淡水河谷 (VALE) 2015 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Vale's conference call to discuss first quarter 2015 results. (Operator Instructions).

As a reminder, this conference 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 May 6, 2015 on 5511-3193-1012 or 2820-4012, access code 2029237#. 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. 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. Peter Poppinga, Executive Officer of Ferrous Minerals; Miss Vania Somavilla, Executive Officer of Human Resources, Health and Safety, Sustainability and Energy; Mr. Galib Chaim, Executive Officer of Capital Projects; Mr. Humberto Freitas, Executive Officer of Logistics and Mineral Exploration; Miss Jennifer Maki, Executive Officer of Base Metals; and Mr. Clovis Torres, General Counsel and Chief Compliance Officer.

First, Mr. Murilo Ferreira will proceed you through the presentation, and after that we will open for question and answers.

It's now my pleasure to turn the call over to Mr. Murilo Ferreira. Sir, you may now begin.

Ladies and gentlemen, welcome to our webcast. Thank you all for joining us to discuss our first quarter 2015 results.

First of all, I'm pleased to report that despite the decline in commodity price, Vale, maintaining its leverage, reduced costs and delivered $1 billion in asset sales.

We had a sound operational results, with production records in copper and gold, as well as the highest production of iron ore and nickel for a first quarter. The first quarter, we achieved a reduction of over $560 million in costs and expenses when compared to first quarter 2014.

Our general sales and administrative expenses decreased by over 30% and our pre-operating and stoppage expenses decreased by roughly 18%.

As I will comment later on in more details, we have reduced our costs and expenses in iron ore, including freight costs, by $13.10 per ton in the first quarter of 2015 when compared to the fourth quarter of 2014. We have also reduced our sustaining investment by $4.50 per ton.

In the quarter, we have recorded CapEx of $2.2 billion. Now, I would like to highlight that our CapEx is accounted for on a cash basis, and if measured on accrual basis this $2.2 billion will amount to roughly $1.9 billion. This lower CapEx number indicates more accurately our CapEx trend for the following quarters.

In this quarter, we divested over $1 billion, with $900 million coming from the goldstream transaction and $100 million from the sale of a minority stake in the Belo Monte hydroelectric power plant. Despite our efforts and good results in reducing costs and expenses, this impairment of lower commodity price [took it] to an adjusted EBITDA, which decreased to $1.6 billion.

Our gross debt decreased by $320 million, amounting to $28.5 billion, with a cash position of $3.7 billion prior to the distribution of $1 billion in dividend, scheduled to be paid today.

I'm proud to announce that iron ore achieved a record production in the first quarter. Adjusted EBITDA for iron ore and pellets reached $1 billion, decreasing over $600 million from last quarter. This decrease was primarily driven by lower iron ore sales price.

As we have forecast in our results call in February, our iron ore cash cost decreased by $3.40 per ton to $19.80 per ton. If our cash cost were presented excluding royalties, on the same basis of our competitors, our cash cost will be $18.20 per ton.

Nevertheless, we are not satisfied, and maintain our relentless focus in costs and expense reduction. We also forecast our freight cost also decrease by about $4.50 per ton to $17.20 per ton as a result of the positive impact of lower bunker in our contracts and of lower spot freight costs.

In our total expenses, excluding SG&A, R&D and pre-operating expenses, were reduced by $5.20 per ton from $9.20 per ton to $4.00 per ton.

As I mentioned in the beginning of this call, we decreased costs and expenses in the first quarter 2015 versus fourth quarter 2014 by $13.10 per ton, including freight, excluding the hedge account impact, and bunker oil. However, iron ore price dropped by $12 per ton in the first quarter of the year.

In addition to this price decline, our price realization was negatively impacted by almost $7 per ton from our price system, namely our provisional price mechanism, in the fourth quarter 2014 and the first quarter 2015. These represented a negative impact of about $450 million, which will not happen again if price is stabilized.

Base metal adjusted EBITDA amounted $678 million in the quarter -- represent an increase of about $100 million when compared to the last quarter. It's fair to say that our base metal EBITDA was impacted by the goldstream transaction. However, I would like to call your attention to our low operational costs in the quarter, and to Salobo's EBITDA, which reached $100 million.

With coal, we continue to develop our projects, which are key to our long-term business profitability, as we eliminated the existing logistic bottleneck in Mozambique. We achieved 86% physical process (sic - see press release, "progress") in Moatize II and 85% (sic - see press release "99%") in the Nacala Corridor.

Once again, we saw improvements in the fertilizer adjusted EBITDA, which increased by 20% quarter on quarter despite the impact of lower sales volume and prices.

