Nov 7, 2013
Executives
Murilo Ferreira - Chief Executive Officer Luciano Siani - Executive Officer, Finance and Investor Relations José Carlos Martins - Executive Officer, Ferrous and Strategy Roger Downey - Executive Officer, Fertilizers and Coal Operations and Marketing Vânia Somavilla - Executive Officer, Human Resources, Health & Safety, Sustainability and Energy Mr. Galib Chaim - Executive Officer, Capital Projects Implementation Peter Poppinga - Executive Officer, Base Metals and Information Technology Clovis Torres - General Counsel
Analysts
Carlos de Alba - Morgan Stanley Alex Hacking - Citi Rodolfo De Angele - JPMorgan Thiago Lofiego - Merrill Lynch Ivano Westin - Credit Suisse Garrett Nelson - BB&T Andreas Bokkenheuser - UBS Marcos Assumpção - Itaú BBA Renato Antunes - Brasil Plural
Operator
Good morning, ladies and gentlemen. Thank you for standing by, and welcome to Vale’s Conference Call to discuss the Third Quarter 2013 Results.
If you do not have a copy of the relevant press release, it is available at the company’s website at www.vale.com at the Investors link. 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.
To access the replay, please dial 55 (114) 688-6312, access code 9054979#. The file will also be available at the company’s website at www.vale.com at the Investors section.
This conference call and the slide presentation are being transmitted via Internet as well. You can access the webcast by logging on to the company’s website www.vale.com Investors section or at www.prnewswire.com.br.
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; Mr.
Luciano Siani, Executive Officer of Finance and Investor Relations; Mr. José Carlos Martins, Executive Officer of Ferrous and Strategy; Mr.
Roger Downey, Executive Officer of Fertilizers and Coal Operations and Marketing; Ms. Vânia Somavilla, Executive Officer of Human Resources, Health & Safety, Sustainability and Energy; Mr.
Galib Chaim, Executive Officer of Capital Projects Implementation; Mr. Peter Poppinga, Executive Officer of Base Metals and Information Technology; and Mr.
Clovis Torres, General Counsel. First, Mr.
Murilo Ferreira will proceed with the presentation. And after that, we will open for questions and answers.
It is now my pleasure to turn the call over to Mr. Murilo Ferreira.
Sir, you may now begin.
Murilo Ferreira
Good morning. Good afternoon.
In fact, Vale had a good performance in the third quarter of 2013 across the board with some – across the board improvements. And they expect that to recover in iron ore and pellets at the level of 83.6 million tons as we said before in some calls.
In fact, we know that now reached a level that we could expect in our budget. The cash cost of iron ore, I am talking about the mine plan, railway and port facilities after royalties fell to $22, which is a number that we at this point of time we consider competitive.
We are taking steps to build a lean organization with austerity plus increasingly looking for the efficiency in a low cost environment. We had some savings, but we continue looking forward in order to decrease the operation cost mainly SG&A, mainly in R&D in the cost of production.
It’s very important to point out that the adjusted EBITDA for nine months. We reached the level of $16 billion almost 9% higher on year-on-year basis and it was and we’re proud that it was mainly devoted to cut costs and expenses.
More than offset the decline of $800 million in gross revenue. We continue to work hard in order to reduce cost in the whole company and very important that we note as well the one topic we will be going extremely well and expect it to conclude at the end of 2013.
We’re working hopefully in the level of 70% and we have room to continue in this speed. I think that we for the lack of (indiscernible) that we wanted to go ahead with some plans to sell some non-core assets as we did with VLI.
We decided to conclude the final negotiation with the construction for the sale of stake and to reduce our stake to less than 40%. In the end we enforce our policy to be very prudent with the leverage of the company and to have a confidence to our shareholders.
Thank you very much.
Operator
(Operator Instructions). Our first question comes from Mr.
Carlos de Alba from Morgan Stanley.
Carlos de Alba - Morgan Stanley
The first question is Murilo. I will really appreciate if you can tell us what is the framework, the negotiating from framework or the analysis framework now the company is using to decide whether to take their fees proposal by the government or not particularly in-light of the arguments that VALE has given over the last two years that the case of the company for not paying the taxes was very solid or is very solid.
