淡水河谷 (VALE) 2022 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Vale's conference call to discuss the second quarter 2022 results. (Operator Instructions) This call is being simultaneously translated to Portuguese. (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 Investors link.

This conference call is accompanied by a slide presentation also available at Investors link at the company's website and is transmitted via Internet as well. The broadcasting via Internet, both the audio and the slide chains has a few seconds delay in relation to the audio transmitted via phone.

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.

But first today are Mr. Eduardo de Salles Bartolomeo, Chief Executive Officer; Mr. Gustavo Pimenta, Executive Vice President, Finance and Investor Relations; Mr. Marcello Spinelli, Executive Vice President, IR; Ms. Deshnee Naidoo, Executive Vice President, Base Metals.

First, Mr. Eduardo Bartolomeo will proceed to the presentation on Vale's second quarter 2022 performance. And after that, he'll be available for questions and answers. It's now my pleasure to turn the call over to Mr. Eduardo Bartolomeo. Sir, you may now begin.

Thank you very much. Good morning, everyone. I hope you're all well. We just celebrated 80 years operating in Brazil. It was an opportunity to reflect on our journey, challenge and evolution to build a better Vale.

As you know, we remain focused on rerating Vale by derisking and reshaping our company. Let me guide you through our main accomplishments since the end of the first quarter. We remain firmly committed to the Brumadinho operation. We disbursed close to $320 million in the second quarter under agreements and donations. In the environmental front, we are now detailing the sanitation projects to the affected communities.

In the compensation of individual damage, new indemnification agreements have been reducing as the deadline for extra legal claims closed in January 2022 for most territories. Since 2019, we have indemnified more than 13,000 people totaling around BRL 3.1 billion. On dam safety, we concluded the decharacterization of 2 of the 5 upstream dam structures to be eliminated in 2022. I'll give you more details on that.

Finally, the reshaping this month, we completed the sale of our Midwestern system. We also signed a binding agreement with ArcelorMittal for the sale of CSP, our steel joint venture in the Ceará state. To give you a full perspective of how much we progressed since 2019, we sold 9 business in 5 different countries that, in their worst moments, cost us up to $2 billion in a year of cash drain.

We remain committed to making Vale a safer and more reliable company supported by robust cash generation and disciplined capital allocation. Part of our social ambition involves strengthening relations with communities neighboring our operations. This month, we celebrated 40 years of relationship between Vale and the Xikrin do Cateté indigenous people in the state of Pará.

The Xikrin people supported Vale's professionals when we started exploring Carajás. Their lands are close to Vale's conservation units in the Amazon, and we have also helped to protect their indigenous territory. Still, our relationship with the Xikrin have controversies. We have now begun a new stage in this relationship.

After 18 months of negotiations, we closed an agreement with the Xikrin community, ending a 15-years dispute. To honor our relationship, we visited the village of the Xikrin, and it was a moment of mutual respect and trust. I want to thank the Xikrin people for welcoming us in their home. It's also important to emphasize that Vale does not carry out any mineral research or mining activities on indigenous lands in Brazil.

We also believe that all activities that may directly interfere in these territories must strictly respect free, prior, and informed consent. A key measure to derisk Vale is our program to eliminate upstream dams in Brazil, and we advanced with important milestones. In July, we concluded the decharacterization of 2 structures, Baixo João Pereira dam and Dike 4 were the first ones of the 5 dams to be eliminated this year. Since 2019, we have eliminated 9 structures, and by the end of 2022, we will eliminate 3 more, reaching 40% of the program.

The projects are complex and, in some cases, pioneering. This is the case of B3/B4 dam, currently at emergency level 3. Using only remotely operated equipment, we have already removed close to 40% of the tailings much faster than our plan. This led us to anticipate these conclusions to 2025. By then, we expect Vale to have no dam under critical safety conditions.

We had an operationally challenging second quarter, which made us revise our iron ore and corporate guidance for the year. In iron ore, while our systems in the South had a solid performance, in the Northern system, we were impacted by one-off moisture issues and the ongoing restrictions in licensing. Spinelli will talk more about that. In base metals, essential maintenance works affected nickel and copper operations, and Deshnee will give you more details.

In our climate change agenda, we reached important milestones towards meeting our targets. As part of our partnership program, we received our second 100% electric locomotive. It will initially operate at the Ponta da Madeira port. In April, we signed an MoU with Nippon Steel Corporation to pursue iron-making solutions, including the usage of green briquettes. This is in line with our commitment to reducing 15% of net Scope 3 emissions by 2025.

Since 2021, we engaged with clients representing almost 50% of our Scope 3 emissions. In portfolio optimization, we have progress with those 2 divestments that I have already mentioned. Finally, in capital allocation, we remain committed to returning cash to our shareholders, and I'll give you more details in the next slide.

Yesterday, we announced the distribution of $3 billion in dividends in line with our policy. Last quarter, we announced the third buyback program for up to 500 million shares. We executed close to 22% of this program in a little more than 2 months. After the completion of the third buyback program, we will have repurchased almost 20% of the company's outstanding shares. This means that we're concentrating future earnings on a per-share basis by 25%. We view this as a form of growth without pressuring the supply side and carrying a lower execution risk.

Now I turn the floor over to our Vice President of Base Metals, Deshnee, for her remarks. Thank you, and I'll get back here in the Q&A.

Thank you, Eduardo, and good morning, everyone. I'd like to start this call by highlighting that our Sudbury mines that were impacted by the strike last year and our shaft incident at Totten mine and that had been in ramp-up since quarter 4 are now running as planned.

That said, in the quarter, our overall Base Metals production was impacted by major maintenance works, both planned and unplanned. Most of the planned maintenance related to the backlog we are catching up on following the 2 years of deferrals as a result of the COVID-19 pandemic restrictions and controls.

