Apr 30, 2014
Executives
Luciano Siani – Chief Financial Officer Murilo Ferreira – President and Chief Executive Officer José Carlos Martins – Executive Director-Ferrous and Strategy Peter Poppinga – Executive Director-Base Metals and Information Technology Clovis Torres – General Counsel
Analysts
Carlos F. De Alba – Morgan Stanley & Co.
LLC Wilfredo Ortiz – Deutsche Bank Alex Hacking – Citigroup Equity Research Louis Diaz – Espirito Santo Bank Tony B. Rizzuto – Cowen & Co.
LLC Rodolfo de Angele – JPMorgan Securities LLC Ivano Westin – Credit Suisse SA Marcelo Aguiar – Goldman Sachs do Brasil CTVM SA Rene M. Kleyweg – Deutsche Bank AG
Operator
Good afternoon, ladies and gentlemen. Welcome to Vale’s Conference Call to discuss the First Quarter 2014 Results.
At this time all participants are in a listen-only mode later we will conduct a question-and-answer session. And instructions will be given at that time.
(Operator Instructions) As a reminder, this conference is being recorded. 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.
This conference call, and the formal presentation are the made by internet by, you can access the webcast by dial on to the company’s website. A reply of this conference call will be available by soon, 5511-3193-1012, or 2860-1416, access code 7647771#.
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; Ms.
Vânia Somavilla, Executive Officer of Human Resources, Health & Safety, Sustainability and Energy; Mr. Galib Chaim, Executive Officer of Capital Projects Implementation; Mr.
Humberto Freitas, Executive Officer of Logistics and Mineral Research, Mr. Peter Poppinga, Executive Officer of Base Metals and Information Technology.
And Mr. Carl DeLuca General Council.
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.
Luciano Siani
This is Luciano Siani speaking. I’m going to do the introduction.
And Mr. Murilo will be coming back to join us with the Q&A session.
Thank you for joining the call to discuss our first quarter results. We’re pleased to report that VALE had a solid operational performance in the first quarter.
That was the best performance for the first quarter since 2008 for iron ore in terms of production. We also had record production ever for nickel by the way just 200 pounds short of leadership in the market, record production for coal for the first quarter as well.
Positive progress across all of our business segments despite the usual seasonal effects of the beginning of the year, especially weather related and despite the more challenging pricing environment. Also as good news, in April, Moody’s the rating agency have changed our rating outlook from neutral to positive with several nice comments about the way the company has been managed and giving us more confidence that we are in the right track.
Therefore, we are continuing our efforts to make Vale a more efficient company in every dimension to create value for shareholders. In terms of financial performance, we had an EBITDA which was close to $4.1 billion, special mention must be given to the base metal division which contributed with $549 million to our EBITDA and is still improving.
That EBITDA was realized with an average nickel price of $14,200 which is far off to the level that we are observing the market right now closer to $18,000 per ton. Overall gross value reduced cost and expenditures net of depreciation and excluding the effect of the gold stream transaction of the first quarter last year by $218 million in comparison first quarter to first quarter.
This was due to our continued cost cutting efforts throughout the company. If you look at expense side net of depreciation, SG&A decreased 20%, R&D decreased 15%, pre-operating and stoppage expenses decreased 33%, so giving confidence also that we will achieve our guidance for 50% reduction for stoppage expenditures this year.
Capital expenditures were $2.6 billion in the first quarter, sustaining CapEx around $750 million also 24% less than in the first quarter of 2013. As a result of this capital discipline and recovery in working capital, we had a fall in net debt to – by $1.3 billion this quarter just over $23 billion, our cash position stood at $7.2 billion down by the end of the quarter.
Notwithstanding the fact that we did not yet have received the proceeds from the sale of VLI which guiding to our cash position just in April. And I am talking about the each of the segments in terms of iron ore as I mentioned we had record first quarter since 2008, 71 million tons, great performance in terms also of transportation of railway shipments, so the operation system is functioning very well.
