Feb 27, 2014
Executives
Murilo Ferreira – President and Chief Executive Officer José Carlos Martins – Executive Director-Ferrous and Strategy Luciano Siani – Chief Financial Officer Galib Chaim – Executive Officer-Capital Projects Vânia Somavilla – Executive Officer-Human Resources, Health & Safety, Sustainability and Energy Roger Downey – Executive Officer-Fertilizers and Coal Operations and Marketing
Analysts
Carlos F. De Alba – Morgan Stanley & Co.
LLC Alex Hacking – Citi Thiago Lofiego – Bank of America Merrill Lynch Rodolfo de Angele – JPMorgan Securities LLC Wilfredo Ortiz – Deutsche Bank Securities, Inc. Marcelo Aguiar – Goldman Sachs Ivano Westin – Credit Suisse Andreas Bokkenheuser – UBS Leonardo Correa – HSBC Renato Antunes – Brasil Plural
Operator
Good afternoon, ladies and gentlemen. Thank you for standing by, welcome to Vale’s Conference Call to discuss the Fourth 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 5511-4688-6312, and access code 5485124#. The file will also be available at the company’s website at www.vale.com at the Investor section.
This conference call and the slide presentations are being transmitted via Internet as well. You can access the webcast by logging on to the company’s website, www.vale.com investor 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, CEO; Mr.
Luciano Siani, Executive Officer of Finance and Investor Relations, CFO; 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; and Mr. Peter Poppinga, Executive Officer of Base Metals and Information Technology.
First, Mr. Murilo Ferreira will proceed to the presentation and after that, we will go 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.
Thank you everyone for being with us in this conference call. Vale delivered a strong performance in 2013 with solid results across all the businesses.
2013 was a year in which we realized the benefits of our cost-cutting efforts; CapEx discipline; and a focus on core business. It was also a year in which we laid out the foundations to delivering solid volume and a free cash flow growth.
So let’s look first our financial performance. 2013 was a strong year for both financial and operational performance.
Our underlying earnings reached $12.3 billion. Our adjusted EBITDA was $22.7 billion, the third highest ever increases in 18% in relation to 2012.
We have record sales volumes in iron ore and pellets, with 306 million tons in 2013. Sales of copper, gold and coal were also record and nickel sales were at the highest since 2008.
Despite the increase in sales volumes, we have reduction in cost and expenses across all our business with savings, net of depreciation charge of $2.8 billion year-on-year. Cost of our products reduced $972 million.
SG&A went down $860 million, almost 40%, R&D decreases $663 million or 45%. Our cash generation allow us to distribute dividends of $12.5 billion in 2013.
As previously announced, we are committed to a minimum dividend of $4.2 billion in 2014, which means our dividend yield of about 6% at Vale’s current share price. 2013 was equally remarkable in terms of implementing the discipline in capital allocation, which has been conveyed to you from day one as Vale’s yield.
In 2013, we reduced $2 billion in CapEx year-on-year making another consecutive year of CapEx reduction. As we complete our project and becoming even more selective in approaching new projects, we shall expect further reduction in Vale’s capital expenditure.
We’ve sold non-core assets and investments worth $6 billion in 2013, imparting our commitment to the simplification of our asset base. We are now exploring strategic partnership such as one in Nacala Corridor that will create value and reduce our capital commitment.
We are also open for partnerships in our global coal and fertilizer segment. Now when we look at major issues we dealt with, we’ve reduced important business uncertainties in 2013 allowing management to focus even more in our operational and strategic things.
In November 2013, we joined an income tax settlement program, called REFIS, for income tax and social contribution on earnings of non-Brazilian subsidiaries. Our participation in the REFIS program resulted in the special reduction in our penalty fees and interest on the taxes.
Elimination of tax from faculties while preserving potential guidance from legal charges to the tax regime and foreign subsidiaries. Last year we were also granted the implementation permits for S11 D and associated logistics passing the way for growth in our iron ore production beyond to 2016.
And to added to this at the beginning of this month, we had more positive progress the grant authorization to mine additional areas around any four mining, which supports the production target of 120 million tons in Carajás in 2014 and increasing confidence in our growth program for 2015 and 2016. I am also proud to comment on the projects we delivered in 2013.
We completed a number of projects we requires to go iron ore production in the years 2014 to 2016. The Conceição Itabiritos plant to start up in the fourth quarter.
It is the first of our Itabiritos project, which will improve quality and extend mine lifes allowing full utilization of the South and Southeastern capacities. Moving to Carajás, add additional 40 million tons per year is currently humping at and we expect to operate it up to the limit of the logistic capacity of our northern region.
