淡水河谷 (VALE) 2015 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to Vale's conference call to discuss the fourth quarter of 2015 and full year 2015 results.

At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session, and instructions will be given at that time. (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 March 2nd, 2016 on 55 11 3193 1012 or 28 20 4012, access code 6759495 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. 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 Ferriera, Chief Executive Officer, CEO; Mr. Luciano Siani, 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 Officer of Fertilizers and Coal; Mr. Humberto Freitas, Executive Officer of Logistics and Mineral Research; and Ms. Jennifer Maki, Executive Officer of Base Metals.

First Mr. Murilo Ferreira will proceed to 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 both our 2015 and fourth quarter results.

Vale's financial performance was impacted by the sharp drop in commodity price in 2015. Despite this drop, we have successfully managed to reduce costs and expenses, implemented growth projects, and advanced our divestment program while maintaining a stable gross debt position.

Despite all our efforts, Vale reported a net loss of $12.1 billion in 2015. This result was impacted by two non-cash impacts, impairment in the amount of around $9 billion as a result of a sharp decline in commodity price, financial losses stemming primarily from the depreciation of the Brazilian real on our US dollar denominated debt and derivative positions.

Despite their immediate impact on Vale's earnings, these events do not impact our cash flow generation in the short term to medium term, and can potentially be reversed depending on the market conditions in the medium term.

Additionally, our efforts were overshadowed by the failure of the Samarco's

tailings dam at the beginning of November 2015. As we have said on many occasions, we have been working diligently with Samarco since the beginning, and we maintain our commitment to support the affected regions, the communities, and the environment.

Now to talk about the financial and operational performance, I am pleased to report that Vale delivered a sound numbers performance in 2015, with annual production records in iron ore, ferrous, copper, nickel, cobalt, and gold.

Our adjusted EBITDA in 2015 amounted to $7.1 billion. In 2015, we achieved a reduction of over $5.9 billion in costs and expenses. Our costs decreased by 20%. Our general sales and administrative expenses decreased by over 40%. Our research and development expenses decreased by 35%. And our pre-operating and stoppage expenses decreased by hopefully 20%.

We also had a decrease in capital expenditures for the fifth consecutive year, with a strong reduction of $3.6 billion in our investments, from $12 billion in 2014 to $8.4 billion in 2015.

Total annual CapEx exceeded the previous guidance by $200 million as a result of a better than expected execution of S11D project and its associated logistics.

Despite a scenario of declining commodity prices and a still high capital expenditure, Vale paid $1.5 billion in dividends in 2015 while maintaining its gross debt relatively flat at $28.9 billion. Our average debt maturity was 1.1 years, with an average cost of debt of 4.5% per annum.

In line with our divestment program, asset sales amounted to more than $3.5 billion in 2015, including the sale of the minority stake in MBR for over $1 billion, the sale of 12 very large ore carriers for roughly $1.4 billion, and $900 million from another gold stream transaction and about $100 million from the sale of energy assets.

Going to ferrous minerals, I am proud to inform you that our iron ore C1 cash cost decreased by $9.60 per ton through 2015, and reached the level of $11.90 per ton in the last quarter, the lowest in the industry.

Our freight cost, excluding the effect of the hedging account for bunker oil, decreased to $14.10 per ton due to lower bunker oil price and favorable renegotiation of our contracts, and the reduction in the spot freight rates.

Our unit cash cost and expenses for iron ore fines landed in China adjusted for quality and moisture went, from almost $65.00 in the last quarter of 2014, down to $32.00 in the last quarter 2015 on a dry metric ton basis. If adjusted for the sale of pellets, this cost will be close to $31.00.

Ferrous minerals EBITDA reached $5.9 billion in 2015. Still on ferrous minerals EBITDA, I'd also like to share with you the fact that Vale's hedging accounting program had a negative impact around $440 million in 2015. However, adjusted EBITDA will no longer be impacted by Vale's hedging account program, since our outstanding bunker oil exposure recorded under this program was settled in the last quarter 2015.

Physical progress on the S11 mine and plant project reached 80%, while the physical progress of our railway and port achieved 57%, with 81% progress on the railway spur.

Base metals adjusted EBITDA amounted to $1.4 billion in 2015, representing a decrease of 45% against 2014, mainly due to the lower sales price.

Nickel production achieved a new annual record as a result of higher production at VNC and Onca Puma. Copper production, supported by Salobo's ramping up, was also a record amount.

