淡水河谷 (VALE) 2014 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Vale's conference call to discuss second-quarter 2014 results. At this time all participants are in a listen-only mode. (Operator Instructions) As a reminder, this call is being recorded, and the recording will be available on the Company's website at vale.com at the Investors link.

The replay of this conference call will be available by phone until August 6, 2014, on 551131931012, access code 9285610 pound key. This conference call and the slide presentation are being transmitted via Internet as well, also through the Company's website.

Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996 (sic - 1995). 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. Murilo Ferreira, Chief Executive Officer, CEO; Mr. Luciano Siani, Executive Officer of Finance and Investor Relations, CFO; Mr. Jose Carlos Martins, Executive Officer of Ferrous and Strategy; Ms. Vania Somavilla, Executive Officer of Human Resources, Health and Safety, Sustainability and Energy; Mr. Galib Chaim, Executive Officer of Capital Projects Implementation; Mr. Peter Poppinga, Executive Officer of Base Metals and Information Technology; and Mr. Clovis Torres, General Counsel.

First, Mr. Murilo Ferreira will proceed to the presentation, and after that we will open for question and answers. It is now my pleasure to turn the call over to Mr. Murilo Ferreira. Sir, you may now begin.

Good morning, good afternoon, ladies and gentlemen. Welcome to our webcast and conference call. Thank you all for joining us to discuss our second-quarter results.

First of all, I'm pleased to report that Vale delivered a strong operational performance in the second quarter, with the best results ever for iron ore production in the second quarter, despite of lower price. We have big projects ramping up. And we have also had consistent cash flows in our base metal business, and also improved operational results in the fertilizer business.

This first half of the year, we continued to achieve savings in costs and expenses amounting to close to $250 million compared with the first half of last year. Despite lower iron ore price, we are generating strong cash flows and we are able to pay $2.1 billion in dividends and maintaining our gross debt and cash position at similar levels to first quarter 2013.

This quarter we suffered a drop in net income of some $1 billion, reflecting the impairment of assets related to the Simandou project and the Integra Coal Mine. Discussion with the government of Guinea advanced, and we are diligent in developing alternatives to recover value from our investment in Guinea.

Overall, we have continued to focus on productivity and continue to ramping up important operations and reduce costs, expenses, and capital expenditures in order to achieve our goal of sustainable shareholder value.

Now I would like to talk about our financial performance, and then I will talk about our business segments. In terms of the financial results, our EBITDA remained at just over $4 billion, similar to the first quarter, with the continuation of our strong base metal performance with an adjusted EBITDA of $609 million in the second quarter, this despite major maintenance work in Sudbury.

As mentioned earlier, in the first half of the year we reduced costs and expenses by close to $250 million when compared with the first semester of last year. SG&A decreased by over 25% versus our 10% reduction target for the year, and pre-operating and stoppage expenses decreased by close to 40% versus our 50% savings target for the year.

In the first half of 2014, Vale's capital expenditure amounted to over $5.1 billion, representing a decrease of $2.1 billion when compared to the $7.2 billion spent in the first half of 2013. The reduction is partially explained by an unforecasted lower CapEx budget for 2014 by the concentration of the year's CapEx in the second half of the year and by saving from scope optimization, commercial negotiations and project execution.

Sustaining CapEx also showed a decrease of about 20% when compared to first-half 2013. Net debt remained at levels similar to this last quarter at just over $23 billion with a cash position of $7.1 billion at the end of the quarter.

Our flagship area, as you know, is ferrous minerals. In this segment we had solid results, even faced with lower iron ore prices. Iron ore production reached almost 80 million tons, the best performance for the second quarter ever.

The ramp-up of the additional 40 million tons at Conceicao and Carajas. We have over 2 million tons stockpiled in Malaysia to feed the supply chain as part of our logistic structure to give greater flexibility and to support the stronger sales volume in the coming quarters.