Also the CLN 150 project including a new tier in Ponta da Madeira terminal would reach it 150 million tons capacity at the port and 128 million tons per year at the railway supporting our production growth in Carajás in short one. In addition, we are lumping at base metal projects.
Salobo I is already operating close to the nominal capacity. In December, it produced over 1080000 tons, which is basically our nominal capacity on yearly basis.
We are now using the lessons learned from Salobo I to improve our future operations in Salobo II. The Onça Puma plant will start-up successfully.
In December, its output was 1300 tons. This represents about 62% of its nominal capacity of 25,000 tons per year, for one single furnace.
Nova Caledônia is going well in 2013, produced about 16,000 tons in nickel off-site and nickel pig iron site creeks. Market gains of an investment cycle we completed important projected base Metals.
Long Harbour is correctly being commissioned. The stock in mining is ramping up and expected to provide an excess of 80,000 tons per year of a nickel and excess of 10,000 tons per year of copper.
So, where will you go from here? 2013 was an another year of relentless focus on health and safety.
Our indicators improved despite of our effort we still had accidents. This is not acceptable and we will not relax until we achieve our goal of zero harm.
In 2014, we will continue with our cost-cutting efforts to preserve our strict discipline in CapEx allocations. We will concentrate on completing our ongoing projects and on delivering volume growth.
We are totally committed to create a value for our shareholders and we are focused on generation of free cash flows, which will manage firmly to reduce our debt levels and distribute increasing dividends to our shareholders. Now, our team will be available for question-and-answer session.
Thank you.
Operator
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session.
(Operator Instructions) Our first question comes from Mr. Carlos de Alba from Morgan Stanley.
Excuse me, Mr. Carlos De Alba your line is open, sir.
Carlos F. De Alba – Morgan Stanley & Co. LLC
Yes, hello. Can you hear me.
Murilo Ferreira
Yes, yes, please go ahead Carlos.
Carlos F. De Alba – Morgan Stanley & Co. LLC
Yes, sorry, thank you very much Murilo. Congratulations on the results.
The first question seems to be the iron ore price, the realized price level is really strong. We all see what the spot markets are used to banks on all the benefits have done.
I didn’t saw the company managed to price positively. So I wondered if you can explain what do you think the job, the better prices and you can break it down by the different components, I would certainly appreciate it, so we can fine-tune our numbers going forward.
Particularly this is something that you believe is going to be sustainable and is really going to differentiate the company from other competitors. And then the second point, just trying to understand.
In the Portuguese call you have said that iron ore prices are difficult to come down or that is difficult for iron ore prices to be down below $110 million on a sustainable basis. And I just wanted to understand what is your logic behind that if we assume that market goes into surplus and it no longer needs the high-cost Chinese mines.
We will lose their support that those high-cost producers bring to the market and does that open the possibility to have prices slightly below $110 million? I just wanted to understand what is the lesson behind those comments.
Thank you very much.
Murilo Ferreiral
Thank you, Carlos. Martins, please.
José Carlos Martins
Okay. Carlos, I’d start out that on our price.
We have some factors that influenced the better performance. Part of this was quarterly price proportion.
We have many contracts that are based on last quarter. So as the price was going up and then it stabilized, you have the impact of those contracts that bring some additional increasing price.
So we calculate one-third of this price increase was due to this fact. Another issue that, as you know, we are working hard to increase our CFR proportion in our sales, okay, so by doing that so we have the impact of the freight on the average price.
So one-third of this increase is due to the CFR sales. And at the end we have a mix of contacts that are better in this quarter.
So I would add this as things that can be kept, but they described to us, particularly very favorably. On top of it, as you know, we had some improvements in the price of high quality ore that can offset a bigger part of the total discounts that we needed to give for lower grade ore.
So I think the scenario was very favorably in this quarter. And as far as going forward, we believe that on a comparable basis we believe that we can perform better, although the average price in the market is now a little bit lower than what used to be in the last quarter.
While we see that the price cannot go below $110 on a sustainable basis is because of the high-cost of local producers, okay. We are talking about more than 350 million tons of local ore.
I think a part of this ore has a cost much higher than $100. And so, as the price is driving now, part of this supply will be taken out of the market.
Sure that if you have a very big increase in supply the price could be driven down a little bit more, but that’s not the case we assume for this year. We believe that this year the additional ore coming to the market around 100 million tons, and 6% of this will be taking out by the flow consumption.
