淡水河谷 (VALE) 2016 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Vale's conference call to discuss the fourth quarter of 2016 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 1, 2017 on 55-11-3193-1012 or 28-20-40-12, access code 4280600 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 Ferreira, Chief Executive Officer, CEO; Mr. Luciano Siani, Executive Officer of Finance and Investor Relations, CFO; Mr. Peter Poppinga, Executive Officer of Ferrous Minerals; Mr. Roger Downey, Executive Officer of Fertilizers and Coal; Mr. Humberto Freitas, Executive Officer of Logistics and Mineral Research; Ms. Jennifer Maki, Executive Officer of Base Metals; and Mr. Clovis Torres, Executive Director for Human Resources, Sustainability, Compliance and General Counsel.

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 2016 and fourth quarter results.

In 2016, we reached an important milestone with the startup of S11D project, the largest mining complex in our history, with a nominal capacity of 90 million tons per year, and average ferrous content of 66.7%. The completion of S11D is a landmark in the mining industry, as it presents technology with low cost, high productivity operations. Moreover, the complex is that clear statement of Vale's ability to make things happen.

For 2017, we stand firm in our pursuit at significantly lowering net debt, while we conclude our investment cycle and prepare the foundations for [even] strong free cash flow generation from 2017 onwards.

First, our financial and operational performance. I'm proud to report that Vale delivered a sound operational performance in 2016 with annual production records in iron ore, copper, nickel, cobalt and gold. Our adjusted EBITDA in 2016 amounted $12.200 billion.

In 2016, we achieved for the fourth consecutive year a reduction of $1.8 billion in cost and expenses, with Brazilian real depreciating on average by only 4% in 2016. Cost decreased by 6%, our general sales and administrative expenses decreased by over 24%. Our research and development expenses decreased by 28%, and our pre-operating and stoppage expenses decreased by roughly 50%. We also recorded a decrease in capital expenditures, with a big reduction of $2.9 billion in our investments from $8.4 billion to $5.5 billion in 2016.

The S11D project started up successfully in December 2016 with the first shipment in January 2017. In line with our divestment plan, we announced asset sales of more than $3.8 billion in 2016, including the sale of part of the Fertilizer business for $2.5 billion, another gold stream transaction for $820 million, the sale of three very large carriers for about $270 million, four Capesize vessels for $140 million and received an additional payment for the sale of Paragominas for $113 million.

Net debt amounted $25.1 billion by the end of the year, a decrease of, hopefully, $900 million when compared with the third quarter of 2016. The pace of decrease should accelerate as the sales registered in November and December months with higher price are collected in the first quarter of 2017. Our focus remains on strengthening our balance sheet, while maintaining our commitment to shareholders return and dividend. In that regard, we pay out BRL857 million of shareholder remuneration in 2016 and we will pay now BRL4.667 billion, subject to our general shareholders' meeting at the end of April.

Vale reported a net income of about $4 billion in 2016. This is a great improvement from a net loss of $12.1 billion in 2015, as a result of higher EBITDA, higher gains on foreign exchange and monetary variation and lower impairment. EBITDA from Ferrous Minerals increase 78% in 2016, reaching almost $10.5 billion, mainly driven by higher prices and gains in competitiveness. Our EBITDA break-even landed-in-China for iron ore and pellets decreased by [$5.07] per ton to [$28.09] per ton in 2016 when compared to 2015, leading to the higher EBITDA margin of $30.50 per ton in 2016.

Base Metal adjusted EBITDA amounted $1.8 billion, representing an increase of 33% comparing with 2015, mainly due to lower cost and expenses and higher volumes, despite lower base metal prices. Base Metals EBITDA increased by 14% in 2016 when compared to 2015, despite the lower nickel and copper price of 36% and 34%.

Salobo's EBITDA was $736 million, an increase of $135 million when compared to 2015, mainly due higher volumes. Salobo achieved a yearly production record of 175,900 tons in 2016, after completing its ramping-up and reaching nominal capacity as of September 2016.

Vale New Caledonia continues to improve, despite a still negative EBITDA of close to $170 million. EBITDA improved by $240 million when compared to the previous year.

With Coal, we saw an important improvement. Coal EBITDA improved, increasing by $450 million, from negative $508 million in 2015 to negative $54 million in 2016, as a result of the ramping-up of the Nacala Logistics Corridor and the Moatize II plant and the strong increase in coal prices. Adjusted EBITDA of Coal shipped through the Nacala Port reached $110 million in 2016.