Although our average sale price for fines suffered a drop to $84.6 per ton. This was softer than the relative decrease in the Platt's IODEX reference price. Cash cost per ton for IODEX fines increased due to an adjustment in the reporting method in which we are breaking down sales into fines and run-of-mines. Later on, Luciano and Martins can discuss this in more detail. The cost level is low and will decrease even further as production increases, diluting fixed costs in our internal cost reduction initiatives there additional [foot].

Turning now to the base metals segment, I am pleased to inform you that the base metals business has made yet another excellent contribution to our results. With consistent cash flow generation, adjusted EBITDA reached over $600 million this quarter, despite major maintenance work at Sudbury, 10% more than last quarter's good results.

Sales revenues of close to $1.9 billion were 9.3% higher than the first quarter 2014 due to the better sales prices in spite of lower production volumes because of the stoppage at Sudbury. Ramp-up at the conclusion of projects was a major contributor to the increase in base metals performance. Salobo I and Onca Puma generated consistent cash flows and contribute 32% of base metals' EBITDA.

Salobo II came in on time and under budget, with a total CapEx of $1.22 billion at the end of the second quarter 2014. The completion of Salobo II in the second quarter 2014 concludes a successful phase of investments in our copper operations, with the Salobo projects coming on-stream on time and under budget. CapEx amounted to $3.7 billion out of our budget of $4.22 billion.

The first line at Salobo II produced the first copper concentrate in June. The VNC is back in operation, with two out of the three HPAL lines running at emergency stoppage. Long Harbour produced its first finished nickel on July 14.

Looking forward, the ramp-up of ongoing projects reinforces our confidence that the base metals segment is set to achieve its EBITDA target of $4 billion in medium-term.

Now to look at coal. Production in Moatize was slightly more than in the first quarter; however, adjusted EBITDA was negative at $154 million due to low coal prices and also the low utilization of our asset base as we wait for the conclusion of the Nacala Corridor.

We have made progress on the Nacala Corridor in the key of our logistic challenges, which advanced in line with our plan and reached physical progress of 77% in the greenfield sections. The first train is expected to run in the fourth quarter this year, and our first shipments are expected by first quarter 2015.

The fertilizer business continued to make progress. Adjusted EBITDA increased to $72 million in the second quarter of 2014 from $35 million in the first quarter of 2014, mostly due to positive impact of sales price. Production of phosphate rock grew in both Peru and Brazil, with a record output for the second quarter.

We also continue to discuss partnership opportunities with a view to maximize our strategic option for the business. Vale is committed to maintaining efficient operations, reducing costs/expenses, and optimizing capital expenditure in order to generate positive free cash flow in any price scenario.

Now we move to the question-and-answer session, but before this, we would like to ask Martins to answer Leonardo Correa, the analyst of BTG Pactual, in order to give some further clarification regarding the telas. Martins?

Leonardo, when I answered your question before in Portuguese, I forgot to explain what's going on with the stock -- the inventories formation, okay? Because we invoice less than what we produce, then we ship it.

So what's going on is we are now fulfilling the inventories in Malaysia. Malaysia is able to storage 4 million, tons and we are storage-ing there mainly high silica material that we intend to blend with Carajas ore as soon as possible. By doing that, we intended to improve the price realizations, because the material that will go to the market after the blending will be a superior quality material.

So we expect two consequences of it. First is improving our average quality and also improve price realizations. So our strategy is to move our volumes as close as possible to the customers and to sell this in the best time to sell. So it's a double target, and we don't intend it to increase the inventories in general, because we are moving the inventories that we already have in the mines closer to the customers. So we expect these extractions not be a burden on our working capital, because we expect to keep the same total volume.

But with the iron ore more and more closer to the customers in now our distribution center in Malaysia, and also in our ships that is moving from Brazil to Asia in a more regular basis. So I think as part of our strategy this increase the inventory in this period of time.

But long-term and mostly in total, there won't be any additional increase in inventories in our Company. I hope the explanation was good enough for you.

Sorry, Leonardo. Let's go to the question-and-answer.

(Operator Instructions) Rodolfo De Angele, JPMorgan.

I just wanted to follow up with two things related to CapEx. First one, I guess with these numbers, we are starting -- I think it's pretty clear that you are delivering on growth on various aspects. We're seeing NOL volumes going up.