So and the remaining 40 million tons is the one that will compete with local ore in China. So I think this is a very low quality value contract 400 million ton of additional capacity against 350 million tons of high cost of local ore.
So that’s the reason we keep our yield that the price cannot be driven below $110 in this year. So that’s the why we see it.
Carlos F. De Alba – Morgan Stanley & Co. LLC
Thank you and then just from me a follow-up on the CFR sales as we mentioned, what is the average freight cost the Vale is seeing today when you said in those service?
Luciano Siani
Our cost – average cost of freight is around $22.
Carlos F. De Alba – Morgan Stanley & Co. LLC
All right excellent. Thank you very much.
José Carlos Martins,
Yes, of course.
Carlos F. De Alba – Morgan Stanley & Co. LLC
Thank you, Carlos.
José Carlos Martins
Thank you very much.
Operator
Our next question comes from Mr. Alex Hacking from Citi.
Alex Hacking – Citi
Good morning and thank you for taking my question. First question is on iron-ore is it okay I mean you just talked about the price probably cannot be sustained the lower $110 a ton.
But in the very short-term, how concerned are you that we could see some kind of a destocking event in China similar to October 2012, given some of the negative data that we are seeing on inventory and steel demand in China. So do you have any kind of short-term concern of price and then the second question will be on Base Metals, I want to you are looking for a sort of $3 billion to $4 billion of EBITDA from its business today metals prices how far towards that gold do you think that you get in 2014, now that we have Sudbury at full capacity plus partial operations in Onça Puma and VNC.
Thank you.
Murilo Ferreira
As part of price when we talk about $110, we do not talk anything shorter than 3 months okay, three months average because it nobody takes decision to Sudbury mine ore to Sudbury blast furnace, with one week price or one day price. So you only have to move to three months average and in three months average all the points you raise about the destocking we’ll be kind of absorb.
I think Chinese the iron ore market is very dynamic. We never had been in the history of the ore anything sold by the iron marketing side.
So the effect happened constantly. One year in China you see very big movement.
You can see price are going down up to $90 and three months later to be $150. It’s always move to be the number.
So I think it’s a talk about the short-term average and price in China, it’s quite difficult. We always look a bigger periods and we look before and we look after and we do not see why the price can be below $110.
So that’s our basic assumption and I have been telling you about this market from today and if you look the efforts, I think you have to believe a little bit more on what I am saying. In the short-term today, China lucky sees a monetary constraint, which is effecting in the seasonal construction Andy and that is affecting still and indirectly affecting the production and iron ore consumption.
At the same time you have a big increase in outstanding production. But even with this situation price in dispute never went below $117.
Today increase a little bit again. So, I think there is a very strong resistance in price in the range of the local Chinese iron ore cost.
So it’s not driven by supply and demand, but is driven mainly for cost structure. So that have nothing to do with the short-term movement that we continuously see in China.
Now we have this pollution issue, we have momentary constraints, but when you talk with the customers in China they are ready to buy my ore, they are ready to increase their production, they are willing modernize their facilities. And even the main institute in China, which is steel in China they delivered a very decent forecast for this year 3% growing in steel production and near 7% grow in iron ore import.
And I think they are very qualified to make this projection, because they work with whole deliveries they have goals action with the areas of the Chinese government. They are aware about the pollution issues.
So that’s the fact that we are looking for. We put our assumptions based on facts, based on reality that we can see and things that we can really capture in the Chinese market and the Chinese environment.
So I believe that this year considering the big increase in supply will not be as good as last year in terms of price, but the price continues to be very favorable and very profitable for Vale.
Alex Hacking – Citi
Okay. Please can you speak about the base metals?
Luciano Siani
Okay, thank you Alex for your question. I would try to answer your question looking in 2015 and then we dug out 2014.
If you take the 2013 realities into account with 2013 prices and then you have to ramp up, you can add roughly $1 billion from [indiscernible] in terms of EBITDA in 2015. You can add to $400 million to $500 million depending on the mix from VNC.
All the North Atlantic optimization, we are doing with the increased productivity and mine plants and also cost incoming on stream. So you can add around $500 million.
If you were now to answer, we are talking at least $200 million. And of course we have to deduct the operating expenses, which will decrease drastically if not disappear.
And then you reach already the $3 billion of EBITDA. This under very similar price scenarios, now you add this to $1.6 billion EBITDA, we had this year it becomes $4.5 billion or higher, and now you at least consider $20,000 in the new nickel price this add to another $1.5 billion in EBITDA which leads us to our $6 billion, which is very conservative because we think prices can be much higher than that, because of the export in the media you are well aware.