I would like to understand how the company is approaching this and whether the company would make decision before the STJ [ph] gives its decision on the company’s case. And then my second question maybe Martins elaborate as to why the operating licenses for Carajas Plus 40 and also showing that (indiscernible) maybe a little bit delay or when we could when the company could obtain those licenses to assure the ramp-up for next year volumes.
Thank you very much.
Murilo Ferreira
I think that we’re working hard in order to understand the whole process regarding the foreign subsidiaries tax liability. At this stage as we said we considered that we have a solid case, but we must understand it's adopted to analyze carefully the whole subject we’re doing a strong and deep hard work with (indiscernible) in order to finalize some agreement regarding the future law that could be a good foundation regarding the subjects for us.
This is the most important to have its not good for us to solve that and at the first day of next year we will be facing with the same problem. Then it’s really very important in this regard to have a new law that can bring competitiveness in the quarters with our competitors around the world.
Regarding the rupees, as you know we have a new law in Brazil which was called as MP 615 that we have some elements in order to analyze the process. But we have learned that people from the Ministry of Finance, they are analyzing deeply in order to provide a new key element.
Then what we needed is to understand the big picture. We don’t want to analyze just a portion regardless of the matters that we consider that we have in discussion.
This again is our virtue to analyze deeply and strongly the whole picture. Clovis Torres?
Clovis Torres
Thank you, Carlos for your question. As Murilo was saying, the whole discussion at the institute for the development industrial studies in Sao Paulo that comprises many companies, Brazilian companies that do business abroad.
It’s taken to account not only the past, but a law that increases strength and competitiveness of the Brazilian industry. So we have been talking to them about, for example, vertical consolidation of P&L abroad that we can accredit tax paid abroad to avoid double taxation and a relevant timeframe to bring the money into Brazil, which is very important.
You see the U.S. tax on a cash basis, the UK do not tax foreign profits of its companies and Brazil does on a competence basis, which means that we are really penalized when compared to our competitors.
So this has been ongoing discussion. We have really improved a lot the current legislation, but it’s still that lot of things missing.
And we hopefully will have a position from the government on the next law O&P very, very soon we hope. And then we can put it together with the conditions that have been enacted on receipts to refinance.
So that as a whole as Murilo said, having the whole picture in hands we have been able to make a decision or suggestion recommendation to our board, so they can make a decision. Thank you.
Murilo Ferreira
Well, about the license we have a preliminary license to operate those projects already. And we believe that during this month or next, we are going to get the final one, but there is no bureaucrat features, there is no impending situations as far as the operation is concerned.
Clovis Torres
Thank you, Carlos.
Carlos de Alba - Morgan Stanley
Thank you.
Operator
Excuse me, our next question comes from Mr. Alex Hacking from Citi.
Alex Hacking - Citi
Good morning and thank you for the question. My questions are on the nickel business, firstly, with regards to New Caledonia, I just want to confirm that the 40,000 tons next year would be in refined nickel?
And then secondly on New Caledonia, do you have some estimate of the cost structure or the margin structure at 40,000 tons next year? Do you think it should be a profitable?
And then my second question is related to Onca Puma, is there a timeframe with regards to repairing and restarting that operation? Thank you.
Murilo Ferreira
Please Peter Poppinga.
Peter Poppinga
Yes, hi Alex. Thank you for the question.
Yes, in fact in VNC so we are making good progress and going to produce 20,000 plus this year and next year like you say the aim is to be at 40,000. This is to be meant to be mostly refined nickel.
There will be a small portion probably at the (indiscernible) product, but not like this year where we had a 60:40 split, which will be very much higher number in terms of refined nickel. Regarding the cost structure of New Caledonia as I said previously we’re working even on the similar price environment of this year which we believe would higher but we’re working that with this 40,000 plus production and the highest product mix but we will be cash flow neutral.
Regarding our Onca Puma we just actually day before yesterday we started the (indiscernible) and we’re pleased to say that we had the first metal and so far everything is going smoothly. Growth is very positive news on the cost (indiscernible) transfer which was also optimized and so we are very happy with Onca Puma and we expect the ramp-up this year and next year to go smoothly with Onca Puma [ph] and more like 15,000 to 16,000 60% something of the capacity will be achieved for sure next year on Onca Puma.