But I wanted to ask you to detail, if possible, how the big project -- how S11D is going on? If you could give us some more detail on the works that are being done.

And my second question is still on CapEx. We saw Salobo being delivered under budget; it's something in the past we were used to see the other way around. So I wanted to ask exactly what drove the potential -- the savings that were achieved, the 12% savings there, just to kind of use it as a case study for us here to kind of check for potential savings on the rest of your CapEx budget still in place? That's all for me.

Rodolfo, thank you very much. You will be with Luciano and Galib.

Rodolfo, Luciano. I will address the second one first before handing to Galib. The major two levers for the savings on Salobo are twofold. The first one, the contingency, which we did not use because of good project execution; and the second one, the exchange rate -- the depreciation of the real in comparison to the original budget was not translated into cost inflation. We were able to keep the cost in reals at the same level that we have budgeted. So we fully took advantage of the depreciation of the real.

Well, about the S11D, the project -- it's running well. No problem so far.

We have contracted up to now something around 50% of the project and spent around $5 billion considering mine plan, plant, the entire logistics. The physical progress, which is something around 32%, in line with the plan at work -- that is very important to say.

We had some important, good achievements. In the spirit of time -- the civil construction is progressing very well. The mine and plant sites in the dry season is very important.

Now, remember that we have been working now in dry season -- the production, it's much higher. And we have already assembled 58 completed models among 109 to be completed, to be finished up to the end of this year.

And the expansion in the railway, it's also progressing well. We delivered two expanded segments that -- this is very important -- increase the railway capacity. In the port side, the onshore and offshore everything is going well. I don't know; we don't have any problem with the contractors. They have performing in a very good way.

We have up to now 28,000 workers on the site. That means that it's a huge amount of people working the project. So I believe that we don't have any surprise. Everything is running according to our plan.

Wilfredo Ortiz, Deutsche Bank.

I just wanted to ask you first on the SG&A front, we have seen some interesting reductions compared to last year, and I just wanted to get a sense as to whether these are levels that should remain going forward, given that preoperating and stoppage expenses should continue to trend down as the year progresses.

Secondly, on the realizations in iron ore, could you give us a sense perhaps as to the differences that you're gathering from the northern system versus the southern system, and whether you are seeing or expecting an improvement from the discounts, perhaps, that you are realizing on the southern system with the investments that you've done so far? Thank you.

Starting by SG&A, I'm happy to say that not only do we believe that those levels are sustainable, but we are actually already building plans for further reductions in the future, thanks for the productivity improvements that we expect from the implementation of new computer systems across the Company.

On the pre-operating expenditures, we believe that -- if you see the numbers, we believe that you are right; it should trend down as the ramp-up of VNC resumes and progresses, because that's the major contributor for the pre-operating expenditures today. So if we can eliminate those pre-operating expenditures, we should get to the 50% target that we have announced. Regarding price, Martins?

Yes, Wilfred. As far as average price of our products, the North System commands a better price -- almost $10 above the Southern System price. And I think this situation will be reduced as time goes by, because we intend to blend more Northern System ore or with the Southern System ore.

So by doing that, we believe we can get a net improvement ore price because part of the Carajas development is not fully recognized by the market. So by mixing it with the Southern System, we can have a much better price for Southern System material and not lose too much price from the Northern System.

So going forward, I believe our price for barter in Southern System (technical difficulty) because of the blending processes that we are implementing. In the future, when we have those Itabiritos projects under production, we are not going to need it to blend so much ore. And then we can have a better price in the Southern System and also keep to the premium that we have in the Northern system. Generally speaking, it's what we intend to do. And that's the development we expect to our blending and shipping strategy going forward.

Thank you.

Carlos de Alba, Morgan Stanley.

My first question is on cost. If I looked at the outsourced services, again, excluding the impact of volume and the exchange rate, I see an increase year on year in the second quarter and also an increase year on year in the first quarter. So I know that the Company is putting a lot of effort in reducing costs; expenses clearly have been trending down. But I wanted to hear your comments, maybe Luciano, on what is happening with this outsourced service line, which is the most important component of the Company's COGS.