Production cost per ton of coal shipped through the Nacala Port decreased by $21 per ton to $77 per ton in the beginning of this year, comparing with $98 per ton recorded in the last year's fourth quarter in [2015], as a result of the increasing production and ramping-up of the Nacala Logistics Corridor.

This week, [Vale] announced a proposal (inaudible) a true corporation with diffuse control and the adoption of the best practices of copper and (inaudible). This is a historic opportunity for Vale, a milestone that may be as important as the Company's privatization 20 years ago. We view proposal as a big step towards implementing a world-class governance and creation of value to our shareholders.

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

(Operator Instructions) Carlos De Alba, Morgan Stanley.

Very strong performance, congratulations. Just wanted to have two questions. Murilo, maybe with the balance sheet in fast repair mode, given the surprisingly strong iron ore prices, Vale has said that they would like to turn into a dividend paying company for all the excess cash the Company might generate. Right now, there is no really specific dividend policy other than the company law requiring a dividend of 25% on net income. Do you think that the Company could turn -- or could come out with a more precise, maybe higher payout ratio and stay in a dividend policy going forward?

And my second question maybe for Peter, is if he could comment as to how the ramp-up of S11D is likely to progress this year and next year, and any particular comment as to how the production ramp-up and shipments of S11D are going, that will be very useful? Thank you.

I think that we have learned in the super-cycle that just in case, and I'm saying about in a long term -- at least a medium to long-term perspective, we should just involve in world-class projects. Then, in case of not having these long-term projects, Vale should be completely devoted to increase dividend policy. But we cannot be precise, because we needed to see in an annual basis what should be done in order to increase the value of the company. I strongly believe in that Vale will be one of the highest payout in the mining sector, in the whole Stock Exchange, but we think that it's very early to provide some comments. Our priority in 2017, for sure, is to reduce our leverage. Thank you.

Carlos, thanks for the question. The ramp-up of Carajas is going well. In the last 30 days or so, we produce -- we expect around 1 million tons. There is no major issues. We have still stop and go operations, because we have to do some adjustments, which is normal. As you saw, maybe 85% physical progress. On average, we have [97%] in the mine and [67%] in logistics and infrastructure, no major issues. Like I said, [truckers] still being commissioned in some parts. And the whole system in 2017 will do 175 million tons. I mean, the S11D, plus the northern range. Maybe we can, depending on how the ramp-up goes, we can reduce the pressure on the northern range and increase in S11D or vice versa. This will -- what we will do is to check what makes best economic sense. Today, the bottleneck is the logistics, so we have 175 million tons on total to ship. And a complete ramp-up, as you may recall, we have -- one year ago we have revised the ramp-up and we have -- it was best for -- it made more economic sense to do the ramp-up in four years, instead of in two years. And that is still the plan and we will be ready to have the full capacity after four years.

Jon Brandt, HSBC.

Congratulations on the results and thanks for taking my questions. I first wanted to ask about iron ore prices and the fact that they are much higher than what everybody thought. I'm wondering if that changes your mining plan, where before you were very vocal about only producing, or not producing sort of your less profitable volumes. With iron ore above [$90] I'm sure everything that you have is very profitable. So, has that strategy changed at all? And I'm thinking more from the Southeast systems, are you going to start producing as much as you can? And then sort of the second part to that question, have you noticed, or are you expecting any restarts from some of the higher cost countries like China and India and sort of what does that mean for your 2018 supply-demand outlook?

And then secondly, I'm just wondering if there is an update on Samarco, if you're still expecting a potential restart in 2017, or if we should only expect Samarco restart next year? Thanks.

I'll leave you with Peter, but for sure what we have in mind permanently in Vale is to maintain, to keep our discipline in the supply side. Peter?

Regarding the iron ore prices, what we see for 2017 in a nutshell would be, we see much higher demand for several reasons than we had in 2016, steel demand I mean, that translates into iron ore demand, steel prices and everything. What we also see is that there is much less supply -- new supply coming into the system than it was the case in 2016. And finally, we see a completely imbalanced stock, the ratio between high grade and low grade sitting in China is imbalanced, which will probably mean an additional demand pull of equivalent of more than 5% what China imports. So from that perspective, I think we have a very strong 2017 ahead of us.

