. Or here in any other place of the world. Why not? It's just to manage risk.

And another point that is really very important. We believe that Brazil is an economy that will perform very well in the next-- in the following-- in the coming years. So we would like to increase our exposure to Brazil markets-- to the Brazil market. Why not? So Paranapanema is good.

So you can say whatever you want to say, but Vale has been disciplined and I hate that. I hate that, but sometimes you have to have some depth just to optimize the return on equity.

Roger, that was very clear and I fully agree with you and I think that continuous reinforcement of that is very important for investors to understand. That is why we basically have Vale as our top pick and I believe, fully, that Vale has enough organic growth to boost its growth pattern throughout this high cycle and I think it was very clear so to basically mitigate this risk that every once in a while I see some investors raising concerns.

So I was really looking for just reinforcements, which I think was something to expect, anyway. So thank you very much for your clear and very straight-to-the-point answer. Thank you, Roger.

Thank you, Ivan.

Excuse me. Our next question comes from Mr. Rodrigo Barros from Deutsche Bank.

Good morning, everyone. Congratulations on the very good results, particularly when we consider the non-recurring effects of the delayed shipments.

I have two questions. The first one on the value in use. We noted that although iron ore prices came down from almost $190 per ton to $120 per ton, at the same time, the value in use increased from $4.5 to $6 per ton. Now I would like to know if you have any explanation why value in use is increasing, despite the falling iron ore prices. This is the first question.

First of all, we needed to understand that the new price formula was built exactly to get this, because the former price system, based only in the iron ore content, so if you have an iron ore that is 58 or 66, the price percent of iron ore would be the same. So that was unfair for Vale, because that situation would allow us to correct price-- to collect iron ore from others, without getting the value in use for it.

So exactly what's going on is as the price goes down and you have the more low quality ore available, the more you need the high-quality ore. So in order for the customers to get that advantage off the low-quality ore, they have to buy more good quality ore and they have to pay for it. So I think it's-- and that's the beauty of the new system for Vale, because now we really have value for our quality and the market is recognizing it and that's the most beautiful, because the market is recognizing and paying it.

So if the Australians have the freight differential, we have the quality differential. So I think both can be happy, okay? Australians can be happy with the freight differential and we are happy with the quality differential. And customers will be, also, happy because they can take advantage of proximity and can take advantage of quality and they can mix their berthing according to their best calculations.

So I think the market is proving our thesis, the long-term thesis that we always told you about it and people are paying. So if people pay, that's the reality. So I don't think we need to explain too much why because as long as the market is paying, it's because the market is recognizing it.

So-- and if the market becomes stronger, probably the VIU will be lower, because when the market is very stronger, what the market needs is iron units, more than quality, because if you don't have iron units you cannot produce the steel. So in a very, very strong market, the VIU will decrease and in a weak market, the VIU will increase. So that's the way the market is recognizing it and it makes sense, when you look at it logically inside the system, instead of the blast furnace berthing, how the people use the ore and all of those things.

So we are very happy with the new system and you'll believe that as time goes by, we'll be stronger and everybody recognizes the advantage of it.

Perfect. Thank you for your answer. My second question regards the Rio Tinto iron ore assets that Vale purchased recently and we all know that these are extremely high quality assets, which, naturally, would command a very good value in use for Vale. I wonder if you could share with us what your plans for developing that asset.

Well, the Corumba asset is the best lump ore in the world, okay? It's our biggest producer-- this mine is our biggest producer of lumps and it has a very high quality, similar to Carajas, but lump so that is an additional value, which is when you have the lump, you don't need to sinter your ore. So there is an additional advantage, besides the quality, there is-- the sizing is also better.

These resources have a big challenge with the logistics. The mine is 2,000 kilometers from the sea, whatever the side you look. It takes 2,000 kilometers to get to sea, so we have-- we are developing of fleet of barges for bringing it to the Plata River, to the Plata, so down to the sea.

And it's not only the issue, because that place is not suitable for big vessels. So we need to make transshipment. So there is a lot of logistics. I think it's not a mining issue to develop those resources, but logistically speaking, the challenge is very big.