In nickel, we have planned major maintenance at our refineries and smelters across Canada, the U.K. and Indonesia. And our sales for the quarter were covered by inventories we built in quarter 1 in anticipation of this.

In copper, we completed the extended major maintenance at Sossego. This was originally planned for 45 days but extended to replace other key components to mitigate future operations risk. The plant is now operating at required run rates.

At Salobo, additional plant maintenance work was performed during the quarter with additional preventative maintenance being scheduled in the second half to address poorer-than-expected asset conditions discovered after key maintenance activities performed in the quarter. This can also be attributed to the maintenance deferrals during the COVID-19 restrictions.

It is for these reasons we have revised our copper guidance to the 270,000 to 285,000 tons. I would like to mention, however, that maintenance works at Salobo I and Salobo II plant do not change the plans for Salobo III, which is still scheduled for commissioning by the end of this year. For quarter 3, we continue with our planned major mine and mill maintenance programs across Canada whilst our nickel refineries will be running with nickel concentrate inventories largely built up already.

We are at the downstream run rates required to meet our nickel guidance. Canadian copper production should be temporarily affected, though, as we produce and sell concentrates in a much shorter cycle than nickel.

Next slide. Looking at our financial performance, in particular, price, you will see that, despite relatively flat sales volumes quarter-over-quarter, our price realization lagged market, especially in copper. As you can see in the graph in the left side, copper price realization was largely impacted by provisional pricing as a result of the copper forward curve price falling in the quarter.

By the end of quarter 1, we had some 44,000 tons of copper marked at $10,400 per ton. At the end of quarter 2, we had just under 32,000 tons of copper marked at $8,300 per ton. This represents a negative effect of about $3,000 per ton of copper.

In nickel, we had a positive balance of premium from product mix with a strong price realization achieved for our Class 1 products and a positive effect of -- from our quotational period. The nickel price lag was primarily due to fixed pricing, specifically our hedging program.

In the first quarter, we started the implementation of the nickel revenue hedging program for 2023, while the nickel realized price for the second quarter was impacted by the strike price of circa $20,200 per ton, which reflected in the quarter's results. The average price for the complete hedge position was increased from circa $21,400 to just over $23,000 per ton, reflecting the higher price fix for the new positions added on quarter 2.

Now let's turn to the future. This quarter, we have made good progress in our strategic agenda. We concluded the feasibility study for the proposed nickel sulfate project in Quebec with an expected annual production of 25,000 tons of contained nickel to produce over 110,000 tons of nickel sulfate. This offers us both diversified sales and an accelerated entry point into North America's burgeoning electric vehicle supply chain as we are seeing from the growing demand of battery production across the continent.

Also, we've continued to advance our agenda in Indonesia. We have just approved at our Board meeting, the development of the Bahodopi Project in Indonesia. Together with TISCO and Xinhai, we expect to start up the 73,000-ton ferronickel facility in 2025, and in line with our overall EV strategy, we have signed last week 2 key MoUs with Ford, one for a 3-way partnership with PTVI and Huayou in the Pomalaa project in Indonesia and the other to explore opportunities with Vale across the EV value chain. This adds the previously announced MoU with Tesla. We look forward to working with these like-minded partners who are ESG focused to supply low-carbon nickel into the EV market.

I now hand over to Marcello to take us through the iron ore performance.

Thank you, Deshnee. Good to hear you all. Good morning. I'll start my presentation, give you an update about our recovery plan. First, I would like to remind you our journey ceased to (inaudible). Remember that we lost 25% of our capacity. We always talk about capacity, volume, but I want to emphasize the word flexibility here today.

The main actions to review the flexibility were based on the resumption itself, the new licenses and the anticipation of projects. What were and what are the main challenges that we are considering in these actions? So regarding the resumption plan, dam safety was the key issue. Remember, all the saga of the vibration tests, the blasting, backlogs coming from the stoppage. So we've been overcoming month by month, and we brought back all sites, not in the full capacity yet, but all operations are on.

The first impact came with the upstream dams. But the main impact came in the Southeastern system with the downstream dams when we temporarily lost capacity of the dams in Itabira and in Brucutu.

Regarding licenses, what are the challenge? You may ask, is this a new challenge? The answer is no and yes. The license process is getting more sophisticated. We have higher level details in the south and the north of Brazil. I'm personally engaged in this process with the best team to provide analysis and working close to the agencies to close the gaps.

Finally, regarding projects, we had impacts due to COVID in the macro conditions. As we are anticipating some projects, we may have some adjustment during the implementation. So the combination of these 3 factors is bringing some volatility to our forecast. We were sometimes optimists, and we're not happy with this plan.

So in summary, we evolve it a lot reducing the first impact of Brumadinho derisking the dams and the impact of the production. On the other hand, we still have to deal with the license process, so we are strengthening the relationship with the agencies to bring reliability to our plan so update system by system.

In the North, Gelado project is almost accomplished. We expect the start-up for Q4 new orebodies. We overcame an important milestone for in 3 projects. So we expect the previous license for Q3 this year, and the main restriction lies in the rolling licenses. This delay made us increase the waste movement, and we are not happy with that. In this, there's room for improvement in this area also.

In S11D, [ABON] crusher's done plus 20. I want to drag your attention here. It's great news. We just received the installation license. So we are allowed to start implementation of the plus 20 in S11D.

In the Southeastern System, Itabiruçu is on time. We expect to bring in Q4. Total dam construction is done, and we are expecting the final permits by the end of Q3. So we expect to bring the asset in Q4 this year.