Looking forward, we expect (inaudible) fertilizer demand to increase this year, despite of a weak first quarter. Purchase will probably increase in the second half of the year to provide for the summer crop.

2015 will be a year to set the basis for an even more competitive and profitable Company as we intensify and consolidate our cost-cutting effort, delivering productivity improvements, and increase our production volumes.

The opening of N4WS mining, the ramping-up of the itabirites project, will also be important milestone leading to big improvement in the quality of our products. Despite the challenged market scenario, we remain confident on delivered of a strong results, in our ability to deal with these more challenging times.

Thank you so much, and let's now open this webcast for your questions.

(Operator Instructions). Carlos de Alba, Morgan Stanley.

Just wanted to get your sense as to what potential supply adjustments can we see on the iron ore from Vale. Clearly, when iron ore prices were close to $47, there may have been some operations in the Southern System that were just breaking even or barely breaking even.

Can you comment as to you -- what are the mines or the tonnage that may be susceptible to shut down if prices do go back to the $47, $45 level?

And the second question, maybe for Luciano. Luciano, could you help us understand a little bit what happened to debt in the quarter? When we looked at the cash flow statement, that appears to have increased by about $1 billion. However, in the appendix 3 or -- of the press release, it shows that total debt basically fell by less than $500 million from the fourth quarter. So, if you can help us understand and reconcile those numbers, it will be appreciated. Thank you very much.

Hi, Carlos. Thank you very much for your question. And so, it is very important to -- this is a very important question, and we have to differentiate between having a certain capacity and actually utilizing it, no matter what.

So, Vale already has committed investment in logistics in the Northern Corridor. Right? Will take us from today's 350 million to 450 million tons capacity. This is 410 million for exports and 40 million for domestic market. And we will, of course, aim to maximize its utilization rate. Right? So, this is a given.

However, Vale will operate with a mature eye on the markets, particularly with a long view on the tendency for Chinese steel (inaudible) production, so that make sure that we maximize value and the returns to our shareholders.

So, this means, concretely, the -- that we -- that with the recent improvements in licensing conditions, particularly when you look at Carajas -- and it means also that with our several new itabirite projects ramping up, now in the Southern and Southeastern System, we now can optimize our upstream operations and mines.

So, it enables us to close higher-cost and lower-quality production flows, if necessary, in those systems, according to market conditions. All this in our quest to improve overall margins.

And if you check the -- if we look at the production flows, we are constantly analyzing and watching, and it could be up to 30 million tons in the South and Southeastern System. It's already -- this, we know. But it's not necessarily going to happen. It's our -- at our discretion according to the market developments.

So, in a nutshell, the capacity will be there -- 450 million tons -- and we are going to use it according to the market conditions. Thank you.

Carlos, I'll give you an explanation of what happens with our debt position when the real devaluates and then reconcile with the overall picture. When you have a debt position denominated in reais, and the real devalues, the -- when expressed in US dollars, this falls. Right?

On the other hand, you have -- a derivative is lost. So, part of the loss that you mentioned -- the $1 billion that we raised were actually used to repay those losses on derivative positions. Which, in a nutshell is -- it works as if you were repaying part of your debt in reais.

Because actually, the debt in reais is kind of -- when translated to US dollars, instead of becoming constant, it reduces by the devaluation. It generates a loss. But then you have to settle this loss by paying cash. Right?

So, you don't see it on our cash flow statement, but actually, the $1 billion that gets seen -- most of it was used to repay the derivative positions, which is the current part of the reduction of that denominated in reais.

So, another way of looking at our total debt is to summing up the total gross debt with the open derivative position. You will see that also in this metric, but the total debt was somewhat stable as well.

Alex Hacking, Citi.

The first question is around cost savings. Firstly, congratulations on the very strong cost savings in iron ore in the first quarter. I know it's not easy.

As we look forward, I think you talked on the Brazilian coal about another $2 per ton of cost saving. Is that just referring to, at the mine level, and are there further possible cost savings in freight or other areas?

And then I guess the second question would just be, if Vale could give us your view on sort of the mid-term iron ore price. I know iron ore forecasting is very difficult, but what do you view as kind of a sustainable level over the next, say, 5 years, based on your view of the cost curve and Chinese steel production? Thank you.

So, yes. Hi, Alex. Thanks for the question. On the cost guidance we gave you, we are confident what -- that we can take out another $2 this year. And we are only speaking about -- we are only talking the cash cost at -- until the port. Of course, including royalties.

So, we are aiming for $17 this year. This doesn't exclude, of course, that we -- in the next years, once you have S11D coming, and also other logistics change optimization, and more dilution of fixed cost, that of course will bring cost down even further.

