淡水河谷 (VALE) 2015 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Vale's conference call to discuss the third quarter of 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 October 28, 2015, on 5511-3193-1012, or 2820-4012, access code 4742831#. 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 Pires, Executive Officer of Finance and Investor Relations, CFO; Mr. Peter Poppinga, Executive Officer of Ferrous Minerals; Mr. Galib Chaim, Executive Officer of Capital Project Implementation; Mr. Roger Downey, Executive Director of Fertilizers and Coal; Ms. Vania Somavilla, Executive Officer of Human Resources, Health and Safety, Sustainability and Energy; and Miss Jennifer Maki, Executive Officer of Base Metals.

First, Mr. Murilo Ferreira will proceed with the presentation. And after that, we will open for questions 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 and conference call. Thank you all for joining us to discuss our 2015 third quarter results. First of all, I'm pleased to report that Vale had a sound operational result, achieving a production record for iron ore, and encourage us also we had a record third quarter production.

Adjusted EBITDA was $1.9 billion, 15% lower than second quarter 2015, mainly as a result of lower sales prices in all our commodities except gold and phosphate.

Gross revenues amounted to $6.6 billion, 7% lower in the second quarter 2015, also due to lower commodity prices.

Costs and expenses net of depreciation decreased by almost $300 million in the third quarter of 2015, despite our higher sales volume. For your reference, costs and expenses decreased by almost $2.7 billion in the first nine months of 2015 when compared to the same period in 2014, despite the higher sales volume.

Our SG&A and other expenses decreased by over 48%, while R&D decreased by 28%, and our pre-operating and stoppage expenses decreased by roughly 17% versus the first nine months of 2014.

Our CapEx was close to $1.9 billion in the third quarter 2015, while project execution was $1.2 billion, and sustaining CapEx close to $700 million. For your reference, CapEx was $6.2 billion in the first nine months of 2015, meaning a reduction of over $2 billion when compared to the first nine months of 2014.

In line with our divestment plan, we concluded the sale of a minority stake in MBR for over $1 billion, and for Valemax to China Merchants for roughly $450 million in the quarter.

Net debt decreased $2.3 billion to $24.2 billion, with a cash balance of $4.5 billion. Our average debt maturity was 8 years, above 8 years, with cost of debt of 4.4% per annum.

Now to talk about ferrous minerals, above all I'm proud to inform you that our iron ore cash cost decreased by $3.10 per tonne, and reached $12.07 per tonne this quarter. Our freight cost, excluding the effect of hedging account for bunker oil, decreased to $16.40 per tonne, due to lower bunker oil price in our chartered contract.

Our unit cash cost and expenses for iron ore fines landed in China, adjusted for quality and moisture, went to $39.10 per tonne, down to [$34.20] per tonne in the third quarter, in a dry metric tonne basis.

Due to big reduction in costs and expenses, ferrous minerals EBITDA reached $1.7 billion, remaining stable when compared to the second quarter of 2015, after adjusting for the effect of lower dividends from Samarco, and from the leased pellet plants during this quarter.

We still, on our ferrous minerals EBITDA, I would like to call your attention to the fact that our results decreased by more than $100 million due to the impact of hedging account for bunker oil. We will no longer have this negative impact in our EBITDA as of 2016.

Physical progress at the S11D mine and plant project reached 75%, while the physical progress at the railway and port achieved 50% with 72% progress on the railway spur.

Base metal EBITDA was about $200 million in the third quarter, having decreased due to lower price, and the negative impact of adjustment in the copper price from sales realized in the previous quarter, and is still outstanding at the end of this quarter. This provisional price had a negative impact of $9 million in the quarter.

Nickel production amounted over [71,000] tonnes in the third quarter 2015, supported by higher production in Sudbury, Indonesia, and New Caledonia, despite the planned shutdown in Sudbury and Thompson in the third quarter.

Copper production was about 100,000 tonnes in the third quarter 2015, with hopefully 40% coming from Salobo. We expect to increase our production of copper and nickel in the last quarter of this year, with the completion of our maintenance for the year, and the ramping up of Salobo to 100% of its nominal capacity.

With coal, we continue our work to eliminate the logistic bottleneck in Mozambique. In this regard, we achieved 96% physical progress in Moatize II, and 94% in Nacala Corridor.