Now moving to our production guidance. We revised our production guidance for 2022. Now is a range between 310 and 320. What happened here? We've been losing some flexibility during the first half of this year. In the beginning of the year, remember, the heavy rain season. Secondly, we have to change the stockpile formation process in the north due to the moisture management for the consequence of a new front in the mine in S11D, all related to safety issues, that dropped restriction to the system. We already addressed most of these restrictions.

This effect would bring us close to the lower range of the previous guidance but with more -- with a higher risk. So we adjusted the risk. We also adjusted the Center West production that we just sold. And we also consider that we can have an adjustment in the volumes due to the market conditions. That's the margin over volume mantra here in the production guidance.

Now moving to the sales strategy. You probably noted that we saw more high-silica products in Q2. We found a good momentum to do those sales. The decision to produce or to sell more or less involve several elements, including price, premiums and freight cost. We analyze the margins carried by cargo. That's the beauty of the Vale supply chain flexibility. We make daily decisions to maximize our margin.

This product, high silica, we can sell early in the chain as a stand-alone product. We can wait for blending or still can wait more and concentrate in China. Recently, we announced a partnership with Shagang and Ningbo Port to develop the preblending facilities in China. We are advancing in the supply chain and getting closer to our clients.

Looking forward in Q3, we expect Vale's average premium will increase considering the higher volumes from Northern System and additional $30 per ton higher pellet premiums already negotiated. So I'll be here for further questions. Now I hand over to Gustavo.

Thanks, Marcello, and good morning, everyone. I'd like to start by walking you through the main drivers of our EBITDA performance in the quarter. As you can see, our second quarter pro forma EBITDA was $5.5 billion, $804 million lower than Q1 2022.

The decline was caused mainly by the $28 per ton decrease on iron ore fines, realized price and $4,400 per ton decrease in copper realized prices following the decline in reference prices during the quarter, which I'll discuss in more detail later.

This was partially offset by a 23% higher iron ore fines and pellet sales, benefited from favorable weather conditions and the solid operational performance on our Southeastern and Southern systems.

Now on to our cost performance. Excluding external factors, our EBITDA performance was impacted by $118 million cost increase, mostly explained by corrective maintenances at our Base Metals business. Despite the high inflationary pressure globally, it is important to highlight that we are on track to deliver our cost efficiency goal for the year, which is to keep our fixed cost plus sustaining CapEx flat versus 2021 levels in local currency.

Now focusing on price realization. The quarter-over-quarter performance was impacted mainly by price and adjusted as the Q1 2022 provisional pricing of $158 per ton for 12 million tons by the end of the quarter was realized at $137 per ton in the second quarter of the year. Also 21% of the sales volumes for this quarter were provisioned at $120 per ton versus $138 per ton average benchmark following the decline in the forward price curves by the end of the quarter. These 2 adjustments had a $7.60 per ton negative impact on price realization versus a $15.20 per ton positive impact in Q1. This resulted in a difference of $23 per ton between Q1 and Q2.

Now moving to iron ore all-in costs. Vale C1 cash cost ex-third-party purchases increased by $2.20 per ton for the first quarter mainly driven by BRL average appreciation, higher fuel costs, and the sale of inventories produced at higher cost in Q1, a carryover effect. Another important cost component is freight, which went from $18.10 per ton to $21.30 per ton, mainly reflecting the increase in bunker prices.

Important to highlight here Vale's competitive advantage on freight strategy where we have long-term contracted vessels for 70% to 80% of our annual needs. As a result, in Q2, Vale's average freight cost was 30% lower than average to [buy down Qingdao] spot prices. This performance has also benefited from our strategic decision to install scrubbers in our dedicated fleet back in 2019 as the low to high sulfur bunker spread has widened during the quarter. This strategy represented a $127 million bunker savings in Q2.

Pellet premium's another positive in the quarter, with a contribution of $1.50 per ton on our all-in costs. In Q3, we expect additional improvement as premiums were negotiated close to $90 per ton.

Now turning to capital allocation. We successfully concluded the $1.3 billion tender offer for Vale's note in June. With that, we maturely advanced our liability management program, extending the average tenor of the portfolio with no relevant debt amortization in the next 5 years. This provide us greater financial flexibility to continue pursuing our strategic objectives.

Our EBITDA to cash conversion was also strong in the quarter. As you can see in the next slide, we converted 41% of our EBITDA into free cash, and use it as incremental liquidity to accelerate our share buyback program. To-date, we have already executed 23% of our latest share repurchase program of 500 million shares.

So before opening up the call for Q&A, I would like to reinforce the key takeaways from today's call. We continue to advance in our social agenda and in the elimination of our upstream dams. Our reshaping program is mostly completed with yesterday's announcement of the sale of our stake at CSP allowing management to focus on core assets that will benefit substantially from the energy transition trend.

On production, we remain very disciplined on our value-over-volume strategy, and we continue to strongly believe on the long-term fundamentals of our industry. Finally, we remain highly committed to a disciplined capital allocation process as evidenced by the announcement of a $3 billion dividend payment to be made in September and our continuous progress on the highly accretive share buyback program.

With that, I would like to open up the call for questions. Thank you.

(Operator Instructions) Our first question comes from Caio Ribeiro with Bank of America.

So my first question is on cash returns. We've seen some other miners toning down expectations on dividends or trimming dividend payments outright. So my first question is, given this worsening macro outlook that we're seeing with recessionary years building and your debt levels closer to the top of your expanded net debt range, can we assume that you'll continue to focus on cash returns and potentially announce new buyback programs once the current one is concluded? And also, what about extraordinary dividends? Is that still on the table?

And then secondly, on provisions associated with Renova, given some recent press articles that the President of the Brazilian Supreme Court wants to renegotiate values, can you give us some color on what's being discussed and also whether this could lead to additional provisions in your view?