And however we had sales volumes below potential about 3 million tons was a decision of Vale not to position those 3 million tons across the supply chain, they are available for the sale in the coming quarters. Average sales price suffered with the $14 fall in the Platt's reference price and also because of price provisions that I will address in more detail later which had an effect of $9.5 billion.
Despite this short decrease in IODEX, the pellet premiums kept firm, and thus the pellet prices, realized prices fell by just above $2 per ton, despite the fall in IODEX. Cash cost in iron ore keep under control, $21.6 per ton.
We are confident that we are going to keep reducing those as we dilute costs over a larger production volume. And as we move on with our cost reduction initiatives, and as we capture the fruits from (indiscernible) coming on stream at a lower cost level.
Distribution center in Malaysia has already received the first Vale Max, we started to build inventory there. This will allow us to blend different quality ores in the near future, and improve our cash flow generation.
And also we are successfully ramping up (indiscernible) in Carajas part of the plus 40. And we are successfully also developing (indiscernible) which is commissioning it’s processing facility.
In base metals, we are pleased to inform that we had excellent contribution to our results in terms of cash flow generation. Adjusted EBITDA $549 billion, 14% of our total EBITDA.
About 300 million improvement in comparison to previous quarter. And as I mentioned with nickel which was substantially lower, the ones we’re observing right now.
The main projects reaping up successfully, Salobo 1 reached close to nominal capacity. Onça Puma already generating EBITDA by $15 million.
Nova Caledônia producing 5,600 tons in the first quarter, of which almost 3000 tons in March alone. So we are gathering speed.
And Long Harbour expected to produce first nickel by the end of the second quarter, and start contributing for our cost reductions across the business. So we are continuing to be confident that we will deliver the guidance of $4 billion in EBITDA for base metals by 2016.
In coal, production at Moatize was the best for the first quarter. We had negative EBITDA because of the low coal prices in very challenging environment, and we continue to struggle with the reemployed capacity, but we expect to resolve this with the logistics solution.
The Nacala Corridor advanced in line with our plans, reached physical progress of 62% in the greenfield section which are the ones, the main restrictions for the passage of the first train at the end of the year. So we keep targeting the last quarter this year for the first train at the Nacala Corridor.
We continue to do our homework in the fertilizer business. We had savings of around $166 million compared to the fourth quarter of last year.
So turning the business into positive territory, and we are also advancing partnership discussions to maximize our strategic options for the business. Well, no business can truly flourish if we do not take care of the employees who together are one of our greatest assets.
So we within Vale want to take this opportunity to repeat that all of the executive officers and our CEO are committed to achieving the highest possible health and safety standards in our operations. So in summary, we continue to work towards streamlining our business, invest only in world-class assets to generate positive free cash flow in any price scenario, and to maximize shareholder value.
Murilo Ferreira
Now, before we move to question-and-answer, I’d like Luciano to stay to provide further information about mainly some details regarding the iron ore prices in the first quarter of the year. Well, there was a mismatch between the expectations and the realized prices that we have delivered.
The page 12 of the presentation basically shows what happened. So as you can see, there were some positive and negative effects.
The IODEX fall is in everyone’s mind, but the $9.5 impact of the provisional price is the one I will address and I’ll provide you with some summary calculations to allow yourselves to better estimate this impact in the future. The sales that we made in the fourth quarter, so about 23 million tons were sold based on the future pricing mechanism.
To get to those 23 million tons we just have to get the previous release and multiply the total sales by the proportion that we told them that were sold under this future pricing mechanism. The best estimate that we had by the time we closed our books for the fourth quarter – the price for these sales was close to the last price observed in 2013, which was around $135 per ton.
So the revenues were booked in the last quarter for these sales based on this price. However, as ships arrived at the clients’ ports, the actual prices were revised downwards because of the fall in iron ore price.
So we had an average IODEX of $120 per ton in the first quarter when compared to the $135 that I mentioned that were booked in the past quarter. We have a $15 per ton difference.
When you apply this to the 23 million tons you get to an effect, which is 327 million tons, which had to be removed from our revenues and impacted the average realized prices of iron ore in this quarter. On top of that, the same effect, if you made the same calculations for the fourth quarter compared to the third quarter, was a positive one, around $3.