The question you asked me about how are people coming back, we don't think it's so easy, so immediately, so elasticity is not there so easily. What we have seen is in China, for instance, for environmental reasons and also for quality discounts, which translates into cost, the break-even is, if you add sustaining, is probably higher than $70, $75, that's sort of a floor. And the same applies to the seaborne supply, the extra supply, where you're seeing huge discounts in terms of quality, which also translates into cost -- higher cost. So the whole cost curve has shifted a little to the right and is now much more steeper than it was in the past. And really I don't see any average prices below $70, probably more in the 80s in 2017.

Regarding will we change our mine plan, we will not change our mine plan. What we have said is we are committed, we have a new long-term target, we have a capacity of 450 million tons, but we have a long-term target of a base case target, which is 400 million tons, which we expect to achieve, the pace of 400 million tons end of 2018. And it is the fact that if you look into 2018 now, and you analyze all the possible supply coming in from the majors, and so you see that actually in 2018, it's 50% coming from Vale. And certainly, Vale will not be the one to derail the supply-demand equilibrium. We are looking for maximization of our margins and that's what we believe in. So, it is 400 million tons, unchanged and we will closely watch what happens in 2018, since it's more than 50% our ore coming into the market in 2018. Thank you.

Jon, regarding Samarco, for sure, to get to the environment permits, it's out of our control. What we can say that is, Samarco is doing everything in the right way. We believe that they have already delivered everything to have the new permit to the case -- to Alegria case. And they need us to get again the same that used to be in the existing facilities. I could say that is very realistic to consider Samarco going back to the operations in the third quarter of this year. But, for sure, I would bet, it's not something that we can have in a statement, because it's completely out of our control. But what should be done has been done. Thank you.

Jeremy Sussman, Clarkson.

I just want to talk a little bit about inventories. My first question, can you guys give us a sense of sort of where Vale's inventories are across the whole system, maybe compared to this time last year? And then I think you touched on, the second question is, you touched on high-grade inventories being much different than lower grade inventories in China. Again, can you maybe give us a sense of order of magnitude? I think overall inventories at port are probably up 25 million to 30 million tons, year-over-year. I'm curious kind of where you see high-grade inventories year-over-year? Thank you.

It's Peter speaking. In terms of Vale's products in iron ore, we have reduced our inventories from last year -- from 2015 to 2016 by roughly 2 million tons to 3 million tons. At the same time, our inventories, they have shifted downstream, they are less concentrated in the mine now and more in the ports, where we have actually blended -- last year, we have blended roughly 40 million tons. So in spite of the additional blending last year, we have reduced inventories and inventories have shifted downstream.

Regarding the inventory sitting in Chinese ports, [around 20 million tons] and there are several sources, they have several ports. We have analysts' reports, we have our own market intelligence and it's the fact that the high grade ores have very low inventories. The medium grades are a little higher inventories and the low grades are really increasing dramatically. So that's the fact and this means that you cannot use, if you would use all the inventory at once -- let's say in one single batch, you would not be able to make a good quality steel at all out of it -- so pig iron out of it. So it must be said, yes, stocks -- inventories have increased in China, but part of them are actually so to say, paralyzed. They cannot be used and they have to be probably used in a very, very long time down the road. Thank you.

Alfonso Salazar, Scotiabank.

Congratulations on the results for the full year. The question I have is regarding costs. We saw an increase in the quarter that was in part related to labor, but also there is a stronger Brazilian real today. So I was just wondering if you can give us some guidance on what to expect in terms of costs for 2017 and how the cost is going to be impacted by S11D ramp-up this year?

Yes, the cost in the fourth quarter has increased a little bit. In the freight, it was the bunker, you saw that it was exactly the effect of the higher bunker. And in the C1, there is mainly a non-recurrent cost increase where we had some stocks adjustment, but also we had some provisions for variable remuneration and also the deal with the unions for the wages for this year. So that is mainly the reason why the costs have increased. If you compare the costs in the fourth quarter, the C1 and compare it to last year's fourth quarter, in reais, it's more or less inline what we had then.