Caio, this is Gustavo. So on dividends and buybacks, look, we've been walking the talk of returning most of the cash and capital generation here to shareholders, right? So if you look at last year, this year, so that's what you should expect us to continue to do. We've done already 23% of the latest share buyback program. We have 18 months to perform on that one, so we have time. So we'll see where the market is, right? I think a lot of it will depend on how the cash generation performs in the second half of the year. But certainly, returning cash to our shareholders is our -- one of our key priorities, and we'll continue to do so.

Regarding Renova and provision, look, based on the information we have today, we believe we have the right amount of provisions in our books. You can check that. We've been updating this recently. We've done this in the Q1. So we are feeling good about what we have. We -- as you know, we are going through the revision of each one of the programs as we speak. But we are feeling good about where we are given the latest status of the negotiation.

Gustavo, if I can add just, I think, on the extraordinary dividends because Caio asked that about specifically. As we said, we are walking the talk. I think we're the most disciplined in the industry. We have to assess market conditions. You see the volatility in iron ore is huge, but we have to bear in mind that second semester is a very strong semester for third quarter and fourth quarter. So we're going to assess if there's a -- remember the bucket idea, first bucket safe, the second bucket, growth, third bucket policy, fourth bucket buybacks, and if there's any additional, we can pay an external dividend, yes, but it will depend on market conditions. So that's fundamentally. But we will keep no surprises. There's -- there will never be surprises. It's just that we'll keep our business safe. We're going to keep our growth. That's preserved. The policy is sacred. Our policy has to be prepared as we did this quarter. Buybacks is the next bucket. And third, if there is market -- if market comes better than we expect in the second semester, eventually, there will be extraordinary dividends. Hope I answered your question, Caio.

The next question comes from Carlos De Alba with Morgan Stanley.

So the question that I have is regarding the cost outlook for iron ore given the cost pressures that we're seeing across the industry and with commodity prices still elevated, any price certainly high. Where do you see the evolution? How do you see the evolution of the iron ore cost in the second half of the year and perhaps an early view of 2023?

And then just stepping back and thinking about the medium to long-term iron ore strategy in terms of volumes, how do you feel about this range of 400 million to 450 million that you had in the past presented to the market. Is this still something that you would contemplate? Or is it more likely that you will target around 400 million tons and then just keep really the -- anything above that for flexibility and to improve maybe your product mix but not really something that we can consider as more likely.

Carlos, Gustavo here. So I'll take the first one, and then Spinelli will complement the second. Look, Q2 is usually our -- the most challenging quarter for us because we do have the carryover effect from Q1. Volumes are not yet at the levels we usually produce in the second half. So as you guys saw in this quarter, we came above the levels that we are pointing to, to the end of the year. We continue to feel optimistic about what we had presented before, which means in C1 between 18.5 and 19 by the end of the year. So that's what we said in Q1. There's a lot of benefits already accruing, and they will accrue even more in the second half regarding the $1 billion savings program that we've announced last year. So we are optimistic there.

And the all-in, as we said, we expected to be very much in line with what we had last year. So this quarter was tighter in terms of premiums as you saw, given the strategy that has Spinelli laid out. But in the second half of the year with more volumes, likely more volume coming from the North, we should expect all-in to normalize towards what we had very much in line with last year.

Carlos, thank you for the question. Let's firstly emphasize one thing. The production is a consequence of margin over 1. So when you say that we're going after 400 million tons of level, and I want to emphasize another word that I mentioned of flexibility, we want -- we will go to this level production if you have a market. So 2 main things here, 400 million to 450 million is only for give flexibility to the level of production. We save 400 million to 450 million to have capacity to deliver 400 million in a reliable basis. So that's the first thing related to 450 million.

And regarding the 400 million level, 2 points here. The base to reach this is related to the margin of the volume if the market needs or not. So despite we have a variation or deviation short term, 5 million tons or even 10 million tons, the mid-term strategy is on. So we meet the long-term strategies on and the pace depends on the market. So again, it may take a longer time but will be connected to the necessity of the market. Imagine if you have -- if you bring 30 million tons to this market today, there's no necessity for that. So again, 400 million tons is the level of flexibility to go after. We have logistics. We have a great jurisdiction to work, no institutional problems or even commercial problem with our clients, the opposite. We have a very committed and strength relationship with our clients. So we are the best choice to increase the capacity in near future, but we're going to behave as the leader of the market as we are and don't bring nothing more than the market needs.

The next question comes from Leonardo Correa with Banco BTG Pactual.

So bringing Eduardo back to the discussion, Eduardo, Base Metals for you has been, let's say, a pet project and a super important angle. You know the business very well. You worked in Canada for several years. We've been -- I mean, Vale has been very vocal, right, on the turnaround of Base Metals for the past quarters. And clearly, all the energy transition thematic has been helping, right, over the past quarters and -- now of course, things are paused, right? The world is facing different issues. But I just wanted to hear your sense on -- I mean, how you think things have been progressing. Clearly, the numbers haven't been there, right? I mean, it was a very weak quarter. And in all fairness, several nonrecurring issues impacting like maintenance, which are probably going to be reversed. But there is a sensation in the market that the company has been facing more recurring issues and that there are more challenges than what everyone was thinking in terms of the turnaround. So no one better than you to try to help us out and understand, first of all, what the obstacles are, if there's anything new that's happening and how you think you can overcome these challenges. .

And the second point here on my side, maybe Spinelli can help, Vale -- I mean, the investment case on Vale relies on the fact that it's a different iron ore producer, and segmentation is a reality, and iron ore quality premiums are here to stay, right? Unfortunately, what we saw over the past quarter or so is quality premiums have been declining, and let's say Vale has been losing this relative advantage. And these negative effects have been impacting all around on pricing and on your delivered costs. And so I just wanted to see if you guys are seeing any relevant changes in how the market is perceiving quality, if this is just a temporary setback, right, given how pressured the steel margin in China is, or if you think there's anything structural happening?