With fertilizer, I am very pleased to inform you that our adjusted EBITDA continues to improve, and reached almost $200 million in the third quarter of 2015, driven by higher sales volumes and lower costs. We remain confident in the long-term perspective of our fertilizer business segment.

In the third quarter of 2015, we continued to reduce our costs and expenses, achieving lower cash cost in iron ore fines, continue our divestment program, and reduce our net debt position. We remain focused on keeping our operating discipline, and preserving our balance sheet as we complete our investment cycle in the next few years.

Thank you for your attention. And now let's open this webcast for your questions.

(Operator Instructions) Wilfredo Ortiz, Deutsche Bank.

Yes, good morning, everyone. I just wanted to ask you. As far as the cash cost for iron ore, given the progress you've been able to achieve thus far, where do you see the cash cost going towards the latter part of the year? And then once you have the ramp of S11D, and specifically where were the Carajas cash cost as of now, and where do you think S11D's cash cost could be, given all the progress you've been able to do and with the FX being right now in your favor?

And secondly, I wanted to ask you also regarding your freight strategy. Following the sale of some of the Valemax vessels and the current marketplace, how sticky would the freight rates be, given that you've sold some of your vessels and the market is one way, and perhaps you have some contracted business and some open? And how are you viewing that? Thank you.

Thank you for your question. Peter and Luciano?

Hi. Thank you very much for your question. So if you look at our cash cost this quarter, it's $12.7 dollars. And this wasn't only because of exchange rate and volume. There was a real gain in productivity, as we had all along the whole year already.

If you imagine -- if you look at our Carajas operation today, and also the Southeast system, which is becoming very competitive because of the new Itabirites project already in production, today both systems they are already around $10 a tonne C1 cash cost.

And so when you look a little further down the road, you can easily imagine that with the S11D coming, which we know will be distinctly below $10 at an exchange rate of 3.5, plus with an optimization of our South system, because there we have still some work to do, you can imagine that at 3.5 exchange rate we will be around $10 a tonne C1 cash cost for the whole Vale.

Luciano. On freight, we see three main levers for reducing freight costs going forward. The first one is we still didn't accrue all the benefits of the lower bunker prices. There's a lag, because of the length of the voyage of the ships, the refueling cycle and process. So we still had in the quarter markedly higher bunker prices than what we have at the end of the quarter. So you should expect for this effect only, lower bunker prices, and thus lower freight rates going forward.

The second one is we believe our mix of contracts, and even the spot usage of spot freight, will improve going forward. And the lower spot rate also enables us better negotiation conditions going forward towards the renewal of existing contracts. So this should improve the mix overall, and also lower freight going forward.

And finally we have logistics optimization, most noticeably the berthing of Valemaxes directly into China, avoiding the stopover in the Philippines, for instance. That reduces also the freight costs going forward.

So we have a positive view on the behavior of freight for the next few quarters.

Carlos de Alba, Morgan Stanley.

Yes. Good morning, everybody. So the first question is if you could give us some comments on the timing and the amount of the Nacala Corridor finance transaction that you expect to close, I guess, in the coming months. And also if you can highlight any other divestitures and perhaps hopefully expected proceeds. That would definitely help you to keep on sustaining your net debt levels or improve them.

And then also if you have any detailed guidance or more specific guidance as to when S11D production should start either next year or early 2017. Thank you.

There hasn't been any change on the prospectus for the project finance. So we're still looking at $2 billion plus, and the closure of it at the end of the first quarter of next year.

In terms of divestitures, we see less of a need for divestitures just for the sake of closing any cash flow gaps because as you can see, we are increasing our competitiveness and lowering CapEx sustaining investments. So this quarter we had-- it was a coincidence-- EBITDA exactly equal to investments, and we expect to-- going forward, to have a surplus on this simple measure going forward.

But we keep on looking for, let's say, opportunistic transactions of smaller amounts. As we said before, we keep on looking into sale of ships. These have been commanding good prices, and it's a good transaction to release capital.

As you saw also on the press, we received a non-binding offer from Hydro for MRN. It's still in early steps. So there's a lot to do to see if we are going to have a transaction. But it's an encouraging sign as well.