Coal and fertilizer; with coal we continued to focus on reducing costs, increasing profitability, and delivering milestone projects such as the Nacala Logistics Corridor. The Nacala Corridor was completed in 2015, while the Moatize II mine should be completed in the first quarter 2016.

Coal EBITDA was negative $149 million in the last quarter 2015, and should improve with the ramping up of the Nacala Logistics Corridor.

With fertilizer, our adjusted EBITDA reached almost $507 million in 2015, driven by lower costs and expenses and gains on realized price through the commercial initiatives.

Despite the reduction in sales volumes in 2015, the fertilizer business segment increased its market share in Brazil. Adjusted EBITDA was $117 million in the last quarter, decreasing quarter-on-quarter mainly driven by lower sales volumes following the usual annual sales.

Just to finalize, I wanted to say 2015 was a challenging year, and we recognize that the sharp decline in commodity prices expected by many market participants can represent a challenge to our strategy of deleveraging the Company after the conclusion of S11D.

We wanted to restate that we are exploring more aggressive options to reduce our debt, including the sale of core assets. We don't have a specific attachment to any assets from any commodity, so we will explore all the options rationally, assessing the tradeoffs between the portfolio of assets that we envision in the long term, the valuation of those assets in the marketplace, and the potential debt reduction that will be associated with each divestment. Our objective after concluding these divestments is to provide Vale with more financial and strategic flexibility.

Thank you for you attention, and let's open this webcast for your questions. Thank you.

Ladies and gentlemen, we will now being the question and answer session. (Operator instructions.) Rene Kleyweg, Deutsche Bank.

Afternoon, gentlemen, and congratulations on the comments about addressing the balance sheet proactively. Away from that, just on the freight, which is now your single largest cost given the cost-out on the mining side, current spot rates are obviously very low and your hedged cost is running at $14.00. But, the potential is there to pick up vessels at a reasonable price, and you've got a ramp up in production coming through from Carajas. Could you talk to us just in general terms how you're thinking about your freight and the opportunities, and maybe comment about the $300 million cost savings you've been able to extract?

And then secondly, could you provide us an update just in general terms on how you're thinking about nickel in terms of your asset base and the market? Thank you.

We can start with Jennifer doing some comments about the nickel.

I think in Q4 we finally delivered the production that most were expecting from earlier in the year. And we've shown that when we deliver the production, especially in north Atlantic, our costs are very competitive.

That's not to say that we're satisfied. We continue to review our costs at all our operations in this challenging market in looking to reduce them. Our focus in 2016 is on our fixed cost basis across Canada, and we're doing a review of that.

And obviously, we continue to review our asset in New Caledonia. And in Indonesia, the performance there, they delivered significant cost reductions in 2015. And we look to continue that trend in 2016.

I would also say Onca Puma in this market remains cash flow break-even. And they're doing a good job to manage their costs as well.

Now let's go to Peter Poppinga, and with some additional comments by Luciano Siani.

Hi, Rene. Thanks for the question. The freight, as you well said, is an important part of costs. And we have an advantage there because we are far away from the main markets.

But, what we are doing is -- the $300 million you were referring to, probably on page 34, where we said we took out of the business -- that we improved our business net of exchange rate around $3.5 billion, which means part of that is $300 million of freight.

That's pure renegotiation of freight contracts and existing COAs being replaced on a more competitive basis by the new COAs. Now we are -- it's going to be a little more in 2016 where we have some COAs running out in the second half of this year.

And the optimization also of the supply chain will fall into that, because there is lots of freight inefficiencies today when we have our own ships sometimes having to be diverted directly to customers because the Malaysia operation was still ramping up. This will be now not the case anymore because Malaysia will be fully ramped up this year.

And also, the floating transfer stations where we have two operations in the Philippines, we don't need them anymore because now we can go directly to China. Remember that was one of the plan B's we had in the past.

So, all that optimization of supply chain will also fall into this freight optimization. And a little more longer term, the new generation of Valemaxes coming in will be, of course, a very big boost because they have a significantly lower operational cost.

Now, on the spot exposure, there is a limit we can -- I am not disclosing -- I never disclose what is our spot percentage. But, it will be at least the double of what we have today -- of what we had in 2015 we are going to have in 2016. So, that's an important leverage as well.

Just to add on this point, if you consider the landed costs in China of $32.00 that we released today, this assumes an average freight of $14.00 per ton, as you also said so.

But, if you consider the tons which are on spot which are the marginal tons basically, this landed cost in China is already $24.00 per ton because the spot is at $6.00, not at $14.00. So, that's, as you pointed out, a huge opportunity that we intend to capture, as Peter just mentioned.