Thanks for the question. It's my pet project. I hundred percent agree. Well, let's start with the fundamentals. I think you're right on. They don't change, right? We have the best assets. We have the best assets in nickel in the world, in Canada and Indonesia, in Onça Puma -- for 60 years of life in Onça Puma. We have the best growth projects in copper in Carajás basin. We are actually delivering them Salobo III as Deshnee just mentioned. It's coming on time, on budget on this next quarter. So we are pretty confident we're delivering Voisey's. We're delivering Copper Cliff. So the growth projects in nickel and copper are coming onstream, and the next -- how can I say that steps are there. So there's nothing changed. We have the best resources and reserves, and that's the name of the game, right in the end, it's what meant.

Short term, we should be very concerned about what you're -- we're talking because people look at the bumps. It's going to be harder. We know exactly what's going on in our business, like we never had problems with Sossego. Sossego had a 4-month onetime stoppage because it take 2 years to stop, restart the plant. And when we start to execute the maintenance, we discovered that we had to [try] to change a trunnion. You never plan a 4-month stoppage. So it was a 4-, 5-day stoppage that end up being 4 months. So again, I'm not concerned on the turnaround -- on operational turnaround, specifically on Sossego. Salobo had these issues, but as mentioned by Deshnee, we operate very well at the mine. So the mine is up and running. So when the plant gets stable, we're going to be able to true. That's why if you look at our second quarter or second semester, guidance is pretty strong on non-copper.

And nickel, the only issue that we have is the underground mines in Canada. We operate extremely well on the surface plants because they even have idle capacity. We operate extremely well in Clydach. We did a restoration in PTVI for the 4 months in the Furnace 4, extremely complex, first time ever that we do that, and it's up and running already as we speak. So I'm not really concerned about the turnaround specifically because, as we said, and we've been repeating that, we're going to extract value one way or another, even if we have to bring a partner to operate to us if we're not able to complete the turnaround. But I'm very confident we have the knowledge.

We operate in Canada for 100 years. We operate in Brazil for 80 years. So I'm not thinking that we have a niche to turn around operationally speaking. What you mentioned, I think, is important to stress, and that my answer a lot of questions that people have is that we believe, and that's true in that effect, that Base Metal has a better life in its own. First of all, for obvious reasons, no decision has been taken. But since we've been discussing this idea with you and with our shareholders, we're talking on the -- what is the end game? We're going to organize the assets after we turn around and -- while, not after, while we turn around, while we stabilize the business, while we deliver our growth projects, we're going to struck the structure the [societary] idea. And there are -- always, I mentioned that, I think, Mike, on the last call or the last presentation that I did that we have options like first option, just keep doing and keep executing and market, we appreciate the value that this business has is not reflected in our share price or in our value and our market cap.

Second, why don't you bring a private investor that sees value even in the downturn because fundamentally, the business didn't change. The business didn't change at all. The nickel price is healthy. Copper is reflecting the slowdown or these concerns about slowing down in the world economy. Copper is a GDP-related asset.

So -- but people that understand the business know that we have a jewel, that we have a real, real big asset or a real nice reserve. So I can bring the private. And then when market -- it's good. It might float, why not, and then we capture the value. But as I mentioned (inaudible) nothing has changed. We need first, execute; second, grow; third, structure; fourth capture the opportunity. But I'm pretty confident that Deshnee and her team are doing a great job to stabilize the business. It's a hangover from COVID. You saw 2 years while waiting for the maintenance we say we're 2 years waiting for the maintenance in the Sudbury smelters -- not 2 years, but the Furnace 4 had to be done in Indonesia. So I'm pretty confident that we are going to be able to extract the turnaround.

The growth projects are coming online and on budget besides VBME that we had overrun. We are coming with news with Bahadopi, as mentioned today, Indonesia is a great place. We are there for 50 years. Pomalaa is there. We're going to bring Onça Puma 2 very soon to the Board. We have -- as I mentioned at the beginning, we have a very good relationship with the [Shagang's] now. We are able to operate that mine stably. So I'm really, really -- you're right. It's my pet project when we're going to uncover a huge value in this business. And now I'll pass to Spinelli.

Well, you brought 2 angles here, right? So the market needs for quality and our strategy. So just to emphasize about the market. We have pellet premium for direct reduction $100, almost $100 over $65. For blast furnace pellets over $65 -- [$90, $100], almost $90, $100 today. Low alumina, we have a lack of competitors with low alumina in the market with premium -- high premiums. You're right when you said about the margins in China is a temporary situation due to all the downstream uncertainties that we have. But we are confident that with all the efforts of the government, that will stabilize this demand -- the downstream demand. And by the end of the year, we have with a lack of competitor with high-grade ores and also the cost of the coke, that is not low. It's not in the lower level as we saw in the past that we can recover also the IOCJ premium level. So again, that's a trend that no return, but we can have some volatility in short term.

And regarding our strategy, definitely, we are the company that is investing in products and in mine to bring high-grade ores. We are sticked to this strategy. We could bring more volumes to the market with low-grade ores, including increased the stockpiles in China and depress the whole portfolio of our company and also the market, but we're not doing that. So we are sticked to the value of our volume, and it is based in iron ore with high-grade ores.

Our next question comes from Thiago Lofiego with Bradesco BBI.

Two questions here for Spinelli. Spinelli, how are you seeing the iron ore demand environment now in the short term, maybe in the second half of this year, especially considering the Chinese government's target to keep production flat. So what's your take on this? And again, what are you seeing on the ground in terms of demand?