So therefore we keep on looking forward to optimizing our capital structure and simplifying the portfolio. But I would say with less of a pressure from a cash flow perspective.

(inaudible), start up.

Okay. For the startup of S11D, I think we commented on the earlier Portuguese call that we were going to start doing the tests with ore in September next year, and at the same time, running the first trains on the rail spur, again in September of next year.

Andreas Bokkenheuser, UBS

Yes. Good morning, everyone. Just a quick question from me on the inventory strategy. I think you mentioned on the morning call that you might be looking to potentially destock some 10% of your current inventories next year. What would be the strategy in terms of timing? Is this something where you're basically waiting to see whether iron ore prices are maintaining strength for you to start destocking? Or would you rather be looking to potentially destock into seasonally weaker volume quarters like first or second quarter? What's the thinking on the timing there? Thank you.

Thanks for your question, Andreas. To be clear, this is not seasonal. This destocking is just because we now have the means to do it. We have capacity at the MRS railway, plus we have the Pico-Fabrica railroad, I mean a road from -- linking Pico to Fabrica, where we can ship then, instead of Guaibia or Sepetiba, we can ship to Tubarao.

So because of this flexibility, we can now reduce stockpiles. When we say reduce stockpiles, it's really about some good material, old materials stocked in the mines of Vargem Grande in the Southern System. And progressively we want to release that because it's working capital. And it will not jeopardize existing production or existing sales.

Ideal stock level today would be something around -- because we have floating inventory in vessels. We have some distribution centers offshore. And in the mines we should go to, in the next 2 to 3 years, we should reach 30 million tonnes. And today we have 55 million tonnes. So this is what we want to do. It is working capital, and we want to reduce. And it's a good opportunity, because we have now this flexibility. But it's not seasonal.

Amos Fletcher, Barclays

Yes. Hi there, gentlemen. I just had a couple of questions. First one to ask with respect to the 13 million tonnes of capacity that you announced you'll be taking offline, and the production release. Can you explain? Will that be seen through lower pellet production over time?

And then I just wanted to get -- the second question is around (technical difficulty). Also a timeframe can we start to expect you to see sales in excess of production in the iron ore business. Thank you.

Please, could you repeat the second question?

Yes. So the second question was just around the fact that in the quarter, it looked like you built around 3 million tonnes of inventory in terms of your sales volumes being 3 million tonnes below production. Obviously you've been making comments around releasing that inventory over the course of the last couple of quarters. And I was just wondering. At what point will we start to see sales being greater than production? Thanks.

So a quarter-to-quarter comparison in terms of stocks, I don't have this detail here. But it's certainly right that in 2015 we will have 2 -- if you compare December 2014 and December 2015, we will have 2 million to 3 million tonnes less of stock in our inventories. That is for sure. And the big reduction will come in 2016, where we are going to reduce more than 10% of the existing stockpiles, like I said before.

Now regarding the 13 million tonnes, it's a little confusing. But let me try to explain it once more. This is annualized capacity. We stop some of our not so high-margin mines, Feijao, Jangada, mainly in the Southern system. But we also bought less third-party ore. But this is annualized. So actually inside the quarter, you will only see 2 million to 3 million tonnes reduction.

So this is not something we are sticking to that, we said once both together, the reductions in the mines and then the reduction in third-party's feed could reach an annualized pace of 25 million tonnes. It is not something which we will stick to. This year, we are going this way. It depends on the margin optimization. It depends on the market. And this year we are, in spite of doing this, in spite of reducing these volumes, we are compensating the volumes in higher-margin mines, and keeping roughly the 340 million tonnes production guidance for 2015.

Thank you.

Jeremy Sussman, Clarksons Platou.

Yes, hello. How's it going? I just wanted to follow up real quickly on the -- on your last answer. Did I hear you correctly? I think previously you'd talked about kind of a range of 340 million to 376-or so million tonnes of production in 2016. Should we now be looking at kind of closer to the 340 range, just given the curtailment of some of the high-cost production?

340 is 2015. That's what Peter said. For 2016, we will announce guidance on the Vale Day.

Okay.

Thank you.

Alex Hacking, Citi.