As we go to 2014, I guess the reality would be in between what we have today and what I’ve just said, so it’s something around $4.2 billion to $4.5 billion.
Murilo Ferreira
Thank you very much Alex.
Operator
Our next question comes from Mr. Thiago Lofiego from Bank of America.
Thiago Lofiego – Bank of America Merrill Lynch
Hi, I have two questions. First one, if you could give us an update on your Malaysian distribution center project.
Do you expect any benefits on your realized iron ore prices, once it’s fully ramped up? And when do you expect to be fully ramped up there.
And the second question is regarding your Vale Max vessels, if you could give us an update on the situation there? How the authorizations for you to build in China are now in or what’s the outlook there?
Murilo Ferreira
Thiago, thank you very much, Galib Chaim for the first question and Martin for the second.
Galib Chaim
Well about the Malaysian distribution center, we expect receive the first vessel in next month to starting the unloading system. And the construction is going very well, when do we expect start the first loading in the exploitation berth, in the second half of New Year, I believe that Malaysia is our best project.
When everything is being done in the best way on there, below the budget and we don’t have any concern upto now at?
Murilo Ferreira
Martins please?
José Carlos Martins
Well as far as Malaysia impact on the result we believe that will be felt in the next year because we are starting say New York to Malaysia during March, and we only be able to export from there after July. Then we have a period that we are building some inventories and then blending ore, and then in second half we can deliver what we call the Green Brazilian blend, which is we kind of ore that we expect to blend with different ores from Brazil, and that can be used to generate less carbonation.
Okay, we are refining a kind of blends that can reduce carbonation in the blast furnace in China. So, this ore we don’t have – how the market will to the prices for this ore, but we will believe that the acceptance will be very good.
Also, Malaysia will allow us to use our Vale Max fleet completely and much, more efficiently even if you not able to berth in China or our 35 vessels that we have owned or contracted can be used in their maximal efficient through Malaysia, through Oman, and through our flow dissipation, also with the port that now are accepting Vale Max. Today we can berth Vale Max in three ports in Japan, two ports In Korea, and another port in Philippians.
So, we are less depended on China acceptance to use our fleet. So that will bring the cost reduction, so Malaysia distribution center will be very important for our fleet increase not only the efficiency of our blending of material, but also our fleets.
As far as entering China, recently establish a new regulation and we believe with the regulation was a big improvement from the last regulations they had. First, because they are transferring to depart the decision to accept ships bigger than the ports capacity.
Second, because they are allowing the ports to have an increase of up 10% of their CapEx. And third, because they change the regulation that will trend to use the big vessels is a reality and that the Chinese ports said it could be adapted to receive those vessels, so I believe that the law regulation itself, is a big incentive for the Chinese ports to prepare themselves to receive larger vessels like Vale Max and other.
So I cannot put when it will be possible, but I believe that as time goes by the chances for China to accept the Vale Max is increasing. But as we always said, China is a sovereign country, they have their regulations, they have their constraints, and our issue is just to the backdoor sales to our base established.
We have read this, also we made the ship to go to China and it’s not possible and we found a way to keep it operating in high performance level and now with Malaysia we are completely free from these dependance.
Murilo Ferreira
Thank you, Thiago.
Thiago Lofiego – Bank of America Merrill Lynch
Thank you. That’s very clear.
Thank you guys.
Operator
Our next question comes from Mr. Rodolfo Angele from JPMorgan.
Rodolfo de Angele – JPMorgan Securities LLC
Hi, everyone again, I wanted make two questions. I wanted to ask you to answer again a question I did earlier, because recurring theme with investors, and the question is really on the case issue, is that past us.
What is the mean for roll-ins that were guided in the valid for this year, and how do you see your volumes getting back going, continue to increase into the coming years, in regards due the case issue that you discussed so much in the last year. So, that’s my first question.
And the second question is also try to address recurring theme that I get from investors, especially the global ones that are looking at your peers in Australia. You actually are – more and more looking for capital discipline and dividends, it’s been particular importance for them, I’m looking at the different mining companies?
We understand that value is a different movement, so for, it’s really been investing in such a big and important project. But there is a liquidity event in the year, we had seen a spike in enterprise or an agreement on [indiscernible] that made to avoid conflicts.
How should we expect Vale management proposal to the Board in regards dividends?
Murilo Ferreira
Over to Vânia?