And then the second question, also you commented about premiums you're expecting improvement in the coming quarters. Can you give us a little bit more color in terms of the product portfolio? Are you expecting maybe less of the high-silica product to be sold? Or how should we think about the product portfolio and the premiums, again, maybe more for the short term, maybe second half of this year?

Thank you for the question. So iron ore demand, let's start with China. I think we started to talk a little on the last question. So what we see the first half, they had a huge problem with the COVID strategy. The small business, actually, we see and we feel in our business more regarding the properties, regarding the constructions. What we have in the second half, and it's good to compare what happened with the last year. So even if you consider that they will -- the forecast that will be a flat production we have the same pattern of last year in terms of CSP.

Inventory is almost the same. Inventory still is below last year. We don't have any energy goal for this year. Even production goal as we had last year, we don't have any Olympics in the first quarter of next year. And we have the economy in total different curve if you compare with last year. So we have a delay in the infrastructure investment. They are committed to that. We've been hearing about the 60% GDP the second half in China. That can happen. Infrastructure can support and manufacturing can also support, we expect double digit in this area. And what we see, they are talking this week about property as a security problem in China because they can bring this to a problem there economy. So there's another level of commitment, at least, that's our forecast.

And so we don't see a hard landing, and probably a soft landed. They will decrease. There's a change in base strategy meet long-term strategy, yes, but there is a support if you compare to last year in terms of demand. So we expect the downstream demand to be here in the -- by the end of this year and especially in the first quarter of next year. So -- and also, we can adjust the value for volume, Thiago, as we mentioned.

And next, China, when we see our clients today, they already booked in the third quarter. We talk about recession, but we don't see recession in their sales, at least yet. But in the fourth quarter, they are in a more short-term view. The main concern are related to any restriction regarding the cost and the availability of energy and the coke, the thermal coke. So energy is a key issue by the end of the year in Europe and part of the world that with the problem of the war. So again, that will be -- is still a problem.

But on the other hand, in terms of premium, if you combine a better market in China, better margins and price supporting the growth -- the late growth that will come by the end of the year in China and the necessity to save the coke in the part of the world that they don't have availability or the price would be high, that'll be the -- but what we expect a consumption of better products.

So product by product, today, pellets, we see a good level for the direct reduction. So we see by the end of the year, almost the same level that we see today. Probably in pellet -- blast furnace pellet, there is a downstream risk but not that much. So that's -- there'll be a wider gap between the pellets. And we've been developing a third wave for the pellets to swing if we have more demand for direct reduction. We can swing part of our production to feed this market or swing to blast furnace. So we'll play this game by the next quarter. And BRBF, as I mentioned, the key point is competition. And IOCJ, as I mentioned, we see a support for upstream risk by the end of the year and the next quarter.

The next question comes from Daniel Sasson with Itau BBA.

My first question is on the asset divestment front, you've done a tremendous job on diversifying a way or actually focusing more on your car businesses after selling your cooperations, VNC, CSP, California Steel and so on and so forth. But aside from MRN that you had already disclosed that is on your list for divestments, is there something else?

And on the same lines, can you elaborate a bit further on the potential on the merits of a potential IPO of the Base Metals division. I mean, given that you don't really need -- you are in a solid balance sheet position, and you don't really need to raise capital to do the growth portion that Eduardo commented on this business, right? Is it just a matter of unlocking value, or do you see maybe opportunities that could only be tapped with new fresh cash, and therefore, the IPO of the Base Metals would make sense.

And if you could maybe elaborate a little bit further, you commented on the Chinese situation on your previous answer. But if you comment what -- if you're seeing a more important deceleration in activity levels of steelmakers in Europe because of the energy crisis situation that you mentioned in your previous question, that would be great.

Thank you, Daniel. I'm going to pass your question to Gustavo, but I want to say that you're spot on. It's not about just -- it is unlocking value, obviously, because there is no value perceived on Base Metals inside Vale, right? We are perceived as an iron ore company. So that's -- we want to unlock that value. It's not unlocked value. So -- and you're exactly right. We -- when we have this structure, we will be able to do different things that we cannot do today. But I'll let Gustavo detail a little bit more because he's having the discussion, okay, together with Deshnee.

Daniel, so yes, so on the potential transaction, right, we haven't decided as Eduardo said, if it's an IPO, non-IPO, but I think fundamentally, what we are trying to achieve here is a more dedicated governance for Base Metals, which we see a lot of merits for.

We also want to make sure we create occurrence for growth. This business is very different from iron ore, right? We have a lot of growth in iron ore by resuming our capacity with limited CapEx. But as I think we have pointed out, we are a cash story today. We appreciate that, and we are happy with that, and we'll continue to pursue that strategy. But Base Metals is different, right? It's a growth business. There's a tremendous amount of momentum for EV transition for electrification of the world.

So all of that calls for a different strategy. And we believe it would make sense to have occurrence that could support an accelerated growth strategy there. The final format, we'll see, but that's how we are thinking about, and that's what we should expect us to pursue. Certainly, the market today is not appreciative of a transaction, but we'll continue to look into that and bring that to you guys once we feel good about it. On the divestment, MRN is the one we've said publicly, and it's quite frankly the last one. So we could continue to look for ways to optimize the portfolio on the margin. But I think we can certainly say we've done most of the reshaping that we wanted to do at this point.

Just to complement your points, but it's like a growthco and a yieldco, but Vale never going to let go the Base Metals business, okay? If we want to bring partners, even if it's private, even if you go public, it's going to be Vale's, and it's going to be a growthco. As currency, nobody has the strong end commodities like we do.

It's a matter of because we believe better governance, we believe better partners could help us grow, but we don't want to lose our growth. Of course, there's a huge amount of opportunities in the electric world, the transition -- the energy transition world. Then we have our yieldco that is really healthy. And it's a matter of resuming capacity, as Spinelli mentioned, as market needs, and we can do that by -- with a timely manner. So just remember those 2 things, yieldco, growthco, but they're all Valeco.