Thank you, Rene.

Andreas Bokkenheuser, UBS.

Thank you very much. Thank you for hosting the call; just a quick question on asset sales. You mentioned during your call earlier this morning that you're looking to reduce net debt. And you mentioned that this morning, as well earlier on this call, to about $15 billion. Just in terms of asset sales, what are you thinking in terms of valuations for the individual assets that could raise that kind of money? I think you were mentioning coal assets, so I'm assuming that includes iron ore. So, can you provide a little bit more visibility on the valuations on the specific assets you have in mind?

For sure we are including everything in our core business. We don't have any constraint regarding the iron ore, of nickel, of copper, of fertilizer, and [nat] coal. For sure we needed to see some tradeoffs between what's happened, which means our long term vision and the valuation of the assets, in order to recommend it to my Board.

But, I strongly believe that we have some opportunities. It's something that we have already started to see -- to test the market. And we have our feeling that, in case of having good assets with good margins regardless of the market that we are living right now, we can see good opportunities.

Thank you very much.

Wilfredo Ortiz, Deutsche Bank.

Yes, good day, everyone. Just to follow up on some of the comments as far as the targets, what have you, in terms of net debt, and recognizing all the initiatives that are in place, when should we start -- could some of that be seen throughout the course of 2016? And by that, I mean in addition to the announced asset sales that you had sort of alluded to during the course of the Vale Day. How advanced would you be in some of these incremental potential asset sales? Is it something more towards the latter part of the year into next year?

And then, as far as costs, expenses, CapEx, considering where we are right now, do you have any targets or further reductions in any of these items that you have previously guided for?

Thank you for your question. In fact, we have our agenda to have everything in place in one year, one year and a half. But, for sure we don't need this to go just in one shot. Probably we can spread in different tranches.

But, it all depends on our negotiations. I believe that you should consider -- you could consider one year and a half as a tenor that we will be able to build good alternatives.

And by the way, I think that we need to provide some further clarification about the project finance as well. And I leave with Luciano about the cost and some clarification about the project finance.

Okay. So, for clarification, the asset sales we are talking about to reduce net debt to $15 billion, they are in addition to what we have announced over Vale Day, right?

So, the Vale Day asset sales, they are more geared towards financing our -- the end of our investment program in 2016, bridging any cash flow gaps depending on the behavior of prices, whereas the more strategic ones, they intend to really slash net debt.

So, in this front -- so, you heard a lot about the project finance. Some of you might be wondering why it takes so long. So, the deal with Mitsui was signed in December 2014 by the same time where there has been a change in the government of Mozambique.

So, all the approvals for the interests of Mitsui in the entities, they took about six months to get. So, we have the tax authorities, the central banks, Ministry of Mines, Ministry of Transportation. So, in fact the discussions toward the project finance, they really started more intensively in the second half of last year.

We got some, at that point, conceptual deadlocks. These deadlocks were resolved by the end of the year. You saw the African Development Bank approving the transaction in December. Now in 2016 I would say -- and then there was a lot of due diligence ongoing, so technical due diligence, social due diligence, environmental due diligence in the mine, in the railway. IFC has just published in its site a very extensive report on the environmental and social due diligence of the project, and you can see the amount of work that's been put into that.

And now in 2016 we would like to make a public acknowledgement here especially to the government to Mozambique and Malawi because of their full engagement into bringing this to fruition. Their support and the intensity which they have been dedicating to the negotiations, that's why we are now so confident that we should be able to finalize the term sheets and have the approvals of the other financing -- the lender institutions by the next few months.

And therefore, we can finally proceed to the more detailed documentation and to closing somewhere -- and receiving the money somewhere in the beginning of the second half of next year.

So, it's simply very complex -- of this year, exactly. So, it's simply very complex. It's five institutions, two governments, a lot of work. But, I have to say, especially with the energy that the governments are putting right now, which I do acknowledge here publicly and we do acknowledge publicly, that we are very confident in a successful closure of the transaction.

Thank you very much.

Carlos de Alba, Morgan Stanley.

Thank you very much; just a follow on on the project financing. If you are more or less have -- the amount will remain the same, around $2 billion, maybe $3 billion on this transaction, or has it been revised because of the delay in closing it?

And second, if you could, give us any update that you have on any more specific targets in terms of cost reductions or expense reductions for 2016. Thanks.

Okay. So, I'm sorry, Wilfred, I forgot to address the cost and expenses. Carlos is giving the opportunity, so I'll start by that.