But for today's -- for this year's cost guidance, we are aiming at at least $17 at cost cash. And this includes -- and it's at the same -- at a similar level of exchange rate.

Now, on the iron ore price, I really -- as you know, the volatility is very high, and we are -- really, it's a difficult task to forecast iron ore prices. For me, the $47 or the under-the-$50 was a clear undershooting.

However, there is a lot of supply coming onstream, and there is -- the demand in China is -- there are some mixed signals, as you know. We saw some reaction in the steel market. We saw some re-stocking going on. But to extrapolate the iron ore price from there is really not my goal today. And so, that's it.

I strongly believe that we are very well positioned. You will see a different Vale in the next months, quarters and years, very focused on productivity and cost-cutting; of course, also on health and safety, more and more. And we are going to give priority over the margins than over the volumes.

Although, as I said before, we will have the capacity to go to 450 million tons, with the S11D, which continues -- progresses very well in terms of project implementation. However, we will also look at the market conditions, and according to the market conditions we are going to adjust some of our production levels in the South and Southeastern System.

Alex, Murilo. Just to highlight, on a positive note as well, that the daily production in April in China reached the highest rate since September 2014. I think that is a good signal as well.

But I have to call your attention for a message of Mr. Chairman Zhu Jimin, Executive Vice President of CISA, as saying that the Chinese mine must surviving even if the global price of iron ore falls to $60. I think that the message is clear.

And again, I think that in our view what's happening in Chinese mind is much more dramatic that most of the analysts are saying. Thank you very much.

Wilfredo Ortiz, Deutsche Bank.

Just very quickly on the CapEx, I just wanted to get a better sense as to what is the run rate that you would expect to see for the year, given some of the comments that you mentioned earlier, and the sensitivities that you provided.

And if you could also give us a better sense of what -- where the sustaining CapEx could end up being, perhaps this year going forward.

And then if you could also perhaps remind us of some of the announced asset sales that have already taken place. When will the cash proceeds come in, and what are the amounts of those cash proceeds? And again, I'm talking about announced asset sales. And perhaps what's next to come, based on the pipeline of what you've -- you're seeing.

Wilfredo, thanks for your question. Luciano. If you look at the release, we provide a table with sensitivities of CapEx to exchange rate. So, this is one effect.

Also, on the Portuguese call, Murilo Ferreira mentioned that we are targeting a level of sustaining CapEx for iron ore between $3 and $4 per ton. And obviously, we're doing our best to reproduce the performance of previous years, whereby we announced a higher number and we end up the year with a smaller number. So, you can count on the same tenacity to pursue a lower CapEx without jeopardizing the scope of our works.

In terms of announced sales -- so, we already had the proceeds in the first quarter for the goldstream transaction and the sale of $100 billion of our energy assets in the north of Brazil.

And we announced last year, also, transactions involving ships, of which we haven't received yet. We announced a sale of four ships to Cosco for -- on China. So we expect -- this is a transaction that we expect to close soon.

We also announced the coal transaction at the end of last year with Mitsui, and we haven't received any money yet. So, it's about $1 billion from Mitsui itself, and we still expect and we're working on that we already also announced, at that time, on the project finance, that should bring an additional $2 billion. So, these are the amounts related to transactions we have already announced.

Tony Rizzuto, Cowen and Company.

My first question is just a followup on your iron ore flexibility. Did I hear correctly that, similar to BHP Billiton, that you would look to flex production possibly to the tune of 30 million tons with some of your less competitive output in the South and Southeastern areas?

And then secondly, a question on the US market. Do you see it as an opportunity, particularly as players there are struggling to bring on supply?

And was wondering if you could address what you think the cost would be from a capital standpoint, and what might the cost be if you could land material pellets -- DRI-grade pellets -- into the US market. Do you think you can be competitive there? Thank you.

Tony, thanks for the question. Well, yes, you did hear correctly. I -- we are not flexible-izing our capacity, however. What we are saying is, we stick to our plans which are ongoing in the Northern Corridor, and our capacity goes from 350 million to 450 million tons overall in Vale.

And -- however, what we are saying is that, given that we have all those itabirite projects now ramping up in the Southern System and Southeastern System, that we there can really substitute some low-margin ores with some higher-margin ores. And if necessary, if the market requires that, we will analyze to -- up to 30 million tons, we are going to reduce production flows.

It doesn't mean that we are going to close mines. There are mines with several products and several different beneficiation plants where we can optimize it, and we would take out up to 30 million tons per year, while keeping our pace towards the 450 million tons capacity in the year.