Let's talk more about the China market -- Chinese market also European in the big view -- a wider view about the world demand. So in China, what we expect for this next half, so we have the seasonality. Don't forget the famous Golden September that we restart the downstream demand. Usually, there's a peak for the construction. Many stimulus coming from the government lagging demand coming from infrastructure by the end of the year and Q1 '23 without any effect of the elections that they have the elections by the end of the year in November. So again, we see a trend. The COVID risk is there, but even after the elections, we see more power. In China, they have power. They have capacity to boost their production. So that's the trend that we are working in our forecast.

So Europe, yes, they're well. So they have good prices, a different level from last half but in a very healthy way. For Q3 sold out. Q4, some concerns about energy. But let's bring the other views about the world demand. Southeast Asia, blooming -- growing really well. India, they are back, and there's a connection that we need to emphasize also that the supply side of the equation here, so CIS is out of the market with more than the 120 million tons of iron ore. And also, if you consider that India is only producing without any export about iron ore in the seaborne market. So we have a balanced market for the Q3. And we will produce more in the Q4 but not more than we had in the last year. So have the same pattern of inventories in China that we can expect that we'll support in a mood of more demand regarding the downstream effect that we have in China. We see Q4 in Q1 '23 in a better shape than last year.

Our next question comes from Alex Hacking with Citi.

First question on iron ore, any comments on China's plan to create some centralized buying entity? And then second question on (inaudible) just on the ferronickel smelter, the 73,000 tons, is that fully incremental to existing production in Indonesia? Can you remind me how the offtake works? Can PTVI market all of that material or just their share of it?

And then on the power, if I remember correct, (inaudible) using gas, the cold, the carbon footprint. Is that still the case even with all the volatility in gas prices recently?

Well, thank you, Alex. Spinelli here. Thank you for your question. Well, regarding this announcement, it's important to say Vale is a long-term part of China. So we maintain a great relationship with the Chinese clients. We just announced that, naturally, we are a strength in this relationship, and we announced the preblended strategy. We are in more than 17 ports in China in blending facilities. We are concentrating ores in China. So we're expanding our relationship with the Chinese.

So we truly believe that, always, the market reflects the supply/demand balance so -- in a timely manner. So we are part of the market. So -- and we do our part, bringing more transparency as we bring our products to the market. And in regarding the potentiality to invest in iron ore, they are deploying their strategy, putting in practice the strategy to secure the resource. And in this point, we see as an opportunity for Vale because we have the best assets in the world and the best possibility to bring capacity to the market in a very safe environment and with the logistics in place. So we are open to them.

Alex, thank you for the question on the Bahadopi project. So this project, as we guided earlier, is an [RKF] project, and we will produce 73,000 tons of ferronickel in addition to the current PTVI production of around 70,000 -- I would say now 76,000 to 78,000 tons on the back of the Furnace 4 rebuild that we have just completed.

In terms of the structure of the project, we will build 100% of the mine, but the plant, the RKF will be shared 49% with the China coal, and that's TISCO and Xinhai, who will also be the constructor of the plant. And then in terms of offtake, for the first 5 years, this will be -- all the offtake will go to Chinaco. And after that, PTVI will get to market it's 49% of the share.

And your question around LNG, that is still the plan. This plant needs about 500 megawatts. We are talking to some of the local suppliers for LNG. We had brought in third parties as well. The solution hasn't been fully stitched. But just this morning, Alex, we've got word from the government that this project will get into the president's national strategic projects, which means that this project will be prioritized in terms of the overall energy support as well. So we're still sticking with LNG. We know it might be a little difficult to source. The plant itself will be built by Xinhai. And yes, we will give you a further update on the next results call.

The next question comes from Rodolfo Angele with JPMorgan.

So I guess most of my key questions, which I think were mostly on what's happened on the cost side and the turnaround of Base Metals were already fully discussed. I just wanted to add one more question. I wanted to hear about the licensing process in the north. What's happening? Is it -- why is it being a bottleneck to value? What's happening there? And that's all from me.

Thank you, Rodolfo. It's Spinelli here. Well, the environmental process, the license process in Brazil and actually in all parts of the world is getting more sophisticated I think is the best word here, and I can say that we have another league regarding ESG and also safety restrictions in the mining industry. So again, that's a level of quality that you need to bring to the license process.

In the north, it's the same. So we are inside Amazônia. So we are bringing the best analysis to guarantee that we have protection and sustainable development in our area of action in Amazônia. So again, we have just an example, look, we have the ITV is our institution. I think we've been investing more than $140 million the last 10 years to bring genome analysis, DNA, to bring a faster analysis to guarantee that we are doing the right thing and working together with the agencies. So again, we could blame against that, but that's a reality. And we need to work hard and actually work together with agencies to guarantee our -- what we say is our long-term strategy as an ESG-compliant company. We need to do our best to guarantee that we are doing the right thing in the license process.

So what we can expect for a short term? We are -- we had a delay in our -- what we call this rolling licenses. All the time, we have some small license that opened the pits, especially in the north range, had delays. We expect another round of small pits for September. The last should be in July. So we already in our guidance, we have this September. It's going well. The other good thing that we already have, the plus 20, that's a huge achievement. We have space for the construction, and we can bring a huge capacity to bring flexibility to this area of our business. So again, that's a trend. That's the level of the game now, and we need to be good.

The next question comes from Liam Fitzpatrick with Deutsche Bank.

Just a couple of questions on your iron ore strategy. So we've seen Simandou. It looks like it's finally getting off the ground, and we could see first production perhaps in 4 years. Given this is a direct competitor to your product suite, how is this going to influence your longer-term strategy to lift the 400 million tons and potentially higher?