Thank you.
Operator
Our next question comes from Mr. Rodolfo De Angele from JPMorgan.
Rodolfo De Angele - JPMorgan
I just wanted you to assist a little on the iron ore volumes I think the whole thesis [ph] for VALE from a bottom-up perspective is getting pretty interesting in a sense that you know I think the actions for management are starting to show in the numbers any two in those, in that direction I think it's important to discuss I think two critical things which are the volumes and then on the cost side. I know there is volume guidance for next year.
It's going to be disclosed in the validation. So you know trying to avoid a fully management and best spot I just wanted to ask you to discuss the ramp-up of the key projects in the short term how things are coming along on the additional 40 million and also on the (indiscernible) project and so that’s question number one and the second is really on cost, there is already in the pocket so far to-date you could comment how you feel about how sustainable these two didn’t are looking forward and the cost of opportunity into ’14 and ’15 thanks.
Murilo Ferreira
With the second one with the Luciano and later on with the first with Martins.
Luciano Siani
We believe that the cost structure of the company has been simplified and it is at the permanent lower level, so there should be no worries that we’re give back the $2 billion on the pace in coming quarters. Actually we believe that we still have more room to go on a short term basis on SG&A.
On cost of goods sold we believe also that our fertilizers and nickel we have immediate opportunities in our order as I explained we will have maybe one or two quarters in which the ramp up project will little bit on the average cost of iron-ore but we’re working to offset that and maybe even though we will lower. By the way for planning purpose just to let you know that we do all our analysis without considering the effect of the exchange rates so we want to reduce costs regardless of the behaviors that is exchange rate so everything that I say on top of that if you believe that the exchange rate will provide a pale in during the count [ph].
Our main target for next year is to have really the preoperating and stop expenses on a lower level this we believe that can be significantly lower for the reasons Peter already explained for VNC and also Puma. The absence of any expenditures, so we think in terms of the size of the opportunity percentage wise as well this is the largest one.
So and going forward to the future we’re thinking iron-ore the next step in terms of lowering cost will be two fold first, the dilution of cost fixed cost over a larger volume so if we can ramp up consistent ability to plus 40, we should have an additional reduction in cost of iron ore. And also if we make progress in terms of our Vale Max issue, the docket in China, there is another hidden opportunity for a few dollars per ton as we can operate more efficiently our supply chain after the ports.
So these would be the events to watch going forward.
Murilo Ferreira
Just before Martins, Martins please tell us about the distribution center in Malaysia as well regardless of the (indiscernible).
José Carlos Martins
Okay. Yes, we are going to start operation of our distribution center in Malaysia end of this year.
The distribution will be ready to receive cargos also Vale Max ships, so that will bring us another flexibility as far as the issue of Vale market in China there, though we have another alternative ready for us by the year end. So this is very important.
And besides that the distribution center will help us to mix different types of iron ore, so by improving our average quality and also improving our price realization going forward. As far as the (indiscernible) project in operation and as you know we have two main constraints to ramp up this project with the total capacity, one is relating to the case that we have already discussed about.
We are in the verge of getting some relief on this, but we cannot say for sure at this point in time. So and that’s the reason we are not delivering how much we can produce there.
(Indiscernible) is under ramp up now for the next year. This project will bring 12 million tons additional capacity when the fully operational, but for next year, we expect to wait and see around 6 million to 8 million depending of the (indiscernible).
I would say to you that we have a potential capacity available 350 million tons of iron ore. Part of it is constrained, because our railway in Carajás there is not ready yet.
So then that will take something like 20 million tons of this 350 up, because only by year end, the railway will be ready to move all the volumes and around 20 million tons constraints based on the case situation that we expect to have a better news to offer to the market by year end. So then our capacity now considering all the constraints, it’s 310, but could be easily evolved if you get a good result of the case discussions with the environmental agency.
So that’s what we can tell at this point in time, but we hope that Vale we would be able to disclose a more clear information about that. Okay, Rodolfo.
Rodolfo De Angele - JPMorgan
Thank you.
José Carlos Martins
You said you would like to put on a bad situation, but you really did.