Looking forward, I don't expect in 2017 to have a big effect of S11D, given that we will still be in ramp-up. But what I can tell you is that we are working in the next two to three years, what we will have is, yes, there will be a dollar or so less in C1 due to the effect of S11D, I mean, diluted in the whole Vale. You will have another dollar coming from our global recovery. Remember, that we are more and more dry processing, instead of wet processing and reducing our strip ratio, not because we are leaving ore behind, but because we are actually using waste, former waste and now processing it in our (inaudible) project, that's another dollar. And then, you would probably go for $2 or so. One, the whole supply chain is completely integrated and optimized, which is not the case today. We have the efficiency piece, where we can still work on and we have the price realization piece. So, we are saying, roughly $4 a ton down the road in two or three years compared to the year 2016 costs. Of course depending a little bit -- in the C1 case, depending a little bit on the exchange rate, which is now a little against us, but that's the order of magnitude I would indicate.

Christian Georges, SocGen.

Just a couple of questions. One of them is on your coal production in Mozambique, if you could update us on what you're looking at in terms of production at Moatize next year? I think I saw that Moatize II will be in action in this quarter, but I suspect it's only going to be happening perhaps in the second half, if you could give us some detail? And just I'm not sure if I missed it in your comments, but you are mentioning that you want net debt to reduce further. Do you have any kind of target of where net debt should be in the coming 12 months? Thank you.

Good morning, it's Roger here. We are ramping up the Moatize II plant, things are going well. We're targeting a 13 million ton to 14 million ton production this year as we ramp up. We had a very good January, which has boosted our confidence in terms of achieving that goal. Obviously, there is always a challenge, but all the systems are doing very well, both the mine, the plant and the [let's call it] railway and port, so we are on target.

Christian, as regards net debt, we have a target to reach $15 billion to $17 billion of net debt. This can be achieved over the next 12 months, depending on prices. But even in a scenario of lowering prices, we are very confident that we will achieve this in the near term, helped also not only by the increased cash flow of the company, but also by the divestitures of fertilizers and coal. Important to note is that one of the reasons behind the increased cash flow generation of the company is not only higher prices, not only higher volumes, and reduced costs, which are already reflected in the results you're seeing, but also lower investments, that's very important to freeing up more cash and lower expenditures with the derivatives. For example, in 2016, we had a lot to spend on settling open positions in bunker hedge and also we had a toll also, because of the appreciation of the Brazilian real in the accounts of the currency hedge. So all those drags on cash flow, they have been cleared, so therefore, even in an environment of very low prices, deleveraging should be a reality going forward, very quickly.

Daniel Lurch, BNP Paribas.

Just two quick questions on base metals. The first one is on capital allocation. You're posting obviously very considerable growth in iron ore, and should, as you mentioned, you would decrease your net debt in 2017. I understand your focus on balance sheet and shareholder returns, but could you outline your thinking about [farm feed] growth options outside iron ore, I'm thinking particularly about over three years. It appears this could offer low cost [farm feed] option. And in terms of timing, what do you think -- when would you start considering investment? And the second question with regard to base metals, how do you think the cash cost to develop in 2017, given the changes you're planning in Sudbury and Canada? Thank you very much.

On the unit cash cost, when you look at the Canadian unit cash cost in 2017, it will be slightly increased, as 2017 is a year of transition. We go down on March 15, with one of the furnaces that will be rebuilt and it will be down until we come back up in July. And in June, the whole surface plants in Sudbury are shut down for the annual maintenance that happens every 18 months. We didn't have that maintenance in 2016. So it's an additional $60 million and a loss of four weeks of productions out of the refinery in Sudbury. This was highly necessary this year because we also be doing the tie-ins for our atmospheric emissions reduction project, and we come back up on July 1. And at the beginning of -- end of Q3, beginning of Q4, we will move to one furnace in Sudbury permanently, and that one furnace, albeit will have an expanded capacity, the long-term reduction of production out of Sudbury is about 25%. But next year it will be probably about 7% down. So with the combination of higher maintenance costs and lower production because of the downtime, there is an increase in costs in 2017. And also the ramp-up Long Harbour and it's contributing more until it gets fully ramped up. But we have, in parallel, action plans to return ourselves and to reduce fixed costs, consistent with the reduction in production as we move forward into 2018 and 2019.