And then linked to the shorter term into the previous question around kind of the iron ore licensing challenges, you previously told us that you wanted to get to 370 capacity at the end of this year. What's the latest sort of target for the end of this year? And when do you think you'll get to that 370 level? And if I could ask one final one just on Base Metals, lot of moving parts in Q2, and costs were quite a bit higher. Can you give us a sense of what unit costs will be doing in H2 or run rate by the end of the year compared to what we've seen in Q2 in the first half.

Thank you. It's Spinelli here. Again, the projects that we have around the world, we don't comment will have some -- but we consider -- and part of our models that will come, it's part of the game. But don't forget there are a lot of challenges in many of them, and we can reinforce that the charge that we have are regarding the license in the mine side, but we already have in place an infrastructure for logistics and ports in an environment that we really know and know how to manage, and also don't have any -- how can I say, the institutional issues.

So again, we are in the best place to bring capacity in a structural mode. Don't forget that quality is the game -- is the name of the game for the near future in the future. So that's a lack of quality in terms of supply. And even if you bring more like coming from Simandou, there's no risk for the strategy in the future when you see the demand for high-grade ores. It's a huge demand.

And the other point about the pace to reach any number, 370 or 400, it depends on the market. And when you talk about our capacity to produce, I pointed that we have 3 main areas to work. And the first one is related to the impact coming from the dams. And we've been evolving in a great journey. We brought back all operations. We're expecting the -- 2 dams that are coming by the end of the year, Itabiruçu and Torto, so -- it's okay. It's on track.

The license can be -- license delay can be an adjustment that we can do and also the projects adjustments. So by the end of the year, as usual do, we're going to say the level of production for next year in the Vale Day. But again, the main point here is how can we adjust the pace to bring volumes to the market. And the trend is quality also. So we're not going to bring products that are not with the demand for them. So the final numbers will come in the Vale Day.

Liam, just regarding your question on Base Metals cost, absolutely agree that this was a -- not a good quarter. But I think the team and I are very happy about the tough decisions we took in terms of trying to get some of the foundations right with regards to the asset integrity. If I then turn to cost, I mean, on the copper side, what was driving the copper cost in the quarter was, of course, the additional maintenance that we had to put both into Sossego and Salobo that affected our unit cost quite materially in the quarter. So good number for us.

And if I look at quarter 1, on an all-in basis for copper, we reduced over $4,500 per ton. In this quarter, $6,300. As Eduardo advised as well, if I look at my quart or my half-on-half improvement in terms of copper production, despite revising the guidance, we still are anticipating a 36% increase, right? And that's because Sossego will be at full capacity. We've revised slightly Salobo for the next -- for the rest of the year on the basis of the maintenance that we want to do. So we are hoping by year-end, we'll get to at least that $4,000, just over $4,000 per ton in terms of the all-in cost for copper. So just so that we all are clear, the all-in excludes capital.

But what's happening on nickel? So if I look at nickel on quarter 1 and quarter 2, we're around $8,500 in the first quarter all in. And for quarter 2, $12,500 per ton, which is a respectable number because, on nickel, we get to offset a lot of the byproducts. The byproducts in quarter 2 led us down a bit because, not only do we have some challenges in copper in the South Atlantic operations, but we also lost a bit of copper from Coleman from an incident that we had in quarter 1, which I also reported on in the quarter, and that's on the Coleman seismic event. So we've lost a bit of byproduct credits that we would typically get.

But again, as Eduardo mentioned, in terms of all of the initiatives underway, we are currently at the downstream capacity that we need to maintain the nickel guidance and, hence, the almost 25% increase half-on-half on nickel as well. So when it all comes together, we're anticipating around an 11,500 to $11,700 per ton in terms of the full year nickel all-in cost. So that's how I would look at the cost, Liam.

This concludes today's question-and-answer session. Mr. Eduardo Bartolomeo, at this time, you may proceed with your closing statements.

Okay. Thank you. Well, first of all, thanks a lot for the interest in our call. A lot of questions, good questions. I think it's great. I want to just reemphasize what Gustavo mentioning when he handles his initial remarks. We matured the risk value with 3.5 years after Brumadinho. We're learning a lot. We will never forget Brumadinho. Brumadinho is a driving force.

I've been always saying that our dams are totally under control. We are much safer now than we were 3 years ago. Our ESG agenda in the top is embedded in a business. We did -- our team did a really great job in reshaping it. It's made us really proud. We sold 9 business in 5 countries. We cashed like $2 billion in drains, you know the numbers. So it's something that we have to celebrate it's over.

Now we have to focus on our core assets. And we have extremely good reserves and resources. And market is in our favor. It's helping us. We don't need to rush. We can do it safely. We can do it up properly. We're going to manage that correctly. As leaders in nickel, as leaders in iron ore, we're going to do what is needed with safety. And we're going to focus that.

I used to say we have a Ferrari. Now it's light. Now we have to run it, run it like one, and we're going to do it. And later, just to reemphasize, we really trust the fundamentals of the industry. The energy transition is here besides all the short-term hiccups. We're not here for the -- I always say it's not a sprint. It's a marathon. We're not here for 1 year. We are here for like Vale for 80 years. We are building the value of 100 years, not as a value for 81 years. So we believe the fundamentals, there is resilient demand.

There are supply hurdles and geopolitical risk, but we are really, truly believing that we have the right moment. So do like us, buy value. The best investment that you can do it because we are extremely, extremely disciplined since day 1, when we said we're going to -- we have capital allocation. We are doing what we say. So best investment, best growth opportunity, effort that you can have in your hands. And that's the exact time to take your risk, so do like us by value. And thanks a lot, and see you again in the next call and keep safe.

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