So the fact that we had a positive $3 in the last quarter and now we’re having a negative $6.5 in this quarter leads us to a perceived difference between realized prices of $9.5 just because of this effect. We apologize for perhaps not having communicated properly in the past, but we hope that with those explanations than anyone that we can give in addition to that, you can better estimate Vale future performance based on the information that we gave.
Murilo Ferreira
Thank you, Luciano. Let’s go with the question-and-answer.
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.
Carlos F. De Alba – Morgan Stanley & Co. LLC
Thank you very much. My first question is regarding pricing, obviously.
Could you please comment about the provisional pricing in terms of these shipments? Are they done under contracts or just sales in the spot or perhaps even without a final customer when they are shipped from Brazil, and that’s one of the reasons why this provisional pricing mechanism is used, or were they – these with contracts, under contract?
Can you comment what type of companies or in what market, I guess it’s China, but could you confirm that it is mostly the Chinese companies who are buying on the provisional pricing, and my second question is – despite the seem on the performance of EBITDA level relative to expectations, we were positively surprised by cash from operations. And there were a couple of things we noticed there, first one was, about $1 billion improvement in working capital coming from accounts receivable, and $1.8 million, sorry, and I just want to understand what happened there, and how sustainable this improvement is.
And also if you can confirm that a negative movement in working capital due to higher inventories of around $800 million was related to the iron ore inventories that you built up in your Malaysia locations. Thank you.
Luciano Siani
Luciano speaking, before I hand over to Martins to comment on the commercial aspects of the sales. Let me warn you that, in order to book a sale, I mean revenues you need to have a customer sign, then you cannot book revenue just because you put iron ore on the ship and put it in the ocean.
So this is very (indiscernible) on that and this is, the articles wouldn’t allow us to do differently even if we – if I wanted to do that. Martins?
José Carlos Martins
Exactly what – this effect, the stay was gone, even we had the level of credits for each, so based on the provision of rights, and the main markets for these sales is China, the opposite to this situation, was a bit to sell at the spot base, so at the end of the deal, we’ll then supply. So this mechanism was developed to have a more stable sales, and more stable commitment from our customers in China, so that’s the reason we develop this model of future price.
Carlos F. De Alba – Morgan Stanley & Co. LLC
Okay, thank you. With regards to cash flow from operations, the reduction in working capital is big on absolute terms, but if you look at days of receivables, the reduction is not so dramatic.
So a great part of it the effect of receiving the sales perform in the fourth quarter, and then as you see, the sales in the first quarter are smaller than the sales in the fourth quarter, so there’s a mathematical effect, but yes there is also some marginal improvement in receivables as well. So if you look at one year ago, a similar phenomenon also have happened.
In terms of inventories, not only now our production was above sales, but in other commodities as well. Because we had such a strong production in the first quarter, and not all of this production were sold either in nickel or in iron ore.
So we are going to have more flexibility going forward. And a small portion of it, the small portion relates to the implementation of our ERP system, where we have anticipated some purchases of parts in order to be on the safe side, so we are putting a large system like that, we better have a little bit more of a question in terms your purchasing.
So you should see the inventory accounts reducing in the coming quarters.
Operator
Our next question comes from Wilfredo Ortiz from Deutsche Bank.
Wilfredo Ortiz – Deutsche Bank
Yes, good afternoon everyone. Just a couple of questions.
I believe in the press release you mentioned that in terms of a number of your projects, they are pretty much going on their budget, is there a possibility that you might announce some CapEx reductions going forward if this trend continues? And then my second question is regarding the fees balance on the balance sheet, it seems to have increased quarter-over-quarter as opposed to decreasing despite payments.
So I just wanted to get a better understanding of how this line item in the balance sheet should be progressing going forward as you continue to make payment?
Murilo Ferreira
Thank you for your question. I think that we continue working based in our budget into project.
So far we’ve had some saving. I think that is very early to announce mainly in the south ranging S11D, but we did very well.