In terms of the capital, from a base metals perspectives, in the next few years, we have to finish the atmospheric emissions reduction program in Sudbury, but then we have to turn our attention to investment in the mine predominantly in Sudbury. We have a copper cliff mine expansion project there that we will begin this year, which will increase the mine speed in Sudbury in the years going forward. But I would say it's predominantly focused on mine investment in Canada, the CapEx program over the next few years.

Andreas Bokkenheuser, UBS.

And also congratulations on the solid set of results. Just one clarification on the balance sheet, so obviously you've seen net leverage per EBITDA comes down quite significantly. Can you update us on your target on your deleveraging process? I mean, initially, I think you were mentioning $15 billion to $17 billion in 18 months, obviously EBITDA is driving down the multiple, but the actual absolute number seems unchanged with net debt still around $25 billion. What's your timeline to get it down to $15 billion? That would be my first question.

And my second question, just on the ramp-up at S11D, as you also mentioned on the Portuguese call this morning, Vale certainly is going to go in and imbalance the market, which is certainly understandable. I guess my question is, hypothetically speaking, if you did want to ramp up S11D within the initial 24-month period, which I understand is now four years, but if you did want to ramp it up in 24 months, could you do that, or are you constrained on the railway? Thank you very much. Those are my two questions.

Andreas, on the debt, the 18-month target was established when we did the same results call one year ago and we were talking about the end of 2017 and we put down this 18-month target. And most recently, we have stated that we don't intend to do any further divestitures, rather than fertilizers and coal. We were considering beforehand to do perhaps other larger transactions within our core asset base. So given the improved cash flows, we have put this out of the table, so therefore, we are working only with coal and fertilizer as the key divestitures, which together with the prevailing cash flows, probably take this timeline to the end of this year, and obviously that depends on the average prices for the year. But nevertheless, even if we get wrong, we are wrong on prices, we're just talking about taking another three months, worst case scenario another six months, but to say that it is very likely that we will reach that $15 billion to $17 billion target by the end of the year. So we continue to go in that direction.

Yes, Andreas, thank you for the question on the ramp-up, but it's like I said before, so, we have decided to go for four years. Yes, we could -- a little bit we could speed it up, but we don't want to do that. We don't want to do that because we have a very well-structured profile now, ramp-up profile, and our expansion of the railway is following a very well-defined system. And also, we don't want to change that. And that's the answer. So, we don't want to change this four years ramp-up.

John Tumazos, Very Independent Research.

Thank you very much for the nice dividends and great performance and good job. First, as you dredge individual tributaries, you must have rebuilt a lot of houses by now. How are the actual cost coming versus projections? And second, is it a practical goal to buy out BHP and Samarco, so it can be integrated into one company, and a more streamlined decision making structure?

About the potential acquisition of Samarco, John I think that it's something which is out of the contest at this stage. We believe that our priority is to reduce our leverage. And, my understanding that BHP is very committed with their whole process into the river, in the region and mainly in the -- going back here with Samarco. I think that it is the subject that we have on the table, is precisely adjusted to go back and to work as it should be. We know that we can reach the level of 70% of the existing -- of the nominal capacity. But it must be a very important milestone to pay our -- to Samarco to pay its debt and to go ahead with all the obligations. Peter?

John, on the costs on the Samarco recovery, they are pretty much in line what was expected when we drafted the original agreement by March last year. We have been obviously updating and getting more comfort with the numbers, but the good news is that they are adhering to the -- very much to what has been offline a year ago. And just to say that also we flew over the river very recently and the progress of the remediation work is amazing. I would say that -- we would say that in a very short time, we will be very proud, we already are, but we would be very proud of what we're delivering to the communities in terms of remediation.

David Wang, Morningstar.

I just wanted to see if you could offer some thoughts on the dynamics for supply and demand going forward. I know you've previously mentioned in the call that a lot of the new supply will be coming from Vale. But I am wondering with the higher pricing, are you seeing a lot of other smaller players wanting to re-enter a market, because they would be profitable as well. And what's your, I guess, longer-term outlook on the sustainability of the sort of credit fueled boom in demand that we saw last year?