Vânia Somavilla
Good afternoon. Regard the first question of the case, as I mentioned before, all the regulatory uncertain are over now.
We have overcame the phase, they were some uncertain about how we would do our sale, now we have completely understood together with environmental agency what are the necessary study that a large coal hired [indiscernible]. So, we have discussed of the methodology now as soon as we need deliberations.
We are presenting the studies. They analyze and its completely in safe with our strategic planning assuring of the gas burning atmospheric reduction for 2013 and for 2015.
So the next three year is on it depends on the what you call the global. That is over on the study and the deliberation for this is completely on schedule as I mentioned before also.
We already had some people from the Burma go in there in the Carajás region just to verify the case and so it is on the schedule, it depends much more now on our planning and they stared that to a constant, because the methodologies are already cleared.
Murilo Ferreira
I’m answering the second one in case of having our cash flow in the most positive way. For sure we can reduce that, we can increase dividends or even to buybacks as we did in 2011.
And what we can assure you that we will stay with discipline in our leverage which is extremely important because as you know we tend us to finalize the first stage of our Moatize project, which reach for next year 11 million tons of coal, and we divestiture to see this first way going of Nacala do hand of, here in the port facility in the first quarter of next year, the first ship from the Nacala port facility. Then I believe that we had many, many things to complete mainly in the Mozambique and in Brazil with S11D and culture.
As regardless of this, we will always pay attention in case of having for the cash in our position, and for sure, we will bring the value to our shareholders. Thank you, very much Rodolfo.
Operator
Our next question comes from Mr. Wilfredo Ortiz from Deutsche Bank.
Wilfredo Ortiz – Deutsche Bank Securities, Inc.
Guys, good morning, a couple of questions on the cost cutting front, do you have an overall U.S. dollar amount target for 2014 in addition to that $2.8 billion achieved in 2013.
I believe you mention of a 10% reduction in SG&A and that you would be cutting on half your pre-operating and stoppage expenses of 2013. So I get to about $1.1 billion just on those to reflect.
Are you targeting a higher amount or is there something along the lines that you’re expecting this year? And my second question is regarding the neutral iron ore production capacity being brought on stream by the Brazilian steel producers.
As more of the Brazilian steel producers more self-sufficient, how could this impact Vale’s iron ore sales to the domestic market going forward?
Murilo Ferreira
Luciano, the first one please?
Luciano Siani
Thank you for your question. You just mentioned, we’ve reduced the guidance that we gave at Vale on the SG&A and on pre-operating expenditures and they are maintained.
So we are very confident that we are going to deliver on both. I would say that we started the year very well in terms of SG&A and on pre-operating and stoppage.
If you just take two numbers we spend $120 million last year adjusted in and which is not producing very well. So note the operating expenditures from this moment on anymore and we also spent $384 million on that.
So just to be sure we are talking about $500 million. So your calculations are correct of these two writings On cost of good sold, we are not giving guidance, but we believe that the initiatives at that we start in 2013 are starting to bear fruit in 2014.
We believe that we have more opportunities to increase workforce productivity. We believe that the comprehensive review of contracts and the procurement approaches are starting to bear fruit more at a speed which is higher than what we had last year and we are looking forward to the valuation of fixed costs that we are going to have as we ramp up production in all of our projects, especially in the iron ore projects.
We say that once we are able to ramp up the marginal cost of producing, the marginal ton of iron ore it will be much lower than the existing term. So this is in effect that as soon as we ramped up production should come into the cost figures that we have.
Murilo Ferreira
As far as the second question, our participation in domestic market is decreasing as we probably know because a bigger part of the steel producers in Brazil are developing their own mines. So as time goes by possibly our sales in domestic market will be lower and we probably will send more ore to export.
We have some exceptions to this one at CSA, which we have a long-term contract to supply up to 8 million tons per year. And also in the feature TSP, which will consume 6 million tons of ore.
But for the other companies it will depend very much on their extractors because all them are developing a strong virtualization extractors. So our main target is the exports market, okay, see one market for our ore.
And we believe that segment market has conditions to absorb and we’re seeing that we are able to produce and ship.
Wilfredo Ortiz – Deutsche Bank Securities, Inc.
Thank you very much.
Operator
Our next question comes from Mr. Marcelo Aguiar from Goldman Sachs.
Marcelo Aguiar – Goldman Sachs
Hi, gentlemen. Thank you for the opportunity.
Question will be regarding the REFIS, I mean you guys explained currently how you arrive at a lower impact on your balance sheet, but I would like to cover more on the tax payment going forward looking to 2014 and 2015. Are you able to use the credits like close to 8 billion reais to reduce the tax to be paid in 2014 and 2015.