Today the market is not so hot as it used to be, but then we can enjoy some merits, you can get some discounts. And I think that it’s the same scenario that we’re facing Mozambique as well in the Nacala Corridor and the expansion in [markets] (ph) it’s right.
As regards to the fees balance, the reason why it has increased is because the reais has appreciated against the U.S. dollar at the end of the quarter.
So the same reason why we reported a positive results in financial expenditure. So with these expenditures, we decided not to hatch those to the U.S.
dollar. So because of the trending, if you see the trends in Brazilian economy, we believe that maybe the reais will continue to depreciate, actually it did since November when we made a decision.
Compared to the end of quarter decrease in balances, it’s only that because of the appreciation of the reais. So when it is translated into U.S.
dollars, the amounts are a little higher.
Wilfredo Ortiz – Deutsche Bank
Got it.
Murilo Ferreira
Thank you.
Operator
Our next question comes from Mr. Alex Hacking from Citi.
Alex Hacking – Citigroup Equity Research
Hi, thank you for taking my questions. The first question relates to the pellet premium which was very strong in the quarter.
I wonder if maybe you could help understand with the wider pellet premium was so strong relative to the underlying price of fines which was kind of (indiscernible) expecting. And then the second question will be on the nickel market, I don’t know if Peter was there or not but maybe an upgrade on what’s happened in Indonesia so far and you know what we think could happen to the nickel price over the next 12 months?
Thanks.
Murilo Ferreira
Thank you. Peter, you kind of start with some comments regarding the nickel.
I think that you have a good crystal ball to give quite few.
Peter Poppinga
Thank you, Alex, for your question. So regarding the nickel market as we all know, we are definitely now in the new dynamics.
We see the export brand in Indonesia working very well and if there was some doubt in the past that it would flexibilize those – those rules in order to allow some companies, we will be building smelters in Indonesia allowing to export the [U.S.] (ph) while they will construct it.
Those are now gone, it’s very clear and the whole country supports. But you see today we have premiums going up.
Although the LME stocks are still high and physical market is getting very strong, mainly demand seen as market themes are going up. And all discounts where discounts in the physical market all gone.
This is on top of the LME development, because LME then jumps roughly 30% from 14 to 18. But the rear – because people are anticipating in spite of those facts, they are expecting the expectations and adjusting, of course, the price.
But the main game and it’s not so transparent, but if you want to really to know what’s happening in the nickel market, you look to the ore, to the nickel ore market. And there you have seen, because often we even really can’t go out anymore, so people are turning them so as to the Philippine trends although they don’t have the right ore in terms of satellite for nickel pig iron.
But in terms of ore – nickel ore, prices actually have doubled in three months, and so this is the real indicator that things are getting are very tight. So we’re very – we knew this was coming.
We are – we think that the next months, the nickel price will still evolve, and basically in 2015, there will be a shortage of nickel around 50,000 or even more funds as a deficit, which will, for sure, leads to prices distinctly over $20,000. Thank you.
Murilo Ferreira
Thank you. Martins, please, about the pellets?
José Carlos Martins
Well, first I would like to put in place two situations. Pellet price plays in two parts, one is the IODEX and the other is the premium itself okay, and this is important.
Another point is that we don’t sell too much pellets in China. The majority of our pellets are sold in Brazil, America, Middle East, Europe, Japan and Korea.
We barely sell pellets in China. So the price formation for pellets is not affected by this provision of price or future prices that we have in iron ore.
So all the sales of pellets are based in the present quarter or even in the former quarter. So then we don’t have this impact of the prices going down as we have in iron ore.
As far as the premium part of the price, it’s very stable, because the market for pellets is rather balanced. And so, the conditions for the premium was good.
The premium for pellets today is about $40. So that is a situation that makes for – things for pellets completely different of things that we have in iron ore today.
So basically is related to this different markets we work and different pricing mechanism that we have for pellets. But anyway, it’s good, the performance for pellets is good.
Murilo Ferreira
Thank you.