Hi. Good morning. And thanks for the question. Luciano, can you remind us of the CapEx guidance for next year, and what FX rate that you're assuming on that guidance? And then a second question for Peter, if it's okay. Can you discuss maybe the dynamics of the pellet premiums? We can see that lump premiums have come off quite a bit recently. Are you seeing a similar dynamic in pellets? And would you consider rationalizing your pellet capacity a little bit like we saw in 2012? Thanks.

Alex, thank you for your question. In the previous release, you had a table in which we reproduced the capital expenditures guidance, given December last year for different exchange rates. The reason we removed it is precisely because we're reviewing that right now. But you should expect the same ranges of the past tables. We shouldn't be far away from those ranges. So the information is on the release. And I believe we were talking about between $6.5 billion to $7 billion, depending on the exchange rates that you look at.

Yes, Alex. Concerning the dynamics in the pellet market, as you know, pellets are much more volatile than other products. And you're right. There's a temporary weakening in the pellet market. Although I have to state that what you see published in the index and in the specialized magazines, this is not -- these are not pellets from major suppliers. You have lots of high silica off specs pellets floating around, and also from Ukraine and countries like that.

In our case, we have a decrease in pellet premium compared to 2014, a couple of dollars. That is correct. And the pellet market is under stress. You have Samarco and Vale ramped up expansions recently simultaneously. You have now no need for productivity in blast furnaces. And in the [ore] segment, you know that the scrap price is very much under pressure due to the exports of Chinese steel, semis and also there is a gas problem in Egypt. So there is a temporary weakness. And we are actually taking off some capacity in Q4, which is a cut of around 10%. And we are going to sell pellet feed instead.

But still we are going to produce in 2015 more pellets than we produced in 2014.

Leonardo Shinohara, HSBC

Yes. Hi. Thank you very much for another question. I just have a question for Peter with regards to premium for Brazilian fines. Would you expect that to maintain over time for this, at least for this quarter? And given that you have some cargos in the spot market, has that been well-received on contract as well? Thank you very much.

Well thanks, Leonardo. It's one of the best surprises we had in Vale, our Brazilian plant which is in quality slightly superior than other blends in the market. And we have achieved premiums $4 to $5 a tonne. Even the weakness of the market now, they are being kept. And I can only say this plant will grow. We will have -- today we have around 30 million tonnes of this blend. It will come to 100 million tonnes. And it will leverage Vale's price realization a lot. For that you have to have liquidity, and you have to have constant quality. And that's what we are working towards. Thank you.

Thiago Lofiego, Merrill Lynch. Mr. Lofiego, your line is opened.

Hello. Can you hear me?

Yes. Go ahead, Thiago.

Can you hear me?

Yes, you can --

Okay. Sorry. Just a follow-up from the Portuguese call to Roger, if I may, on the fertilizers front. So would Vale consider ever spinning off the fertilizers business at all, just as was the case at some point with base metals? Meaning your profitability is robust right now. So with decent prospects, so would you consider eventually selling your stake to the market? That's the first question.

And second question to Peter. On the third-party ore purchases, so from the numbers and from your comments as well, it seems like you're running pretty close to zero purchases as of now. Is it fair to assume virtually no third-party purchases for 2016? Or do you still have a minimum level, maybe due to attractive contracts that you may have in some systems?

Okay, Thiago. I'll start off then. What we're working on today is building a model that works, and catapults our existing operations into a much more robust, and much more profitable business in the fertilizers industry. Like I said earlier, we are in a sweet spot. Brazil is fast-growing market. We're putting in some very structural changes to the business. Productivity standards are growing. Our improvement is not just an FX-based improvement. There's a lot of productivity and cost savings structurally in the business that we've managed to achieve.

So going forward, the strategy is maintained at building this -- I guess the champion in the fertilizer industry. We're looking at all options. But it's one step at a time. And we will certainly look at every option that we have to build this business.

Regarding your question on the third-party feed, yes, we will reduce it. But it's very difficult to predict how much. There is purchased -- in purchased, we have also some contractors operating mines for us, so there is small amounts which we probably will keep. But it will be reduced. Thank you.

Thank you very much. Thank you for your time. We can say that we remain very focused in our operating discipline, discipline in capital allocation, preserving our balance sheet, and we continue to be very confident about being 2016 as a new era in Vale with our new projects. Thank you very much, all the best.

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