And then my second question is: coming back to Carajas, I see the Company is still expecting to see receive the global license to expand the mining operations of the current Carajas unit. And when we are getting -- we're going to get into second half of the year, when is the limit by when you need to get these license so that you can still hit your production target next year, given that maybe December through March you have the rainy season in Carajas, and that could affect the operation of the mine and the expansion of the mine? Thank you very much.

Luciano, and later on, Vania, please.

The first two quarters of this year were unusually high in terms of maintenance services, and that explains part of the outsourced services -- most of the outsourced services increase. So we had, as already mentioned, the shutdown in Sudbury.

We had also a safety shutdown also in Sudbury during the second quarter. We had some fertilizer maintenances in the first quarter. We also had corrections that we had to make on the projects ramping up -- Onca Puma, Salobo, even in Plant 2.

So I would say part of it has to do with the adjustments on the operations which are ramping up, which are generating cash. So they don't go into pre-operational expenditures, because the cash generation is still cost. So they go into costs, so they are recorded as outsourced services. So we should expect as the operations normalize to have this line also trending down.

Regarding the license, we really don't expect problems, and this should be coming soon. It all depends on how it will be -- what will be written in the license: if we have a bigger license for the whole area, or if we will have a smaller license.

And then if you have a small license, so we have to adjust our production plans to this area. But in there we have sold just what we are going to produce it in [Ernek] for more licensing in a separate way. But it's okay -- we can manage this. We can handle all these situation. I guess Martins should add something to this.

We have everything on place to produce 150 million pounds, like next year in Carajas. Even if you have a restricted license, we don't see any problems in reaching this number.

But, sure, if you get a complete license for the whole area, that will solve our problems for many years. Otherwise, we needed to keep licensing year after year. But we are expect to have a full license, and then we have our free hands to produce as much as possible to do what we do better, which is to produce it in larger scale and larger volumes.

Thiago Lofiego, Merrill Lynch.

Martins, if you could comment on your expectations of new supply for 2015 in the market. You mentioned in the Portuguese call you expect additional 140 million tons of new supply in the market this year. But if you could share with us your expectations for next year? And also if you could comment on or give us some more color on capacity closures in China. Do you think they will be significant going forward, or do you think that Chinese annual protection is being more resilient than you expected?

Talking about your first question, I believe that the market is in really good condition, and the additional supply this year came in mainly from Australia. And we will reach something like, as I told you before, 140 million tons.

But 90 million -- 93 million, to be more precise, was already absorbed by the market. So I think in the second half the additional volume that will come to the market against the same last year -- last half year of 2013 will be around 50 million tons.

So I think in the second half, the pressure of the additional supply will be lower. And as you know, steel production continues growing China -- and everywhere, not so much -- but continues growing. For next year we believe that our estimate in booking at this point in time is an additional 100 million tons will come to the market.

But the next year, the main source of this additional volume will be Brazil, and specifically Vale. I think normally people focus too much on price of iron ore and also in China. I think there is a reason for it in the last six or five years, because Vale was not increasing production too much, mostly because Vale had a lot of projects under erection that was not contributing for the bottom line.

I really believe that you and your colleagues needed to focus a little bit more on the basics of business, to focus on our portfolio of business. I think I explained we did not have a good situation in other business. It is okay to look at another, to look China.

But I think going forward, I really believe that you have to put those things on a second priority, because it look much better what we are delivering in the other business, okay? I think we have a very good upside on the nickel business.

We are finishing our investment on coal, that also you are bringing more volumes, and copper also. Then I think the issue of China and the issue of price will have less impact when analyzing our results.

I am being participating in this meeting so many years. And it's amazing how much you focus on China and how much you focus on our price.

Now I think it's a moment that we are in increasing volumes; we are reducing costs. So the drivers of our results will depend much less on what could be the price in China. I think we are preparing ourselves to live in this moment.

So I'm not very much concerned like many people are about China. Sure that China will not grow so fast as what used to grow, but will continues growing.