Operator
Our next question comes from Mr. Louis Diaz from Espirito Santo Bank.
Louis Diaz – Espirito Santo Bank
Hi, good afternoon all. Just one question here on the physical progress of S11D.
You say on your report that physical progress is at 50%. If I look – and correct me, if I’m wrong, please – if I look at your theoretical plan or physical evolution plan, we should be expecting a 65% of physical progress by now.
This is a 15% difference. I think it should be a delay of around nine months.
And the question is, can you offset this delay if in fact it is a delay and if this is not going to cost you an extra CapEx? This is the question.
Thank you.
José Carlos Martins
I will ask the value chain was in charge of our project to lesser yield.
Murilo Ferreira
Yes. According to our plan, we don’t have any delay in our project.
We are developing all the works together with the contractors according to our plan. The Earthworks in the mine, the plant, it’s progressing very well.
Our forecast for the railway extension, it’s also progressing well. Indeed, we have the first section being delivered today of 8.3 kilometers of the railway expansion will be delivered today.
And the onshore and offshore construction is also progressing well, according to their plan, and we’re still on our track and the abstract for their mine of the production, the spur will be in the second half of 2016 without any delay. So far we don’t have any – we don’t expect any delay in our production for the S11D.
and by current rate, it’s not guided to announce at this point of time, we have some savings. It’s not the right moment to announce, and also the project is doing very well in their financial perspective as well.
Thank you.
Operator
Our next question comes from Mr. Tony Rizzuto from Cowen & Co,
Tony B. Rizzuto – Cowen & Co. LLC
Thank you very much. Hi, everyone.
My first question is that regarding China and a lot of discussions about the shadow banking system. I wonder what your thoughts are about how much of the inventories are tied up in financing arrangements.
And how do you see this playing out? My second question is in regards to the recent Brazilian court ruling on foreign tax disputes.
What are the next steps we should be looking at? And will you ever be compensated for the monies that you have paid out thus far?
Thank you.
Murilo Ferreira
I will leave with our Legal Counsel, Clovis Torres in order to answer your question.
Clovis Torres
Good afternoon, Tony. We had a favor of judgment at the Superior Court and we got few votes out of five, one was declared, conflicted.
and then now we have to wait until the decision is published for us to decide on our next steps. The press had been saying the tax authorities will appeal.
We have to wait to see what will be the reasons for the appeal, but so far what we have is a very important decision, it’s very difficult to be revert and the decision actually deals that the Brazilian government has no right to tax revenues that originated from countries with which they find double tax decreases. So this is a decision and that we’ve been defending from day one.
In a way, we are very happy with it but the next steps will depend on whether or not the tax authorities will appeal.
Murilo Ferreira
Regarding the financial markets in China, it’s absolutely important to say that 80% of the market hands off to government with the top five banks, and we have the southern bank, the local banks, they are struggling today in order to continue with the same level of transaction but we needed to consider that 8% in hands off the four top banks. Martins, you could add some further comments?
José Carlos Martins
I do not see any reason why the Federal Bank situation could impact out on our market. What having some monetary policy in China that restricting supply and all the business in China being affected by that.
In case of iron ore as we have a lot of traders, not to iron ore but also steel. In China, it is mainly sold by traders so you have a lot of finance in this area.
So the market will be affected accordingly but I don’t believe it is a permanent impact. Some (indiscernible) how longer to take the Chinese government to put some solution in this financial situations at bank and so and so.
Tony B. Rizzuto – Cowen & Co. LLC
Thank you.
Operator
Our next question comes from Mr. Rodolfo Angele from JPMorgan.
Rodolfo de Angele – JPMorgan Securities LLC
Hi thanks again, just two questions, two follow-up questions actually, first on iron ore we discussed a lot the S11D project but I wonder if you could just give us an update on the volumes coming from the former additional – and also about the – how the interest projects are coming at along. And my second question would be to Peter on the base metals.
I think your answers have been focusing of course on prices of nickel and that’s of course extremely good news. But I just wanted to hear from you what are you expecting in terms of cash flow generation mainly as I understand CapEx levels should be substantially lower going forward.