Can we assume this full amount deductible for the tax to be calculated? The other question will be regarding the mining law in Mozambique, I mean can you elaborate a little bit of what’s happening there, how secure are you guys in terms of royalties, the whole legislation?
And also update in the K on the cash cost. We should expect, I mean in terms of met coal at the port, when Nacala will be fully operational and also the cash cost for the thermal coal as well.
Those will be my questions. Thank you.
Murilo Ferreira
Please club these to our legal counselor and then Luciano Siani and later on Roger Downey. Good morning to everybody.
The [indiscernible] as you know, it was provided by law and we have now report provisional measure. The provisional measure is regarding the future tax for the CSP legislation and as such, it has amended in a couple of articles exiting the fees legislation.
One of these amendments actually provided for an extension, on the potential tax that would arrive and you’ve taken an advantage of the expenses that you had on the litigation. For example, if we had the 40 billion reais, at that time $22 billion that you could take advantage in your balance sheet, the fees would reduce it because of the cuts it gives on interest and penalties.
You would be able then to take advantage only of those that you actually put in your balance sheet, not really the full amount. Otherwise you would be taxed on the difference, on the reduction of your debt.
So as such, the MP 627 amended the law to say that the gain that you have on the difference of the full amount of your debt and the one that you actually enter your receipt would not be taxable if they present. Therefore you could take advantage of the full amount and not actually have any tax on your future gains.
So that’s really the basis for the way that we have accounted for the seasonal balance sheet.
Luciano Siani
Marcelo, this is Luciano. You are correct.
So we will have minimal cash outflows for tax payments in 2014 because of those crises. It will be a significant impact on our cash outflows.
Marcelo Aguiar – Goldman Sachs
Hi.
Roger Downey
Obviously things are changing in Mozambique. It’s a different environment today than it was a few years ago.
Ours is the most advanced project and the only project that is realistically advancing and I think this has changed a bit the attitude towards mining. Regarding our business there, we produce met coal and thermal coal basically at the same cost, right.
It is the same process in it essentially. So we cost them in the same level.
Once Nacala is fully operational and we’ve ramped up both Moatize I and then Moatize II to 11 million tons and 22 million tons per annum run rates respectively, we should be definitely working back an FOB cost within the first quarter. As you remember that Moatize is an open-cut mine.
Once we have a large scale and very efficient railway and port running in Nacala along the Nacala railway and the Nacala port we will have world class operations from mine to ship. And obviously this is going to take us down to where we should be ready with that sort of thing.
Murilo Ferreiral
Thank you very much Marcelo.
Operator
Our next question comes from Mr. Ivano Westin from Credit Suisse.
Ivano Westin – Credit Suisse
Hi, thanks for the question. I have just two reports.
So the first one on your debt level. Just looking to get a sense on how much room you expect probably reduce your debt, I mean what is your comfortable level.
And the second question on cash cost for iron ore. While you are ramping up your production in 2014 and 2015, what sort of cash cost change can we expect if any?
Thank you so much.
Luciano Siani
The current debt level when compared to EBITDA is very comfortable, right, and when compared to our future projections, comfortable. I would say the buyers would use excess cash more to pay dividends than to pay down debt, although some reductions would be desirable given that we should sum up the refused liabilities.
And to reassure, as you know, we have a negative outlook from SAP since the application [indiscernible]. So I would say that from that perspective it would be advisable to have a downward train in that in order to reassure the credit card ratings.
But I would say the buyers are going to use our excess cash more towards dividends. In terms of cash costs in iron ore, we are very close to $21 per ton on cost of goods sold per ton of iron ore FOB, right.
So you got to that number when you exclude the freight expenditures and not considering also the expenses. So I’m referring to the business segment information on the financial statements.
I would say without giving you your guidance for this year because it will all depend on the phase of the ramp-up. There is some adjustments and expenditures that we will have to incur in order to one off expenditures in order to ensure a good ramp-up, perhaps putting some part of our ideal fleet obviously in order to working conditions and so on.
So you should see more of the effects of the dilution for this particular reason on 2015. And today we have a fleet of around 50:50 in terms of fixed cost and marginal and variable cost, so the way to think about it going forward is that the additional production is more cost more to marginal production, more variable costs than fixed costs.
So I believe with that we can give some of the math for 2015.
Ivano Westin – Credit Suisse
Thank you.
Operator
Our next question comes from Andreas Bokkenheuser from UBS.