We, as Vale, in the last seven years we didn't increase any volumes in iron ore. And now we are increasing it. Our volumes are coming to the market, but also our cost will be down, and our average quality will also increase.

So -- and the other business we have are delivering better results, also. So I kindly ask all of you to focus a little bit more of your analysis in the other business, in the results that we are getting in other parts of our portfolio of products.

Alex Hacking, Citigroup.

Congratulations on the improved operating performance. I have two questions on CapEx, if it's okay. I think in the first half, the CapEx standing was only $5 billion. I understand there's seasonality there, but have you revised lower your annual guidance for CapEx? Because $14 billion seems high at this point.

And then I guess the second question, more high a level, just looking out a little bit: you guys are done with Salobo II now. Congratulations. Mozambique is the only non-iron ore project left. Should be finished next year.

So at what point do you start thinking about what else should be going in the pipeline? Are you planning to wait to see how iron ore prices shake out over the next couple of years? Or are you sort of willing to move sooner than that in terms of pushing some other non-iron ore projects into the pipeline? Thanks.

Thanks for your question. I think that you are right. We are almost finalized many projects like Salobo, Mozambique. We are in process to implementation of S11D in the south range of Carajas. The Tubarao project -- you have so many projects that intend it should finalize until 2016, 2017.

And as we have shared with you, we are looking for the best return. We are not looking at the highest volume, to be the number one in volume. We wanted to have our assets in the first quartile -- maximum in the beginning of second quartile.

We wanted to have the chance to expand through, call it, the brownfields. And we must have just world-class project. In this regard, in the case of not having new projects based on these assumptions, for sure we prefer to pay dividends and to reduce our debt. Again, it's our priority to bring the best return to our shareholders. And Luciano, please, about the CapEx?

Alex, so let's discuss first capital projects. We have, yes, seasonality, especially because the weather conditions favor in Brazil the construction works on the second half. So we should expect acceleration over the CapEx spending on the second half.

We are not sure at this moment if we are already able to announce a reduction in CapEx for the year, because we still -- not only we expect this uptick, we are still working to realize more savings on procurement, and on not spending the contingencies on the projects where we are -- which are on the final stages, which are finishing. And also on scope optimization. But perhaps too early to give you an expectation of reduction.

On maintenance CapEx, I believe we can already talk about the 5% to 10% reduction in what we have planned for the year. And that has nothing to do with deferral of reporting investments, of less sustaining to preserve the integrity over the assets; but rather, again, with better planning, better engineering even of the sustaining projects which can lower the budgets.

We are analyzing the trade-offs, and those are investments which have a shorter construction period. So you can make decisions within the year that impact the year itself. So I would say that so far, we are happy to see maintenance CapEx trending downwards. And 5% to 10% reduction is something that we believe is achievable.

Andreas Bokkenheuser, UBS.

Just a quick question on cost. So you have been guiding that, obviously, costs are going to come down as you ramp up production at Carajas. And, of course, there's always the chance of a favorable FX movement as well.

Are you seeing any other options for costs to come down? Can you see any efficiencies being gained now? Or had most of the stuff been done, and it's now down to Carajas at this point? Thank you.

As I told you before, we have a lot opportunities for cost reduction conduction -- not only by managing costs, but also by managing volumes. We have different mines with different cost structure, and we are bringing additional capacity with much lower cost.

So then we can manage our internal mix, because we have a cost curve for the market; but also, we have a cost curve internally that you can manage to find the better mix between volumes and margin. And also ensure that we try to operate as much as possible with our lower-cost mine.

On top of it, we have also our strategy to reduce our costs by better negotiating with suppliers and by improving our operations in our plants. And also I think there is a lot of space for innovations in what we are working on.

We have also possibilities to reduce costs on the shipping side as long as we put our -- the sea operations. We have a lot of areas that we can reduce our costs. And I think, as I have told you before, more and more our focus is on managing volumes, and managing costs, and managing quality.

I think these three points are very important in our strategy. And as long as we are bringing new mines to the market, it's clear that we are going to see a very positive impact on our cost structure and also in our price structure.