So the supply and demand and about other players coming back, well, I already said that we have a better demand than last year. We have less new supply this year coming in than last year and we have imbalanced stock. This means a very strong environment for iron ore prices. I don't see the prices at all, this new -- the players coming back, either being Chinese mines or seaborne, because the cost curve has shifted, it's not only about cost anymore, it's now really about quality, this translates into a huge discount and translates into additional cost. So that is distinctly higher than $70 -- this break-even $70, including some sustaining $70, which is sort of natural floor, a sort of a limit. And then the other one is that those players, we believe they don't come back really quickly, because there are environmental restrictions more and more in China and it's just not so elastic like we have seen in the past. So, in terms of the longer term, there is also the depletion issue. Lots of them will face huge depletion issues, and I don't see them coming back easily. They may come back a little bit, but it's not from one day to the other. That's my call here.

Jamie Nicholson, Credit Suisse.

Just quickly, given your comments on strong net debt reduction, do you expect to continue with liability management on your bonds and buy back some additional bond debt? And if so, would you be focusing on the higher coupon debt or the near-term maturities, or what objectives would you be looking to achieve? Thank you.

Well, we just did one example of what you're mentioning, the bond that we issued a few weeks ago. We announced yesterday that we are repurchasing the Eurobond, which matures in 2018. So yes, we look forward to continue to do a liability management, which doesn't mean that we will keep accessing the markets. We have other alternatives outside of the capital markets to do liability management. But it's good to use this nice window in terms of lowering cost of debt in order to refinance part of the maturities. We did, in our view, a good job last year by cleaning up 2017. We have only a $1 billion of -- mostly in agencies maturing this year. And we now have the task to push forward the maturities of 2018 and 2019, which will happen simultaneously at debt reduction. And we don't have a clear preference, there are some high coupon debt over the longer term. Should be the cash flows surprise on the upside, we should also remove some of those high coupon debt. But the priority over the short-term still is to refinance shorter-term maturities.

(Inaudible), Citibank.

I would like to get, if you can provide what is your expectations on pellet productions for this year and next year? And regarding the Moatize, I know that you mentioned briefly on your 2017 production, but what is the expectations about the expansion to 22 million tons? Thank you.

Pellet production this year, we will have higher production than we had last year. So, probably coming close to [50]. But pellet production is of course one of our competitive advantages and we will do everything in this current environment to increase production without jeopardizing the quality. We are even considering tolling options around the world where we provide the pellet feed and get back the pellets. So pellet will be -- and by the way the pellet -- new pellet price, which in the previous call was, why it didn't reflect in the fourth quarter, this will kick in only in the first quarter of this year and you will see the effect this year. So it will increase the production. And we also announced the Sao Luis pellet plant restart. This will only happen in the first half of 2018, since we have to do some work there. And the rational is actually really that we have this plant there. What changed from the past is that we have now the logistic infrastructure, we had not infrastructure at that time, so we had to make a choice between selling sinter feed and grinding sinter feed for the pellet plant. Now, we have the infrastructure with the logistics [peaking].

And also what we are doing internally is we are going to recover pellet feed from tailing dams, where we have huge tailing dams which will be re-utilized. There is no concentration needed, just cycloning and getting these pellet feeds ready to be pelletized with minimum of grinding. And so this is a very good case, a very nice case in terms of sustainability of the region, but also making use of the resources we have. And the plan is to make blast furnace pellets and to swap some of the blast furnace pellets from the Tubarao plant into this Sao Luis plant and to create more space, make space available in the Tubarao plant for increase in the production of the direct reduction segment, which is the segment really growing in the world in the next [few years]. Thank you.

We are ramping up in tandem with the railway, expecting to reach 18 million tons next year, followed by 19 million, 20 million tons in 2019. After that, it really depends on the market. We will obviously going to be disciplined and sensible about how we move towards any bigger targets, obviously with some investments. The amount could even go to 30 million tons, it is just a matter of what the market looks like, and how the investments pay out. Thank you.

Thiago Lofiego, Bradesco BBI.

I have two follow-up questions. One is Peter, why do you think swing capacity is not coming back online, at least not in a massive way for now? What do you think are the factors behind that? And second question, considering no changes in oil prices from here, where should we expect your average freight rate to stabilize? We still have higher priced contracts maturing that should be replaced by lower priced ones, I mean just to understand that dynamics? Thank you.

Regarding on the freight, once the second generation volume of shipments, once they kick in, a little more than 30 ships. As you know, $3.5 is more competitive than the first generation. And once we have rebalanced our portfolio, I would say at a bunker of [250 million ton] -- based on [250 million ton], I would say that we should come close to $11 in the mid-term. That's our average portfolio, which is of course lower than what we have today, but it really depends on how we can rebalance our spot contracts. (inaudible) and the [third] generation of (inaudible).