Andreas Bokkenheuser – UBS
Yes, thank you very much and thank you for taking my question. Just following-up on the debt question looking at your balance sheet and your cash flow statement it looks like your total debt was unchanged in the fourth quarter relative to third quarter of your long-term debt when that was about $6 billion, $7 billion about 13% and there was no change in your short-term debt.
So can you sort of clarify how that was possible? And secondly, it also looks like you fit in the market lately raising debt or looking to raise debt in the first quarter, in view of your declining iron ore prices some runs I think it sort of looks like you’re financing your dividend payments by debt around an internal cash flow.
Can you confirm that’s being the case? Thank you very much.
Marcelo Aguiar
Okay. The total debt was stable when compared to 2012, the gross debt.
The net debt as you pointed out increased from the third to the fourth quarter had we received the proceeds from VOI from the sales in this service, this wouldn’t have happened. So we believe to return to the levels of net debt of the third quarter after we received those proceeds.
The reason why the short-term debt decreased and the long-term debt increases is because we had modernizations in the fourth quarter which are part of our short-term debt and we financed this with long-term debt. The reason why we are growing, we went to the market, to the Brazilian market, the bonds that we issued internally they had tax breaks for individuals.
So we were able to fund ourselves at a rate which when swapped with the U.S. dollar was between a 100 basis points and 150 basis points below the current yield cut that we had.
And the strategy was to use that to anticipate our funding need for this year which are minimal. So you shouldn’t see Vale go into the market again and that was not a big transaction, it was below the [indiscernible].
So we’re talking about $400 million. So basically we have all of our refinancing needs for the year already provided.
So going forward, so we have not paid dividends last year from that and we do not look going forward to pay dividends out of that. There are few items that can provide us good surprising cash flow for this year, one was already pointing out prices of iron ore.
We have the VLI proceeds, the divestitures which will be used to out flow part of the CapEx which was budget for 40 year, some of the tax credits are already mentioned on the conversation. So we are very confident that we got to be able to do both, to pay good dividends and keep our debt on a dormant front.
Operator
Our next question comes from Mr. Leonardo Correa from HSBC.
Leonardo Correa – HSBC
Hi good morning and good afternoon everyone. Thank you for taking the question.
The first one is back to Martins. Sorry Martin, just interest on the quality premium side.
I think we probably want the most important issues and themes to discuss rather going forward. But just to confirm and understanding that most of the Carajás shipments are being sold on a CFR basis.
And also if you can indicate what type of premium levels for that type of material you’ve reaching. I mean we received some transactions at close to $10 premiums, so just wanted to confirm that.
And second bringing back Roger into discussion, I think you’ve been very clear on the coking coal side of the business. It’s non-recurrent in looking to these type of sustainable.
There is a pricing issue, but you also have logistic issues which are going on profitability. So I think that our net sales force is cleaner.
Just wrapping this down to fertilizer side, there also have been some issues on pricing, on market structures, so that we’ve had an impact on the overall profitability. Is there anything else from a cost perspective Roger, we can see going forward to spend around those operations that have been profitably a couple of years back.
So just wanted to get your views on what can be done and what steps you’re taking on the fertilizer side? Thank you very much.
Murilo Ferreira
Let’s starts with the premium okay. Sure that we have been selling with o premium up to $10.
There is still – we applied formula price for the 62% with, what additional content we have in Carajás as well and then on top of it to up to $10, okay. But this is very dynamic, to pent up from the situation of the market.
So I cannot, we don’t believe we can keep this, but to pent up from the quarter is the situation is market as better. Going forward I believe that the premium can we increased on wide average price transitions long as we put in operation our projects in the southern system.
Because as you know we have some discounts that are needed deal with high silica order that we are now producing. So this high silica ore discount almost offset the gains we have with premium with Carajás.
But as long as we bring all those projects that you know the, Carajás projects that you have. So we have many projects n the Southeastern system, designed to increase quality to the former levels, so we are going to get speed up those discounts.
And then our average price realization spent has increased spent to increase it, but I think that will be more. We‘re going to feel this more in 2015 on.
Roger?
Roger Downey
You’re absolutely right in terms of your use on those. Well, obviously things will be conformational once we have world class operations and we fully dilute our capacity with production and that we are being today penalized by the fact that we can’t move the coal to the markets.
Regarding fertilizer yes, it is a very tough year in 2013. So, big disruptions in demand, the rupee made it – the devaluation of the rupee made it very difficult for the Indian markets to retain and remain big importer of fertilizers throughout the year.