New mines also bring better quality and also bring a lower cost. In the last seven years we were very much pressured by the depletion of existing mines that come deeper, and the distance becomes longer. And so that's now factored in our results.

But from now on we are bringing new production with much lower cost. So I think we are in a very bad situation to reduce our costs. And you will -- I'm sure that you are going to see as time goes by these lower costs to be in our results.

Thank you.

Alan Glezer, Bradesco.

I have two quick questions here. The first one is regarding the corporate business. I was looking at Vale's average sales price. It was 5% higher Q-on-Q. But meanwhile we saw that the reference price of LME was down around 3% Q-on-Q.

I was wondering if you guys could explain why we have this difference? Maybe if it was regarding the distribution of sales along the quarter?

The second question is regarding iron ore. I was wondering if you guys could give color regarding the iron ore inventory level at the Chinese news at the moment. We know that the inventory at the port remains elevated above 112 million tons, but I was wondering if you guys could give color regarding the inventory at the Chinese mills themselves? Thanks for taking my questions.

Please, Peter Poppinga, about the copper.

Okay. Thanks for your question. Like we said, it's very normal adjustments. In copper we have some intermediate products in our mix, like copper concentrate and anodes. So this explains some difference in the price regarding to LME. We also have our pricing system -- it's month after month of arrival. So sometimes you have the provisionally priced at time of shipment, with the final prices then settled on the basis of the LME price for future periods.

So generally one to three months after shipment to customers. So it is a quarterly thing, a timing of sales, and should be normalized in the next quarter. Thank you.

Well, as far as the iron ore plants already in China, the number for the (technical difficulty), but the numbers of the inventories on the customer hands is not that easy. In average, we believe today this inventories is around 20 days and reducing as the market is becoming more liquid, as the customer knows that there is a huge inventory in the ports and a lot of ships come into China.

It's quite understandable that they are reducing the inventories that they need in their plants. So our last evaluation was around the 20 days. And we don't believe that they can go too much below that.

Also to remember that this inventory was more than 30 days some years ago and have been reducing slowly as customers become more confident that there will always be some ships arriving, and there will always some inventories on the ports. So that's the situation today, but I don't believe that they have space to reducing more than 20 days their inventories in the steel plants.

Thank you.

Amos Fletcher, Barclays.

I just had a couple of questions, firstly on the nickel business, and particularly the VNC asset. I was just wondering -- it's running well below the guidance that you gave for 40,000 tons of production for this year.

What do you think is a realistic number for this year's production, given what's been happening in the first half? And then, secondly, do you think that it's realistic for it to produce at full capacity over the medium-term, or do you think it's more realistic that only having two out of the three lines operating at any one time is sensible?

And then my second question was just relating to the joint venture with -- potential joint venture with Glencore that was discussed about a year ago in the Sudbury basin. There was a number put out there of synergies of up to $550 million back in 2006 in the original Xstrata/Falconbridge proposed merger. And I was just wondering where those discussions have got to and what the potential could be there in your view?

Please, Peter Poppinga.

Okay. Thanks for your question. So on VNC, we had achieved -- we are on a good track. We had achieved through months of March 60% of the capacity of the plant. And by the way, when you say three autoclaves versus two, because we have three lines, but for to achieve 100% of the capacity you don't need to operate the three lines, actually, because there's always -- frequently a scheduled maintenance.

So, actually, you have to only operate with 2 1/2 autoclaves in average along the year -- that's the right number to have in mind. But then we had this acid spill, and there was, by the way, no damage in the ocean.

Then afterwards some social unrest, being this the catalyst of that. So now we are back to the operation. But you are right, this is of course not achievable anymore, our target of 40,000 tons we wanted to achieve this year. So we are probably going to revise that. For now it looks that 30,000 tons would be achievable -- which, by the way, is not very close from the breakeven price on the current price levels.

So at the end of this year, if we get good pace and good momentum, we would then reach breakeven at VNC end of this year. In terms of Glencore, what we are doing is because we realized we did a sufficient break in our bigger discussions, and what we are doing for now is trying to perform some of the smaller projects individually, incrementally. And we are doing some progress there.