Rodolfo De Angele - JPMorgan
It’s hard, but thanks for the request.
Operator
Excuse me, our next question comes from Mr. Thiago Lofiego from Merrill Lynch.
Thiago Lofiego - Merrill Lynch
Thank you for questions. I have two questions.
First one on the Moatize project, how comfortable are you with the plans with the Nacala Corridor project considering that the project execution is at 30% of physical progress right now. So what is the maybe realistic start update or second half ‘14 is something you are comfortable with?
That’s the first question. And second question, regarding the CapEx for this year for 2013 you are running below your annualized run rate right now is below your guidance, so could we see this year’s CapEx slightly below the guidance or should we see some acceleration in the fourth quarter?
Murilo Ferreira
Mr. (indiscernible) will answer your question regarding Moatize project.
Unidentified Company Speaker
Thiago good morning. Well, let me explain about the Moatize project in the Nacala Corridor, Nacala Corridor has two parks that means the Greenfield Park and the Brownfields Park.
What we’re looking for next year is just make sure that our startup will be for the Green Park that means the (indiscernible) is linked upto the Malawi [ph] Border and also the Greenfield for the Malawian railways. And the (indiscernible) so what we’re presenting to you is that physical progress of the Greenfield Project that is our target for the next year and we still have the same target, we’re not moving, we hope that in September of next year we’re transporting the first cargo for more mine to the Nacala port that is our target that is still there.
Thiago Lofiego - Merrill Lynch
And when should we effectively see the capacity of the system reaching 18 million tones towards 2016?
Murilo Ferreira
Well that will be the Brownfields Park of the Nacala Corrido that will take two years in 2016 or 2017 we will have the full capacity for the entire Nacala Corridor including the Park of course. It's the same capacity that we’re achieving for the Marches expansion considering that they start upward Marches expansion will be at the end of 2015.
It will be a run park for the Nacala Corridor.
Luciano Siani
On CapEx we should see some acceleration of CapEx on the fourth quarter as usual but we will probably be slightly below budget and we will probably will run slightly below on sustaining investment firm probably going to make our commitments of projects but run a little bit low on sustaining investment.
Operator
Our next question comes from Mr. Ivano Westin from Credit Suisse.
Ivano Westin - Credit Suisse
First one is on CapEx you did a very good in releasing CapEx in the first nine months of the year but at the same time in Q3, Board has approved the CapEx from increase of $253 million to Burrow 8 [ph]. I just like to get a view on which project you believe you could run risk of having additional CapEx over us.
And second question is on the Potash business, in previous calls and releasing you had stated your positive long term view for the year. I will just wonder what is your long term process which is far the maintenance of this positive view of the sector given the latest chance in the business.
Thank you so much.
Murilo Ferreira
I would like to point out that the problems that we had in (indiscernible) is related to big events, the first one was a strike, the second one a big problems that we had with contractors and we don’t think that we can extract in the whole companies just as you said and said very well is the case that we’re not happy but something can happen during the implementation of any project and about process it.
Luciano Siani
Yeah the situation of the Potash market is still quite unclear, however it seems to be rebounding of a trough that we saw in the past few months. Brazil is still lagging, recovery in other markets but we’re very confident in that we will see better markets in 2014 especially with return of some very important buyers to international markets like India whose rupee valuation and the fact that their monsoons were late this year have kind of let them out of the market this year.
So we are still very much on track with the recovery in prices and our appetite for potash remains and will going through our project portfolio and progressing with those with the review of the portfolio and with our development.
Ivano Westin - Credit Suisse
Okay, clear. Thank you very much Murilo and Roger.
Roger Downey
Thank you.
Operator
Excuse me, our next question comes from Mr. Garrett Nelson from BB&T.
Garrett Nelson - BB&T
Yes, thanks for taking my question. I have a follow up to an earlier question on coal.
Could you provide some information about where your Moatize cash cost per ton are currently and where you expect cost per ton to decline to when the project is completed and fully ramped?
Roger Downey
Hi, Garret. It’s Downey again.