The other question was on, why would they not come back? Yes, the marginal supplies, well, they will, but it's a question of -- in China, for instance, what you're seeing is more and more environmental restrictions. Lots of mines reluctant to come back, lots of strict controls. And as I said, the breakeven, purely on the cost basis, even if they got -- you know that they got a recent tax incentive. But even with that, if you check the average breakeven cost, it is $64, $65 including sustaining. And if you now add the quality for those concentrates they have, they have 6%, 7% silicon average, but now the guys coming back, they would have 8%, 9% silicon. And this is in today's market conditions, with the today's coal prices, very difficult and translates into another $5, $6, $7 of penalties. So we are talking $75, which is today possible, we are higher in seaborne. But it is the reluctance what we see, it is also the elasticity, which is not there and lot of those are actually underground, which is not easy to restart a mine like that from one day to the other. That's why we think it starts from one day to the other.

Thiago, just to add one further comment, we needed to pay attention, as you know just recently, we have learnt about eventually the government cannot allow to mine coal in some provinces. We must pay attention, we can see some chance not allowing iron ore as well. Thank you.

Marcos Assumpcao, Itau BBA.

I have a question on coal. You mentioned in the press release that as the Chinese mines would be able to get back to the 330 days of production per year, the market could get back to equilibrium. So if you could mention what is the equilibrium level that you're expecting? And also when we take a look at the Sena-Beira -- the profitability of the Sena-Beira Corridor, we see that it's actually much, much lower than the one for Nacala. So for how long we will still have like take or pay contracts for Sena-Beira and so we should see some lower profitability in this Corridor. And so if you could comment a bit the volumes that you have to carry on that Corridor would be nice?

And last question on iron ore. we're seeing some talks about Simandou being sold to Chinalco. If by any chance this is confirmed, as you know the project very well, how long do you think it would take to put a project like that in place? Thank you.

Just start off with coal then. First on the market there, we have seen the coal prices move exactly [with the news flow], which kind of tells you that the difference between 276 days and 330 days production in China is where the balance lies. When the 276 day curfew was implemented, and yes, we did have some supply disruptions at the time, coal prices shot up to $300. Since then, when they flexed production to 330 days, coal prices started basically to free-fall. And now the announcement of the resumption of the 276 curb, they bounced back. So what I would say is, that's basically what -- I think we've seen a floor. We've seen where prices need to be in order to -- and we're prepared to satisfy supply and demand today. And where they will probably remain at least over the course of this year. Peter's comments about the steel industry in China and steel prices just corroborate the fact that we're probably going to see the balance lying a bit above where we are today.

The other comment that I think is worth making in that respect is that because of the volatility we saw, especially in the fourth quarter 2016, the buyers and a lot of those buyers were left without volume at the end of last year. Probably don't want to see the volatility and they want to make sure, especially those who are on contracts, want to make sure that they have a benchmark price, which is sufficient to guarantee their volumes. So, we would say that it's probably worth risk saying that the first quarter of the Japanese fiscal year starting April 1, we're likely to see a benchmark re-settled above where the spot market is, which I think is a very good reading for our business.

Regarding your comments on the [Beta] railway, this is the last year of our take or pay contract. Any volumes that we push down Beta now will obviously be in addition to what we can do in Nacala. In Nacala, we will be ramping up towards a 19 million ton, 20 million ton target by 2019. And, again, anything above that would be -- depends on the market, where the market is, if the market needs more coal and whether we can be competitive through Beta.

The maturity, well, actually I think that is the third quarter of this year, the maturity of the existing contract --

Oh the contract, yes, and this year in third quarter.

And just to answer, Marcos, I think that the level of complexity, having a green light in the Simandou project, it's very high. As you know, the project which faces a huge dispute regarding the path into the [girth] and I think that before anything must be decided about the process, the [SGR] and to solve some issues. And regardless of this, I think that's just in the first phase that used to having (inaudible). I have learned that the cost could be above $20 billion, which is in our view, something that can jeopardize the whole project. But it's very early to say, because, first of all, must be solved regarding the legal dispute. Thank you very much, Marcos.

I also like to say thank you very much for spending your time with us. We appreciate your questions and all the best. Bye-bye.

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