And by doing that, it's sort of a top-down approach. We are going more a bottom-up approach and having little projects, little synergies being realized. That's where we are today. Thank you.

Renato Antunes, Brasil Plural.

First, Murilo, if you could talk a little bit about the market outside China? Are you guys seeing demand in other rival markets -- Europe, Japan?

Also on that context, today iron ore prices seem cheap on a relative basis when compared to scrap. And if you think that this lower price could increase competitiveness of blast furnace producers?

And the second one, on the projects in Minas Gerais, the Itabiritos projects. If you could talk a little bit about project implementation there -- how is that going on? If I'm not mistaken, I think Conceicao Itabiritos II saw a minor delay of the startup. I just wanted to get your views on how that is moving forward. Thanks.

You raise a very interesting question about scrap, because it's not only the price of iron ore, but goes to the price of coke and coal is now very convenient. So I think a few makers based on the scrap are having a tough time to compete with the steel makers based on blast furnace.

But I believe that scrap -- it has to go to the market at an even price. Scrap is the price taker. So I believe that the main possibility is for scrap price to reduce going forward. As long as iron ore in coke and coal stay with prices the level they are today, blast furnace operators will have a near $100 cost advantage against the scrap on the present level.

We are seeing China, for instance, big steel makers that were used to using scrap blending in the blast furnace -- they are avoiding it, because now if they put scrap in their blast furnace, they will increase their costs. So I think the moment is not for scrap to grow.

And I believe that this situation is already going on, not only in China, but those in Europe and the States. But long-term, scrap has to go down in order to establish the balance.

So I do not see this fact as a structural factor that can influence the market in long-term. The adjustments will come based on price. You have many scraps that they go to the market at any price you have. If you look, for instance, [Carnedos] -- they generate a lot of scrap daily. They cannot keep it. They needed to make it move.

So scrap is a price taker. Scrap for sales -- scrap sellers are our price takers. So they will have to adjust their price anyway. So I would not put too much emphasis on this as a way to change the technology of the Company. You have some companies that have some flexibility, some steelmakers that have some flexibility.

But we are not them, or they have to use the scrap, or they have to use [spigone]. So the impact will be minor. As far as the project, I was going to ask my colleague, Galib, to give more details about what's going on with our Itabiritos projects. After Conceicao Itabiritos that already started, and it's producing now almost full capacity. But we have three other projects that do enter in the next two years. So Galib will give you more thoughts about this.

Yes. Your question was related to the Conceicao Itabiritos II -- the second plant. It's very important to explain that the completion of the plant will be achieved at the end of this year. So there is no delay on the completion of the plant.

The problem that it's been -- let's say a brownfield project. We have to do a lot of tie-ins to connect the existing plant to this new expansion. Those kinds of tie-ins usually take something around two or three months.

So that's the decision, together with operations standoff, affecting the core -- your plant production. That means you can't imagine two months of shutting down a huge plant like that.

The decision was to do the tie-ins, and then next year take in the most liquids, or the most -- the time for to do it will be during the rain season, where the production -- usually it's lower. That is what the decision. So everything is going well. There is no problem regarding the CapEx, and pay schedule, and no surprise up to now.

Adding another point is that we are now finishing the Pico Fabrica road that will link a south system with a Southeast system. This Pico Fabrica road will allow us to move near 20 million tons per year from one system to the other system, giving us a lot of flexibility and also allowing us to ship some iron ore that is now trapped in the south system because we don't have enough port capacity.

So Pico Fabrica is very important. Also, part of the Vargem Grande Itabiritos project is the terminal for loading iron ore that is now being completed. And also, you have much more flexibility for us as far as loading ore and also mixing ore from southern systems with the ore from southeast system.

We are putting a lot more investments that we call sustaining in order to streamline production from mine into the ports. And we are going to get results of it from this year on.

Another question that you raised about the markets outside China. In the first seven months of this year, it's very interesting to notice that the market outside China grew a little bit more as far as good fuel production is concerned.

Outside China the growth was 3%, and inside China was 2%. But as you know, also, the markets outside in China is less -- it's more scrap based -- the contents of scrap base is much bigger, so we didn't see a big impact on our markets outside China.