Now, the US market is very interesting. Yes, we are selling some pellets there, but not very much. So, given the recent shale gas [evolution] and the competitiveness of DRI plants in the US, we are looking at the US and we have several supply agreements already in place through the US.

However, we are not participating in any capital expenditure or in any joint venture in the US. What we are going -- what we are doing, and it's increasing, that our products -- the pellets, mainly -- and remember, we are going to increase pellet production naturally over the next years, that those pellets are becoming -- are very interesting and very competitive in the US market. Thank you.

Jeff Largey, Macquarie Research.

My first question was just to go back on the announced transactions in terms of raising cash. When you talk about the four ships where there's been -- where the deal should close hopefully soon, and also thinking about the coal JV, I mean would you expect that those transactions, when you -- I assume that they actually close here in the second quarter. That would be my first question.

Yes for the ships; no for the coal JV. It should take longer. And we also have other efforts that we are doing, that we expect closure already in the second quarter, which goes beyond those two transactions. And part of it also involves additional sales of ships.

Okay. Great. On the second question, it was just to -- still sticking with coal and Moatize, was just to get a sense, given the rains and flooding we saw in the area earlier this year, are there any lingering effects in terms of getting particularly the Nacala Corridor construction complete, or is that all sort of behind us, and things are moving along smoothly?

No we don't have any problem regarding the Nacala Corridor. We have already transported something around 200 wagons to -- from Moatize to Nacala port, and the port onshore is working very well. No problems. No problem at all.

Thank you (inaudible).

Rodolfo Angele, JPMorgan.

Just -- sorry to insist on the theme. We just -- I wanted to follow up with you on this discussion of the volumes versus market conditions tradeoff. It was discussed also in the previous call, and we started getting a few questions from investors.

So, I just wanted to make sure I understand this (inaudible). So, this Management team has been talking about capital discipline since -- for a long time.

And in that kind of philosophy, there's a mining plan for the year -- for the years to come in place, that considers that you're going to have the new Itabiritos projects that you have, and [for the US] now. And those two projects, and these plans, you already had the intention, I guess, to replace some higher-cost capacity or at least that you deal with some depletion that we're seeing.

So, when we're discussing this tradeoff volume here, Peter, are we talking about something new and in addition to what has been planned? And I ask this because people have been asking us specifically the number that was discussed on Vale Day, of production of iron ore for this year, including third parties, at close to 340 million.

Could we see that number going lower? Or, is this tradeoff something that you already had incorporated in your plans for the year?

Hi, Rodolfo. Thanks for the question and the opportunity to clarify. You are right -- it is -- what we are talking here, volumes versus market, is something new.

What -- let me recap what we -- what -- the Vale Day 340 million tons production guidance. This is one thing. And there is also depletion involved here. We -- as you know, we produced 330 million -- around 330 million and plus, including some purchasing, in 2014.

Now, we added new capacity in 2015 -- around 32 million tons -- the Itabiritos project, part of them already in 2014; the other part in 2015. Now, the difference is 32 million tons.

Now, we are substituting already low-margin ore. 22 million tons are coming out, so that 32 million minus 22 million are 10 million. So, that means that you add the 330 million, plus 10 million, gives you the 340 million which we announced at the Vale Day. And this is margin optimization. Okay?

On top of that, what we are saying is that we are keeping our capacity plans to 450 million, mainly now due to the Northern Corridor and the investments in logistics which are underway.

And -- but, depending on market conditions -- now, since we have lots of more flexibility in the South and Southeastern System, depending on market conditions, we would be able to close higher costs and lower quality production flows in those systems to improve, again, further the overall margins; of course, taking out proportionally the fixed cost as well. And that's it.

Up to 30 million tons, we could do, on top of this. So, this doesn't mean that we are going to do it. Not -- maybe part of it; maybe nothing; maybe all of it. It depends on the market condition. It depends on, how can we maximize the margins for our shareholders.

Rene Kleyweg, Deutsche Bank.

Just to follow up on that, the 30 million tons does not include any third party purchase decreases? And what is your obligation in terms of a -- let's say, a minimum level of third party purchases that you have to make?

And then just a second one, following up again on Nacala, specifically around the power supply to the port. Given the weather disruptions and so on that we've seen, and the effects of that on the northern grid in terms of outages in Mozambique, how are you getting on, or has there been an agreement with the local power supplier in terms of upgrading the network that Vale was potentially going to be contributing some capital towards? Has that been -- has that reached a conclusion? Thank you.

Thanks, [Rene]. Regarding the third party ores, we purchased 12 million tons last year. This year, it's roughly half of that. And most of it is already taken out. So, when we say up to 30 million tons, means our own production flows. But again, it's up to. It doesn't mean that we are going there. Thank you.