So, could you just comment on that as well, that’s all thanks.
Luciano Siani
Okay, thanks for your question. In terms of cash flow generation in base metals, you are right to say we shouldn’t rely only on prices and I think you have seen that we are doing our homework and our operations would be all positioned once they are in depth in the first and second first quarter that’s already clear.
We gave a guidance sometimes ago it was actually for the next five years. but now in the press release, we have a guidance for $4 billion EBITDA by 2016, all right.
This was based on prices like we have today. If you have higher prices, which we believe – firmly believe, it’s the case; you have to have of course, for every thousand in nickel price, since we have produced close to 300,000 tons, you have to add roughly $300 million.
But so this depends on the price $4 billion, we think it’s very achievable in 2016 under the current price scenario. but we know the price will be higher.
And so Salobo will be close to $1 billion, Sudbury is $1 operation, in terms of EBITDA and we have PDBIs 700,000. BNC is ramping up now well and people maybe don’t realize that we – in March, we were at 60% of capacity.
And once fully ramp up, the VNC will also contribute 500,000 to 600,000 million to the EBITDA. So we are very confident that $4 billion is very achievable or probably more, because of the higher price in the future.
Murilo Ferreira
Okay. As part of the project S11, this part is underdevelopment, because we have already the mining operation.
The concentration equipment operation, everything is okay. We are ramping up the logistic area in order to have additional capacity in the logistic area until the end of this year and we expect next year to operate plus 40 completely full capacity.
As far as Itabiritos, Conceicao is ramping up according to the plan, it’s moving very well. Also we are starting after the number eight pellet plus in the data.
So as far as these projects that are now under commissioning in iron ore we are okay with them. We have the new projects that will be developed in the next year and not only S11D, but we have working on other projects and other established projects that we will answer in operation next year.
So everything is under the schedule and we do not see any problem in this regard and according, we produce the – we inform the deal during the Vale Day in New York. There is no change in those plans.
Luciano Siani
Thank you, Rodolfo.
Operator
Our next question comes from Mr. Ivano Westin from Credit Suisse
Ivano Westin – Credit Suisse SA
Hi. Thanks again for another question.
Just wanted to do a follow-up on the Portuguese call, Martins mentioned that the iron ore supplies coming to the market. And you are forecasting a 3% to 5% goes to production growth in China and a demand not as strong as before.
So, in this scenario, just wondered what is the expectation of Vale in terms of iron ore price for the second half of the year? Thank you so much.
Murilo Ferreira
We expect that the price in the second half will be better than the first half. One thing is for sure the price will not go below 110 on a sustainable basis.
I think we have many time see the price going below this level, but recovering very fast. I think in the second half there is a possibility for better price, but sure we will need a better performance on the month because supply is almost even off, so we know all the mines that we went and operate, so we know how many ore will come to the market.
So this is – it’s already gone – already given. So it will depend on the demand side to improve not only in China, but outside China.
We see some better figures in Europe economically speaking not in the steel and iron ore market yet, but we believe that we will reach this point. So we really believe that we are going to have a better second half.
Anyway, I don’t believe the price will go below 110 because those are the level that many producers mainly in China will leave the market. So I think the price will be in this range with the potential to be above this level, depending up on the demand behavior.
Operator
Our next question comes from Mr. Marcelo Aguiar from Goldman Sachs.
Marcelo Aguiar – Goldman Sachs do Brasil CTVM SA
Yes, hi. Thanks again for the opportunity.
So, focus on cost a little bit, just I'm giving you – sine you have a lot of new capacity coming online in the second half of this year and the beginning of next year. Assuming the all variables constant – I'm talking about oil prices, currency, so forth.
How do you see the average iron ore cost of Vale in 2016 when you compare to 2014? I'm talking about the cost that you guys reported on the press release of $22, $21.
And the same thing would be for nickel as well. How do you guys see this cost evolving before by products?
The other question will be more on Simandou. I would like to understand what's going to be the future Vale in Guinea.