And also they had some inventory. So we saw one of the biggest players in the market exiting.
At the same time that’s a big phosphate mines enter the market I am talking about Ma’aden in Saudi Arabia. So, we had an increase supply match immediately with a sharp decline in demand.
What happened is that we have lot of those tons built in the market they all came to Brazil. Brazil is still presenting a lot of growth, Brazil is being applied by every fertilizer producer in the world as the growth market.
So it’s natural that whenever you have changes in the environment like that, but Brazil is going to be hit hard. So, what we saw is very aggressive pricing especially on behalf of Asian suppliers, and we saw SSP, superphosphate prices as lower to $130, $120, $130 per tons in Brazil.
So that’s we are talking very, very low prices indeed. Having said that in terms of discontinuity and our operations installed, two things will certainly see in 2014 related to 2013.
First of all, in 2013, we putting a new plants in Tubarão and USSP plants and new phosphate [indiscernible] plants and they would started ramping up at the end of last year. So, we will have – and these are new plants, so they will have lower running costs, lower costs and that will average down our cost in Brazil.
Also in Enviva, we are ramping up and we are reaching – we’ve reached pretty much nominal capacity there and obviously diluting process as well. And we are using more value of our rock in Brazil from mid last year, and that again is make us more cost competitive on the coast of Brazil to back down.
So, what we will see is certainly some improvements in our cost competitiveness. We should also see further improvement in markets things are looking little better.
We’ve already seen the MAP prices the monoammonium phosphate products, which normally are leading indicators as to where phosphate prices are going. We’ve already seen an improvement there, which means it’s we can be optimist about where the fertilizer industry is going this year.
And with regards to potash, yes we have seen the big disruptions in the way and in the market structure. If you look back over the past decades it only went back to where it was the full a market is divided by between four or five place.
Even though DTC is still a bit of a question mark there, we also have indications that’s these things are back to normal. So, the pressure on pricings have been lower than anticipated I think.
And that just tested the appetite for potash in markets in general. And again, our biggest plan is focused on Brazil.
Brazil can’t get enough potash and as a result so we’re still finding Brazil a very promising market for our fertilizer business. Thank you.
Leonardo Correa – HSBC
Thank you.
Operator
Our next question comes from Mr. Renato Antunes from Brasil Plural.
Renato Antunes – Brasil Plural
Good afternoon. Thank you for taking the following up.
And the question is on the S11D project. You mentioned in the presentation as why in 30 year mine line.
I just wanted to confirm that this takes into account the impacts from low proliferation of case story. The first one, the second one just to clarify, I mean if you could out of your volume growth over the next five years, you mentioned the 453 million tons, I think production target.
How much of that comes from your South system. If you could just given the sense on how much coming from the South system, it would be great.
Thanks.
Murilo Ferreira
Vânia, please.
Vânia Somavilla
Good afternoon. Regarding the license for S11D, we’ve got the license in July 2013 and all this cases are already concluded in the license process.
So, we have already got approved there 137 case. And these are also included in this steady years that you have mentioned.
So we consider that the caves issues in the S11D is overcome.
Murilo Ferreira
Martins the rest.
José Carlos Martins
So, to ask again in which period do asking the increase in the production of the Southern area, against the Northern area which period you are considering?
Renato Antunes – Brasil Plural
Long-term target, you guys provide I think it’s 453 million if I am speaking, I think it’s a five year out target not referring to the short for 2018?
José Carlos Martins
If you look for the why do we increase the production until 2018. So, 436 million tons okay, that will be our target production for 2018.
From this a big part of it will come from the North system, because in the Southern area, a big part of the capacity increase. The projects will be to replace depletion and also to increase quality and to expand the mining life.
So, the increasing production in this Southeast area and Southern area will be marginal. If you look at long-term the total increase will be around 10 million tons only because the bigger part of the increase will come from the North.
In the Southern system and the Southeast system because the ore producing decision is also high cost. It has a higher cost than in the North.
Our EBIT to KPUs [ph] in the logistic system that we have. So we want to keep it optimizing our logistic assets, which is very big in this era.
So the big increase is our production will come from the north area.
Murilo Ferreira
Thank you very much for being with us in this conference call. Before going to the end, I’d just like to say thank you for your comments.
Your comments bring monetization. For sure we are very focused in the discipline and capital allocation and in to bring return to our shareholders.
Thank you very much.
Operator
Thank you. That does conclude Vale’s fourth quarter 2013 results conference call for today.
Thank you very much for your participation and have a good afternoon.