We actually engaged in a full company-wide review of our plans in the beginning of this year. Those plans were just approved by the Board, so I would say the Company is indeed targeting additional cost and expense reductions.

For instance, I'll give you guidance for CapEx. Now we are targeting more something around $5.5 billion instead of the original $6.2 billion that were disclosed during Vale Day.

I'm not going to give specific details on cost and expense reduction. But, I want you to make sure that, whatever the plans that we did as of the end of last year that we approved in our annual budgeting process, they are now superseded and the Company is putting all its energy to deliver, in addition to that, additional value and competitiveness. And the heads of the businesses can address those opportunities specifically.

On the project finance, just to remind you, the transaction as a whole should bring around $3 billion, being $1 billion from the equity portion from the Mitsui agreement. And the project finance itself, we are setting a conservative target of $2 billion.

We have commitments for more than that, but we believe that perhaps at $2 billion we can reach the optimal balance between the cost and the capital structure of the entity which will bear the debt. But, if need be, we have the opportunity to go above that.

Thank you, Carlos.

Christian Georges, Societe Generale.

Yes, hello. Thank you. Just a couple of question I would like to clarify. In terms of your cash flow, how much of the proceeds which you announced last year, the sales of Valemax and so on, was actually accounted for in 2015? And how much do you still have to account for 2016, if any, and whether you could give us an idea of how much more outside the project financing in Mozambique you have in mind in terms of the potential proceeds of other assets, actually excluding the divisional failure you are contemplating?

And the second question is really that you've got about 20 million tons, actually, of additional annual production that you are able to produce and market in 2016. What would be your behavior if overall demand is static or even lower in 2016 with lower demand from China? How would you behave with those 20 additional million tons? Thank you.

All right. On the proceeds, again, making a clear distinction between the transactions announced during Vale Day, which were intended to be done in 2016, and the other more core assets that -- we are not going to talk about proceeds.

But, focusing on the transactions which were announced on the Vale Day, a few days after Vale Day we concluded the sale of four ships for around $400 million. So, therefore that was actually accounted in 2014 rather than in 2016.

We have already talked about the project finance. We do have also a transaction of energy assets and bauxite assets that -- again, I'm not giving particular figures, but we have indicated that we could see, each of them, several million dollars.

In addition, we have also another seven ships still remaining on our portfolio that can be sold. We have also other alternatives which you know about, which are, for example, additional preferred shares or additional streaming operations that we are constantly evaluating.

So, beyond the project finance, we have indicated then at Vale Day that we could reach somehow something around $4.5 billion and maybe even $5 billion of asset sales if you put all those transactions together.

And again, that's the -- what has been announced end of 2015 do not relate to what Mr. Murilo had started his speech talking about, which is the sale of core assets to reduce debt.

Thank you very much, Christian. Peter, please?

Christian, thanks for the question. The guidance -- although I said in the previous call that the seaborne market, in my opinion, is balanced, of what is coming in of new supply, which is around 60 million, and orders coming out, which is 40 million, and the rest is depletion, we think it's not time to push for extra production.

That's why we gave the guidance at the Vale Day of 340 million to 350 million tons. And it will depend really on market condition and our margin optimization -- continuous margin optimization efforts. So, I think that's a very balanced answer I can give you.

Tony Rizzuto, Cowen & Co.

Thank you very much, and congrats on the successes in driving costs lower. And good to hear the initiatives to try to de-lever in a meaningful way.

My question is a follow up. I was not on the earlier call. But, on the iron ore market, was wondering if, as a result of the Samarco tragedy, are you diversifying or diverting more supply to Europe and possibly away from China to make up for that shortfall that was previously going to Europe out of Samarco?

Yes, thanks for your question. This is not a Samarco subject only. Yes, we are increasing our sales in Europe, but naturally because some of these smaller companies are struggling to cope with the volumes there, and also because Europe is recovering a little bit in terms of the steel market.

Samarco, yes, there we are also stepping in for the moment. But, it's much more about Europe naturally needing more iron ore from Vale because of some of the smaller suppliers reducing or offsetting our production. So, it is actually both, but much more the natural trend to go to Europe again.

Thank you.

Sylvain Brunet, BNP Paribas.

Good morning, gentlemen. I had a question on VNC gold. It goes a little bit further by the strategy when we see the losses of over $400 million of EBITDA in 2015. First, wanted to understand how good a proxy this was for the cash losses the operation is now making.