Will Vale – is leaving Guinea for good, or Vale will file injunction against your partner to try to get back cash that you paid? And you recently had the news of Rio Tinto filing against you guys in New York.
So also, this topic, if you can comment about the potential impairment you guys can do and if you can – already going to be doing this at the second quarter, so just a general update on Simandou, present, past, and future, and about the cost of flow. Thank you.
Murilo Ferreira
About Simandou the issue, it was expressed by the committee and by the President as well that the Vale did not commit any kind of mistake, did something wrong. The President also said that Vale came bid to get this.
There is a permit gain. And we know that that in the end of these process we will analyze because for sure we believe that our former partner (indiscernible) we’ll go to the court in order to discuss the subject, and I think that is very early to – to call any comments.
Regarding with the issue and not aware about the contents, we needed to analyze before trying to comment something. Thank you.
Luciano Siani
Well, on costs, as you mentioned, the biggest lever to cost reduction on a structural basis for 2014 and 2015 is cost dilution and that is applied to both iron ore and to nickel. In nickel also you have some industrial optimizations coming.
You have Long Harbour coming in. You have core, the optimization project, which you have to have all its effects to be felt.
But in iron ore certainly a good assumption to make some calculation. That’s what we are targeting, is to consider that the additional production that will come will come more – this marginal production will come more closer to variable cost than to the total cost.
And then you have a dilution effect over the larger production base. So, we hope that we can get closer the physiological $20 mark and eventually to pierce that once S11D comes in.
Operator
Our next question comes from Mr. Rene Kleyweg from Deutsche Bank.
Rene M. Kleyweg – Deutsche Bank AG
Afternoon, gentlemen. A couple of questions.
One, in terms of the tone as regards potential progress with joint venture partners, that seems a little bit more conservative in terms of your expectations. Is there any color that you could add there?
And then the other point would be just in relation to VNC. We have the 40,000 ton production guidance on Vale with first quarter production just under 7,000.
I was just wondering where we were in terms of being on track or whether that 40,000 target for the year was at risk. Thank you.
Murilo Ferreira
Peter, please.
Peter Poppinga
Thank you, Rene, for the question. Regarding VNC, as we reported that we had almost 6,000 tons nickel produced in the first quarter.
But you must remember that last quarter we had this pipeline incident, no environmental damages, but we were down. And so once you restart a plant like that you don’t produce normally in the first month.
So January was not very strong and we had also big problems with weather cyclones. So it means that you can take March as a good reference.
We were producing with three autoclaves, sometimes with two autoclaves and with two FPRs, producing at 60% of the capacity. And so we are confident that the arithmetic is going in such a way that we are keeping the 40,000 tons focused.
Murilo Ferreira
About the transaction, M&A transaction, I can tell you that we are absolutely committed, delivering as promised in the end of June regarding the Nacala Corridor and the coal assets as well. For sure it’s not just in our hands, but we are working hard and at this point of time I don’t need any changes about the agenda that we presented to you.
About fertilizers, until the end of the year it’s much more challenged in the strategic perspective because we needed to analyze different concepts. I think that the contest is different as well, but we think that we can deliver.
But for sure the coal and the Nacala Corridor in three months time, I think that we are much more confident that – more confident than ever that we will be able to deliver. Thank you very much.
Operator
This concludes today’s question-and-answer session. Mr.
Murilo Ferreira, at this time you may proceed with your closing statement, sir.
Murilo Ferreira
Thank you very much I think that it’s very clear that we continue to work with huge discipline in capital allocation, trying to reduce our cost, SG&A, R&D and doing the right investment of delivering the projects on time, on budget and if possible below and while working hard in order to deliver all the projects below budget. And I think that I would like to ask – to apologize for the clarification that we did regarding pricing.
But it’s new. We don’t think that that's increasing.
And for sure, we have some doubts. But today, I hope that we have provided the full clarification in order to have good results aligned with your forecast next quarter.
Thank you very much.
Operator
Thank you. That does conclude Vale’s conference call for today.
Thank you very much for your participation, and have a good afternoon.