We expect the better performance in the United States, which economy is now moving faster; and also in Europe, we will bring some additional demand for iron ore in the next year. But we do not count that this will have a big impact on our sales.

Only to give you a figure, steel production in outside China today is 30 million tons below the steel production that was reached in the first seven months of 2008. So we didn't get the same level of steel production outside China. And I think that this will -- that it one day will catch up, but I don't believe will be sooner. I believe it will take more two or three years until steel production outside China reach the same level of 2008.

So our confidence is mainly based in China, Asia, Korea increasing volumes. Japanese economy is very stable and also with good performance as far as steel production is concerned. But not enough volume that can change too much the picture as far as iron ore consumption is concerned.

On the other hand, the cost curve, we believe you, continues to work in our favor. Companies that have lower costs -- they will increase their volumes and keep very good margin generation as long as you control your costs and really improve your cost structure.

As I told you before, our focus today is to better manage our volumes; streamline our operations between the systems; blending ore material; shipping more on a CNF basis; and reducing cost, which is our main priority. To keep Vale in the first quartile of the cost curve is our main priority, not only by working daily in our business, but also by bringing projects that can really improve our cost structure.

Leonardo Correa, BTG Pactual.

My question is regarding Mozambique and potential asset sales. I know that you already spoke about this in the previous call, but just looking at what happened with Rio Tinto -- I mean, the company announced a sale of $50 million of the Riversdale asset, which they acquired in the past for $3 billion or $4 billion. So I just wanted to get a sense of if anything changes with respect to the growth coming out of the Company and CapEx also committed to the business throughout the next couple of years.

And the second question, to Luciano -- Luciano, this is a smaller detail, but anyways -- you have a funding line of BRL6 billion with the BNDES; also, infrastructure bonds of BRL1 billion. Just wanted to -- when you sum all that up, considering the Vale's current net financial expenses, what is the level of decline that we can see going forward, given these very attractive rates of funding? Those are the two questions. Thank you very much.

Leonardo, when we swapped into US dollars the infrastructure bonds, you get to a dollar-based rate close to 4%. And then when you do it with the BNDES loans, you get to -- depending on the credit line, you get to 1.5%, 2%.

So as your mix shifts towards those forces, you tend to lower the average borrowing cost for Vale. However, we believe that even because of the size of the exposure to the BNDES, and even to some other export credit agencies, that the opportunities are more limited now to significantly borrow from those sources.

However, if you look at the balance sheet, right, if you look at the income statement, when you go into the financial expenses, you see an increase in interest expenses. And this is an accounting effect. Why is that?

Because what goes into interest expenses is the nominal interest rate, which is higher in reals than in US dollars. When you swap into US dollars, you get the derivatives -- I forgot exactly what is the name of the line, but there is a line that tells you the effect of the swap rate in which you swap not only the currency but also the interest rate.

So there you get both effects: both the effects of translating from reals into dollars, and the effect of lowering the nominal rate also from reals to dollars. So, therefore, if you focus only on the interest expense line, you won't see the decline in the borrowing costs. You have to look at the aggregate of the financial expenditures, including the swap rates as well.

Leonardo, regarding the Mozambique projects, what we can tell you is that, as you know, in raw material, like coal and iron ore, it's really very important to have a definition regarding the logistic in Huawei and the port facility. And if you are considering to analyze each project, many projects in Mozambique, you must take care of these even.

As far as I know, they were trying to have it specifically ruled by [Iver] during years and years, in our view for knowing very well that Mozambique is to us something that could be almost impossible for them to be implemented. Then we know that it's very premature to analyze the terms and conditions of the transaction, mainly knowing that they had some issues not solved in the country as well.

It's what we have to say. It's very premature to analyze given the price. Thank you very much.

I really appreciate to have an opportunity for so many questions. I apologize, because we know that we have some further questions, but we are not able to answer. We have already finalized our session. Thank you for very much to be with us. Bye-bye.

This concludes Vale's conference call for today. That you very much for your participation. You may now disconnect.