Second, could you confirm that on your guidance you will still proceed at current prices with a ramp up that would lose roughly $4,500 per ton cash? And that's on top of the proceeds that you will have to pay to Sumitomo for their exit. So, could you please square that with your medium to long term view for nickel that would justify spending this sort of money in this business? Thank you.

I think the first thing to reiterate is, as we said at Vale Day, is that we're considering all our options in New Caledonia. And that exercise is ongoing, and later this year we'll be able to update you on that.

Essentially, we're projecting a unit cash cost of about $13,000 in New Caledonia this year. And we originally guided around 46,000 tons. I'm not sure that we will do 46,000 this year. That 46,000 required an investment in the mine fleet that at this time we're holding back given the nickel market, so we could be 5,000 or 6,000 tons less than that.

And I think, just to balance the conversation on New Caledonia, because I know there's a lot of negative sentiment on that and, as I said, we're doing our review, you have to remember that it is a very long life resource base, and so you don't make a decision in the moment. You take your time and make sure you've fully considered all the factors that go into making a decision with a reserve base that is over 30 years in terms of life of mine.

John Tumazos, John Tumazos Very Independent Research.

Thank you for all your good work. The current time is sort of an extreme moment, $26.00 oil, $6.00 iron ore spot freight, $3.75 nickel, etc. If iron ore rebounds just $10.00 next year, it's $4 billion of EBITDA. I'm worried that you might make too many decisions during the extreme moment, sell core assets cheap. What will you do to lock in low costs, more contract shipping, and keep your upsides open? Just a little patience in 2018 could reduce a lot of debt just from the wonderful assets in place.

John, this is Luciano. This is a great question. That's precisely why we do not want to rush and to be making decisions at the spur of the moment or pressured by market conditions. But, we have to balance with the insurance that we need to have in case prices go lower.

So, you can be sure that, in the tradeoffs that we are going to make, the preservation of an upside will be paramount. We do believe that over the medium to longer term being in possession of the great assets will be rewarding. So, therefore, that has to be in place.

On the other hand, we need to acknowledge that there is a large chunk of debt that we need to refinance over the next few years. So, striking the adequate balance is what management is looking for on the benefit for shareholders.

Marcos Assumpcao, Itau BBA.

Hi. Good morning, everyone, two questions here. First one, what were the price assumptions that you used for the impairment test on nickel, iron ore, and coal?

And the second question maybe to Murilo or to Peter, we saw -- given the recent results in the mining industry, we saw Anglo saying that they could be selling iron ore assets. We also saw BHP and Rio Tinto reducing their dividends. Do you think that -- and even cutting CapEx for future expansion as well. Do you think that there is a read across to the mining industry, and more specifically to iron ore prices, of these recent results in the mining industry?

Marcos, Luciano on your first question. And this comes from the financial statements. There is a footnote, 15, that talks about impairments. The numbers are there.

So, just for the sake of clarity, for iron ore we are using a curve that starts at $48.00 and goes longer term to $65.00. For coal, we started -- we are going to $85.00 to $140.00. And nickel starting at $13,000, phosphate $105.00 to $125.00. And you see you have all the details on that footnote.

Marcos, could you please repeat your second question? I'm sorry.

Okay, no problem. Given the difficult results that we saw for other mining companies, like Anglo saying that they could be selling iron ore assets, BHP cutting CapEx and also cutting dividends, do you think that this shows that we're probably close to a bottom here, even like the large companies or the low cost producers? Theoretically, the more prepared companies are already saying that these kind of price levels maybe are not sustainable. Do you think that there is anything that we can read from these results or from these recent actions from these companies?

I think that, as you can see, Marcos, with most of the ratings in the bond market and the share price, I think that there is a clear demonstration that, at this level of price, and as Peter mentioned a few moments ago regarding what happened with the supplier in Europe, saying that they are not able to confirm some contracts, in our view it's very clear that, if you are not in the bottom, you are very near. Even if it's not a decision by themselves, it's a decision by the credit issues.

Thank you very much.

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

Leonardo Shinohara, HSBC.

Yes, thanks for the question. Just a quick question. You had more CapEx disbursement because of better than expected physical progress at S11D. So, the question is, given that and you have put it out that in the second half of 2016 you might start production there, can we expect anything for this year in terms of tonnage coming, or will there be a shift, in other words, producing better product, higher Fe content as opposed to lower? Thank you.

I think that we can have more flexibility in the ramping up. We don't think that we are to go to the market and to sell. The [context], it's mainly in order to assure that the ramping up can be more smooth.

I think that you at the end of our webcast. Thank you very much for your questions, and all the best.

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