We are moving to produce 6 million tons there. We made some investments and we are developing, as I told you, the barge system for it. But we believe that we can reach 15 million tons by 2012 to 2013, but that will always depend on the price of the ore in the markets. Because logistic-wise it's very expensive to do it, hence that was the reason that this mine was never fully developed.

But the price of iron ore probably stays above $100 per ton, long term, we believe that we can get full potential for this mine by 2012 or 2013, in the region of 15 million tons per year.

This is our [technical] reserve.

Excuse me. Our next question comes from Leonardo Correa from Barclays Bank.

Yes, good morning. Thank you very much for the call. My first question is regarding the iron ore quarterly pricing mechanism. The question is for Martins, please. We have been recently hearing of high resistance levels of the industry on the quarterly pricing mechanism and this is basically given the kind of distortions it may generate.

So just to hear from Martins if Vale's contemplating to change the system to a monthly pricing system going forward, just to get your views on that.

And the second question is regarding, also for Martins, regarding the outlook on iron ore demand for Europe. Given that the restocking is now close to complete, what type of demand levels are you seeing for Europe during the upcoming quarters? Those are both of the questions, please.

Well, as far as the price system is concerned, we just came from a price that was established for a period of one year to a system that the price is established for quarters. So it was a big improvement from one system to the other.

I think the answer for your question will be given by the market, okay? Because as long as volatility stays too high and probably there will be need for some adjustment, but I believe that after this over-shooting in this year, in these two quarters, and you see now the iron ore price is stabilizing (inaudible) in the spot market in China.

I believe that this volatility will be reduced going forward and maybe we don't need to change it. But the answer will be given by the market. So as we've told before, we need a system that can cope with the volatility. So-- and I believe the quarterly price can cope with that and will help to reduce volatility.

And if you reduce volatility, you have, also, a kind of vent that will keep the prices stable if the variation is under the same level. Long-term, I believe that we can have a more stable price. Then maybe when-- the price is established quarterly, but probably the price would be kept for a year or two if the volatility is not so big.

So I think volatility and customers will have an answer on that. For the time being, customers are committing themselves with the new price system. It was a big change for them. They come from a one-year price to a quarter, so they have their relationship with their customers. So this is a big challenge. It's a really big challenge and we needed to realize that how customers will behave under this system has a lot for this to stay or not.

One thing is for sure. If you look at oil prices, oil price is a commodity much bigger than iron ore, much important than iron ore, all over the world, and the prices are established daily and the market has lived with that. I don't think that all this talk about iron ore price moving every quarter is not good or it's bad, I think it's all a question to be used to that and as time goes by, people-- you adapt to it and I think, also, volatility can be much lower under a system that can self adjust quarterly.

So I believe the quarterly system will stay.

You asked the second question about Europe. The European market recovered faster than any other. It was a big recovery, very fast, also put a lot of pressure on us because of the deliveries, because all the customers started putting more orders almost just in time asking for more iron and so and so and I think that was the history during the first half.

Now the market patternized a little bit and it's normal, because we have vacations in Europe. Every year it was the same and so I think it's a natural movement.

One thing to look is that performance in Europe is uneven. The countries who have a different behavior, being Germany, practically come back to the same level of pre-crisis as far as the steel production and iron ore consumption is concerned. But some countries are lagging and Europe, as a whole, even after this recovery, on average, is 15% below pre-crisis levels. So I believe that there is a space from some growth ahead, because a 15% decrease is too much for Europe. So I think in the fourth quarter we are going to see some recovery in Europe.

Excuse me. Our next question comes from Mr. Rodolfo De Angele from JPMorgan.

Hi, good morning. My first question is about the Chinese iron ore industry. I wanted to ask you if you could comment on what's going on there, specifically, if you have a view on what's the marginal cost of production and if there's any structural changes going on, such as consolidation, anything on those lines.

The performance of Chinese iron ore production was very good in the last three months. I think they're operating near their full capacity and that is one of the reasons that brought some stability for the price market, also, because after the winter they come and produce almost a full capacity and they brought a lot of their ore to the market and brought some stability for the iron ore price, which is not bad, which is not bad.