In terms of our cash costs, I am delighted to say that for the whole of the coal business, we are below budget and below last year. Obviously, we are working towards improving the situation there and Moatize especially given the fact that we have had, where we still find difficulty in bringing out the full capacity up in the mine due to limitations on the railway mean that we can’t dilute up our costs as much as we would like to, but we are on track and so I am delighted to say that the turnaround in the coal business has been very good production across the board in coal has been stable quarter-on-quarter, but quite much higher year-over-year.
And I think I would say is it a straighter especially in the past quarter in the past year have delivered 38% increase in production year-on-year. So that’s remarkable and it’s all part of one big effort to optimize and deliver existing operations and the growing Moatize operation.
Garrett Nelson - BB&T
Okay, that’s good information. But do you have maybe any internal projections regarding where based on the same thickness and geology of Moatize and when Moatize 2 is completed, where your cost per ton might shake out when that just for modeling purposes when you are fully ramped at that operation?
Roger Downey
Well, we have (indiscernible) thickness, they were about 30 meters. So it is really a remarkable mine.
I mean, we have always spoken of that this is a mine that could operate the low $60 per ton right at the mine. We have bit on target that’s part of this year.
And like I said we are lot better than that and we could certainly reduce that considerably once we get the full scale operation out at about 11 million tons a year and then 22. So there is a lot of upside in terms of costs.
Looking at the cost today is almost misleading, because we are running only at about 3 million tons, 4 million tons of met coal. So it’s little bit misleading.
But yes, it is a mine that has – as you all know it’s open cut with a lot of room to move big trucks. So we have got state-of-the-art what we would call world class operating conditions at the mine.
Operator
Excuse me our next question comes from Mr. Andreas Bokkenheuser from UBS.
Andreas Bokkenheuser - UBS
Yes, good morning and thank you very much for doing the call and congratulations on a good set of results. Just returning quickly to Carlos’ question earlier on the licenses, you mentioned that you expect to get the license for Carajas 40 by November or December of this year, what would you say is the cutoff date before your 2014 production target actually becomes at risk?
Are we talking basically December 31 sales or do you have a little bit more leeway? Thank you.
Murilo Ferreira
Let’s publish first that the license to operate the plants that lot to do with the (indiscernible) itself. We have the already preliminary license to operate the plant and the plant is operate.
The second class is about the mining era that we can mine and that is the constraint that we’re suffering because the mining area now we needed to solve the issue and it's since completely independent from the (indiscernible) is a mine installation and the license to mine is relating to the case and that is one that is taking a little bit more time and then we first realized. So as I told we’re in the process of classifying all the case and this is a forward and back situation because we needed to present the data to the environment agents, sometimes they ask more data for us and then we needed to make additional investigation in the mining side in this case and that is the issue that’s taking a little bit more time but as far as (indiscernible) all the license to this project to operate it's okay.
The question is the license is to mine the area that will fit the installations that we’re already put in operation. I expect that I was clear now for you.
Andreas Bokkenheuser - UBS
And just one follow-up is pertaining to you know I understand that it's taking time to negotiate with the government but presumably at one point if you haven't got the license then your production target for 2014 on the mining side becomes at risk. So I’m sort of wondering at what time, you know at what point do you basically reach for that essentially you no longer can achieve your production target for 2014 on a monthly basis.
I mean what are we talking, are we talking this year you know could you get the license by next year and still need to target what’s your initial impression of that?
Murilo Ferreira
In parallel that what we had this year and to processing we’re not able to explain very well. In the beginning of next year as we have a season mainly in the markets of Brazil our last season the markets in Brazil will be able to produce in accordance with the weather conditions but then for sure the production in the first quarter of next year will be reduced comparing with the potential for the mine that we have as a volume for next year.
To be very precise we needed to and we promised you to get all the clarification and to validate that they use spread the production in a quarter to base in order to do give a good clarification for everybody. Thank you.
Operator
(Operator Instructions). Our next question comes from Marcos Assumpção from Itaú BBA.
Marcos Assumpção - Itaú BBA
First question in regarding production I would see positive highlights as well during the quarter was Carajas increased production during the quarter. And you mentioned in the press release that there were some evolution on the mining plans of Carajas.