And the obligation to buy from third [party] (inaudible).

The obligation to buy from third parties -- these are flexible contracts. Most of them are done on a quarterly or annual basis, so we have lots of flexibility there.

(Inaudible). Regarding the -- okay. Here's Humberto Freitas. Regarding the energy for the Nacala port, we are a little bit late with the construction of the line. We will have these lines in 4 or 5 months. Till there, we are operating with diesel fuel. This is the information.

Thiago Lofiego, Merrill Lynch.

I have two questions. Just to understand about the timing of the project finance, what's the expectation there, for that deal to unwind? And if it doesn't happen this year, how would you offset the lack of cash from that deal, maybe with other asset sales, or what could be done in terms of leverage if that deal doesn't happen this year, for example?

And then the second question is to explore a little bit more on your S11D project. I understand the mine and the rail -- they have different CapEx evolution timing.

So, would you maybe consider, as an alternative, not postponing but reaching peak production levels of 90 million tons may be more likely towards 2020, not in 2018 as you have been pointing? Through a slower CapEx in the rail, would that be an alternative? Thank you.

Thiago, Murilo. I think that we can understand, but is a very challenging decision. With our experience, in case of having some delay in this project, we will see increasing costs, is the experience that we have. Then this issue regarding to postpone mainly the investment in the railway, is something that must be analyzed very carefully.

About the project finance, Luciano?

The timing for the project finance is expected for the fourth quarter of this year. If there is any delay, the plan is to offset that with two types of transactions. First, $1.5 billion with sales of ships, of which we've already commented, part of it has already been disclosed to the market; and another $1.5 billion on sale of preferred shares into specific assets, which are very well advanced, these transactions, and we expect to close them pretty soon.

Thiago, just to address properly, we needed to check -- we need to analyze in case of having some alternative to postpone the (inaudible). But at this point of time, [you] are not analyzing any kind of changing in the agenda in the implementation of the project.

Jeremy Sussman, Clarkson.

Just one last clarification -- trying to get a sense of how soon we could look to see some production adjustments. Is this something that we could see in the near future, or is this more predicated once S11D is more up and running and you have a little bit more flexibility on that front?

Thanks, Jeremy. This is not related to S11D. This is related to market conditions and our flexibility we now have in the South and Southeastern Systems, that we can have new capacity coming and substitute old and low-margin capacity, and going beyond that.

So, production adjustments are a possibility. It can happen in 2015; can happen in 2016. But it has to do with the market, and not with our margins. By the way, our margins in the Southeastern and Southern System -- none of them are negative. Right?

So, it is a question of adjustments of margins and not -- and -- or, adjustments of production flows. Because you can obtain better margins by mixing things differently.

Marcos Assumpcao, Itau BBA.

First question on iron ore, actually just to confirm the number here. The EBITDA per ton on iron ore fines in the first quarter totaled $10 per ton. And I adjusted the price for Vale. Instead of the $62 per ton Platts, after adjusting for the pricing systems we get actually to a price equivalent of $55 per ton. So -- for fines.

So, basically, I would like to confirm with you guys that the -- if that calculation is right, the breakeven price for Vale in the first quarter were -- was around $45 per ton. So, like to confirm that. And to see if you are already closer to $40 per ton, probably, in the second quarter, as you continue to cut costs.

And my second question is regarding the coal assets in Moatize. If you could comment a little bit on the expected cost reduction for that operations, whenever you start to use the logistics and also you start to increase volumes there so you would have more dilution of fixed costs. Thank you.

Marcos, on the first question -- this is Luciano -- you are right. The breakeven was around $45 per ton.

And without any -- if you just consider the $2 per ton that that was mentioned afterwards in terms of potential cost reductions already in 2015, and another $2 simply taking out the hedge accounting effect which affected EBITDA for iron ore, this gives you already, without changing the exchange rate -- always remembering the exchange rate on average for the first quarter was BRL2.84 -- that we would be already operating near $40 per ton. So -- but, as Murilo said, the goal is to go beyond that with our cost-cutting efforts.

Marcos, on the logistics for Moatize, we are expecting OpEx, including railway and port, of between $18 and $20 per ton, which obviously is a much improved situation compared to the current situation, whereby we're paying around $60 per ton in the Sena [Beira] corridor. So, that's our goal.

Now in the end of the session, I think that it's time I should say thank you very much for your support or your understanding.

And we can say that we continue to work hard in order to deliver our projects below budget and on time, and to be better competitive, and based in the discipline in capital allocation, and to bring the best return to our shareholders. Thank you very much.

That does conclude Vale's conference call for today. Thank you very much for your participation. You may now disconnect.