But looking forward, they don't have too much space to grow and when you look at their structure, the largest mines in China can produce 10 million tons per year. So the majority of their mines is below 2 million tons per year. So their cost structure is very high. Another issue is that 30% of their production is underground and you can imagine how expensive it can be to bring iron ore from (inaudible) is very big. So then their cost structure is very, very different.

For some iron it can be as low as $50, open pit and big mines. But for some mines, it can be near $140 or $150. And those mines, when the spot goes down like it did, they get out.

On average, their cost is around $80 to $90 per ton. So-- and that's the reason, I believe the long-term price for iron ore will be not below these levels, because that was their cost structure. As long as China continues to grow their economy and their steel industry, they will need iron ore. And their cost structure for their local mines can be a floor for the iron ore price.

So, I don't-- also, quality is another point that's important. Today if you look at 66% iron from Carajas and a 58% iron from India, you have almost $30 difference between both. So it's a huge difference for quality, for iron ore quality.

So, long-term, I believe that this price will not go below $100. We had that problem in 2008, but in 2008, you have a slowdown all over the world, Europe almost disappeared, and everybody dumped Chinese markets with iron ore and their market at that time was not good, also. So it was so many factors that put together and then the prices went down, as low as $50.

But I don't believe that will happen again and I believe that the iron price will be sustainable in the range of $90 to $100 per ton, long term.

Thank you very much.

Excuse me. Our next question comes from Tony Rizzuto from Dahlman Rose.

Thank you very much. I wanted to confirm something I thought I heard and then also ask a question about pricing for iron ore. And I think I heard earlier that, Martins, when you were mentioning about the carry over tonnage in the second quarter, I think I heard a figure of 10 million tons. Could you confirm that for me? And if you could, give us an idea.

Yes, 10 million tons.

All right, thank you. And did I hear you say that that would be behind you or a little further in 3Q, as well?

Yes, we have some carry over for this-- for this quarter and lower than that, for sure, and I think we can finish all carry over by the end of this quarter. So when I enter the fourth quarter without any carry over.

All right. Thank you for that.

And then the second question is, when I think about the realization, obviously, there's been a lot of discussion about that so far, but would it be unreasonable when we think about the pricing mechanism now and as this-- the carry over tonnage dissipates somewhat, you're operating at better levels, the port issues, et cetera, are we likely to see a pricing increase that could be closer to 40% or 50% sequentially?

We have a problem. We cannot hear your question. There is some interruption. There was interruption in your line.

Can you hear me now?

Yes.

Okay. Let me repeat that, then. I apologize. I don't know what's going on.

If we think about the pricing mechanism, with your operational issues behind you at the port, a little bit dissipation in terms of the carry over further behind you, it is unreasonable to think about a sequential price for iron ore that could be 40% to 50% in the third quarter?

I'm sorry. But continue to interrupt so I cannot understand your full question. I know you talk about carry over, about the price realization, but I was not able to get what your question was.

All right. Let me, maybe, take me one--

Sorry, but there's interrupting.

Maybe one final shot. Can you hear me now?

Yes.

All right. I'm just trying to get a better handle on the third quarter price realization for iron ore. With these issues moving behind you, is it likely that we could see an increase of maybe on the order of magnitude of 40% to 50% in the third quarter on your realizations?

Well, I think the situation in the third quarter will be positively affected by-- because the price went up. We have the-- if you look to the average of spot, it went up, so that information you have. And also, you have some improvements in the points that you raise about the carry over.

But I ask you to be very, very cautious about it, because I told you before that you are making calculations on a wet basis and the price system is on a dry basis. So then you have a $6-- $5, $6 difference only on that.

Another point is, the sales that you have in domestic markets. Vale sells much more than our competitors in domestic market. Brazilian domestic market is a big market for iron ore, so all those sales are done at a price that is lower than FOB base price, because you have the logistics that cannot be considered.

So, the price will go up because of the average that's increasing spot in China and also because of the carry over, it'll be lower. But you have the other factors that will be present, anyway. And, in my view, you have to be very careful when you make your assessments.

And, as you know, we cannot make any kind of forecast about where the price will be. The system is there. You know about the price. The points-- I told you what the points that would influence this average price, but it'll be up to you to draw what the number will be. Sorry for that, but I cannot elaborate more about it.

Excuse me. Our next question comes from Mr. Marcos Assumpcao from Itau (inaudible).