My question here is all the problems that you were facing before are solved already can you elaborate a little bit on the production of Carajas going forward as well and I suppose if Martins could comment a little bit on the different pricing systems evolution we saw during the third quarter little bit of an increase of sales volumes on the current prices and the lower volumes on the future prices. If you see that as a trend how do you see the different pricing systems evolving.
Thank you.
Murilo Ferreira
Marcos I know that you’re very smart, and very intelligent but given some key elements for sure you will be able to give the volume for next year. We apologize but we enforce that you present the validity and the second point, Martins.
José Carlos Martins
Yeah as far as the price system we do not see any structural change. They are very effective that normally you’ve a different set of customers not only China, but outside China and the mix can change for one quarter to the other.
So I do not see any big changes in the basket of different price systems that we are applying for now. I think the average of this year could be a good year from next year.
Marcos Assumpção - Itaú BBA
Alright, thank you very much.
Murilo Ferreira
Thank you, Marcos.
Operator
Excuse me, our next question comes from Mr. Renato Antunes from Brasil Plural.
Renato Antunes - Brasil Plural
Hello, good afternoon. Thank you for taking my question.
And just quickly going back about the CapEx theme, looking through the release, we noticed that the expected investments for 2013 in some projects was increased, although the total budget for the project did not increase. I just wanted to get more color on why that happened?
Is it possible that I should be moving faster than expected in some products, is that it? That’s the first question.
And the second quarter about (indiscernible), you guys mentioned in the release about a high operating rate already in October, I just wanted to get a view on how much more we could see in terms of better cost once (indiscernible) reaches some capacity? Thanks.
Luciano Siani
It’s Luciano. In CapEx, yes, you are right we have taken the opportunity to accelerate some projects, so the increase is on the forecast for the year, do not mean that we are going to change the budgets on a multi-annual basis.
In fact if you see, there were some reductions as well few of them some reduction, one which I would like to point out is (indiscernible) to, if you see the reduction then because the project is approaching completion, I believe that in this case, particularly it’s an indication that we shall have an opportunity to end up below the last approved budget for the project, which is $1.7 billion. In (indiscernible), Peter please.
Peter Poppinga
Yes, (indiscernible) of course are not representative right now, because we are still ramping up. We are forecasting cost very competitive.
For (indiscernible) in the first quarter for sure and once (indiscernible) has ramped up fully, we are expecting the cost to be below 3,000 without byproducts and you should take into account the gold, it will be below $2,000 per tons. So it’s very cost competitive, but it will only happen next year.
Murilo Ferreira
Thank you very much, Renato.
Operator
Excuse me, our next question comes from Mr. (indiscernible) from Deutsche Bank.
Unidentified Analyst
Good morning gentlemen and congratulations on the numbers. I just had a quick one and apologies I jumped on from another call halfway through so if you have touched on this already, but what are you able to tell us before Vale Day as regards the opportunities for synergies and cost reductions around the nickel operations in Canada with Glencore?
And do you expect to be the operators of those assets or will it be a JV company that setup with staffing from both companies and just any color you can provide on that and apologies if you have discussed it already?
Murilo Ferreira
I think that we are analyzed deeply all the opportunities synergies that we can trace in summary as we did in 2006 write out that acquisition of (indiscernible) and but we don’t have any conclusion, but the whole discussion is mainly based in having on corporate joint venture, not a joint venture. Please Peter, could you give some further information in this regard.
Peter Poppinga
Yes, thanks (indiscernible) for the question. While we yes, indeed we are studying potential synergies on the mining and the milling and then the smelting in the Sudbury Basin and it makes a lot of sense as you know.
We are finishing the mapping phase now and the negotiation phase about next year. So there is nothing more to add that this exercise actually is being done every year.
Last year we already had a small operational synergies identified and we executed it. It was around a mine and we have excess and so we are very optimistic that this time we will put something together like Murilo said in the format of an unincorporated JV and things are going well.
Murilo Ferreira
Okay Peter. Thank you very much everybody.
I think that we had a great chance to discuss with you and with your comments, and aiming to see the merits and demerits for the next coming year. Thank you very much for your support.
Operator
Thank you. That does conclude VALE’s third quarter 2013 results conference call for today.
Thank you very much for your participation and have a good afternoon.