Hi. Good morning, everyone. Congratulations for the results. My first question is regarding iron ore volumes in the third quarter. I understand that shipping operations will be running at much more normalized levels in the quarter, but I would like to understand if from a market perceptive is Vale suffering or facing a little bit of shorter-- short-term demand on the back of the cool down in the Chinese property market during this period and also the seasonal slowdown in Europe.

Eduardo told you before that production is running very well, so we're going to have sure a better performance in this quarter for many reasons and as far as markets, we are delivering every ton that we are able to produce and ship. So I told you before that July all the sales were completely normal, no problems, no problems to deliver. For August we have all the ships already nominated. And for the time being, I do not see any problems arising for this slowdown in the corporate sector in China.

And I think a good proxy for analyzing it is the iron ore spot price. That's moving up in China in the last two or three weeks.

That's perfect. My second question is regarding the nickel business. When do you expect volumes to return to more normalized levels on this business and given the end of the strike recently in Sudbury?

Hello, this is Tito speaking. Thanks for the question, by the way. I was, obviously, sleeping here. We are already bringing back all the employees, so, of course, we need some time to train them again, so we should be back on full capacity by September.

It's good to remind you that we were already operating with a 50% capacity. So that's why we think it's going to be fast. If we were not operating before, probably it would take us much more time, probably three months, to come back to the full operation.

It's important to address that we are still on strike in (inaudible), but it's not interfering with the operations, because even there we are operating 100%. We managed to bring in-- to work with the staffs and the replacement workers. So Canadian operations should be full capacity by the end of September.

Excuse me. Our next question comes from Rene Kleyweg from UBS.

Good morning, gentlemen. A couple of questions. One on Simandou. Could you just give us an indication of when or what hurdles need to be met for the next payment to BSG and what potential capital commitments would be made prior to that next installment?

And secondly, Roger mentioned the challenges facing the industry in terms of water consumption, et cetera. There had earlier been a mentioned possibility of a dry beneficiation process system for-- Hello?

Yes?

Oh, sorry. There had previously been mention the possibility of a dry beneficiation process system for the 30 million ton expansion at Carajas. Is that still under review? I see you've got the (inaudible), but I was just wondering if you could update us on the potential dry process there?

Well, Martins speaking. As far as Simandou we are committing now nearly $200 million for projects, for developing the projects, for the mine and for the logistics. And the next payment will only be done after some benchmarks are achieved as we get the full license to bring ore through Liberia.

So-- and after we have this feasibility study in place. So then what we are committing now is this $200 million for a feasibility study, basic engineering and also the project for the railway that we needed to revamp it, the railway add that we needed to revamp it.

So that's for-- in the next one year and a half, we are not going to have, probably, any other payment as far as Simandou is concerned.

As far as dry processing, we are now processing almost 50% of the ore in Carajas by dry processing. The new 20 million ton project is a dry processing system. And even in the former system, we are processing almost 40% in a dry way.

So the 30 million tons projects, plus 30, will be dry processing and also the big (inaudible) project will be dry processing. Our target from now is to move the Carajas to be 100% dry processing, which will be very much environmentally friendly.

Not only we are working on this dry processing, but we are working, also, in truckless operation. So we intend to reduce a lot the use of trucks in the mining and we believe that we can get 70% carbon emission reduction by doing that.

So we have a lot of initiatives in Carajas with the new technologies, with the new process system, to make it much more environmentally friendly operation.

And only to give additional figure about it, when we move iron ore through our big ships, 400,000 ton ships to Asia, we reduce 35% carbon emissions. So one of our main targets is to produce iron ore in a much more environmentally friendly way. So we have a lot of initiatives on this way that not only bring a more environmental concern, but also can reduce costs, so we can get both a lower cost and lower environmental effect-- we can affect less the environment by doing that.

So it's a very good combination.

Excuse me. Ladies and gentlemen, this concludes today's question-and-answer session. Mr. Cavalcanti, at this time you may proceed with your closing statement, sir.

We thank you very much, everybody, for attending this call and see you next quarter.

Thank you. That does conclude our Vale second quarter 2010 results conference call for today. Thank you very much for your participation and have a good day.