Oct 23, 2015
Executives
Murilo Pinto de Oliveira Ferreira - CEO Luciano Siani Pires - CFO Gerd Peter Poppinga - Executive Director, Ferrous Minerals Roger Downey - Executive Director, Fertilizers and Coal
Analysts
Wilfredo Ortiz - Deutsche Bank Securities, Inc. Carlos De Alba - Morgan Stanley & Co.
LLC Andreas Bokkenheuser - UBS Securities Pte Ltd. Alexander Hacking - Citigroup Global Markets, Inc.
Thiago Lofiego - Bank of America Merrill Lynch
Operator
Good morning, ladies and gentlemen. Welcome to Vale's Conference Call to discuss the Third Quarter of 2015 Results.
At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time.
[Operator Instructions]. As a reminder, this conference is being recorded and the recording will be available on the company's website at vale.com at the Investors link.
The replay of this conference call will be available by phone until October 28, 2015 on 5511-3193-1012 or 2820-4012, access code 4742831#. This conference call and the slide presentation are being transmitted via Internet as well, also through the company's website.
Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Actual performance could differ materially from that anticipated in any forward-looking comments as a result of macroeconomic conditions, market risks and other factors.
With us today are, Mr. Murilo Ferreira, Chief Executive Officer, CEO; Mr.
Luciano Siani, Executive Officer of Finance and Investor Relations, CFO; Mr. Peter Poppinga, Executive Officer of Ferrous Minerals; Mr.
Galib Chaim, Executive Officer of Capital Projects implementation; Mr. Roger Downey, Executive Officer of Fertilizers and Coal; Ms.
Vania Somavilla, Executive director, Human Resources, Health and Safety, Sustainability and Energy; and Ms. Jennifer Maki, Executive Officer of Base Metals.
First, Mr. Murilo Ferreira will proceed to the presentation.
And after that, we will open for questions and answers. It's now my pleasure to turn the call over to Mr.
Murilo Ferreira. Sir, you may now begin.
Murilo Pinto de Oliveira Ferreira
Ladies and gentlemen, welcome to our webcast and conference call. Thank you, all, for joining us to discuss our 2015 third quarter results.
First of all, I'm pleased to report that Vale had a sound operational result achieving a production record for iron ore and encourage us also we had a record third quarter production. Adjusted EBITDA was US$1.9 billion, 15% lower than second quarter 2015, mainly as a result of lower sales prices in all our commodity except gold and phosphate.
Gross revenue amounted US$6.6 billion, 7% lower in the second quarter 2015, also due to lower commodity prices. Cost and expenses, net of depreciation decreased by almost $300 million in the third quarter of 2015 despite our higher sales volume.
For your reference cost and expenses decreased by almost $2.7 billion in the first nine month of 2015 when compared to the same period in 2014, despite the higher sales volume. Our SG&A and other expenses decreased by over 48% while R&D decreased by 28% and our pre-operating and stoppage expenses decreased by roughly 17% versus the first nine months of 2014.
Our CapEx was close to 1.9 billion in the third quarter 2015, while project execution was 1.2 billion and sustaining CapEx close to 700 million. For your reference, CapEx was $6.2 billion in the first nine months of 2015, meaning a reduction of over $2 billion when compared to the first nine months of 2014.
In line with our divestment plan, we concluded the sale of a minority stake in MBR for over $1 billion and for Valemax to China merchant for roughly $450 million a quarter. Net debt decreased 2.3 billion to 24.2 billion with a cash balance of 4 billion and 500 million.
Our average debt maturity was 8 years, above 8 years with cost of debt of 4.4% per annum. Now to talk about Ferrous Minerals, above all I'm proud to inform you that our iron ore cash cost decreased by $3.10 per ton and reach at $12.07 per ton this quarter.
Our freight cost excluding the effect of hedging account for bunker oil decreased to $16.40 per ton, due to lower bunker oil price in our chartered contracts. Our unit cash cost and expenses for iron ore fines landed in China adjusted for quality and moisture went to $39.10 per ton down to $34.20 per ton in the third quarter on a dry metric ton basis.
Due to big reduction in cost and expenses Ferrous Minerals EBITDA reach at $1.7 billion remaining stable when compared to the second quarter of 2015, after adjusting for the effect of lower dividends from Samarco, and from the list pellet plans during this quarter. Still on our Ferrous Minerals EBITDA, I would like to call your attention to the fact that our results decreased by more than $100 million to the impact of hedging account for bunker oil.
We will no longer have this negative impact in our EBITDA as of 2016. Physical progress on the S11D mine and plant project reached at 75%, while the physical progress at the railway and port achieved 50% with 72% progress on the railway and port.
Base metal EBITDA was about $200 million in the third quarter having decreased due to lower price and the negative impact of adjustments. The copper price from sales we are like the previous quarter and still outstanding at the end of this quarter.
This provisional price had a negative impact of $90 million in the quarter. Nickel production amounted over 70% 1000 tons in the third quarter 2015, supported by higher production in Sobre, Indonesia and New Caledonia despite the planet shutdown in Sobre in the third quarter.
Copper production was about 100,000 tons in the third quarter 2015, with hopefully 40% coming from Salobo. We expected to increase our production of copper and nickel in the last quarter of this year with the completion of our maintenance for the year and the ramp-up of Salobo to a 100% of each nominal capacity.
With coal we continue our work to eliminate the logistic bottleneck in Mozambique. In this regard, we achieved 96% physical progress in Moatize II and 94% in Nacala Corridor.
With fertilizer, I'm very pleased to inform you that our adjusted EBITDA continues to improve and reached at almost US$200 million in the third quarter of 2015, driven by higher sales volumes and lower costs. We remain confident in the long term perspective of our fertilizer business segment.
In the third quarter of 2015 we continue to reduce our cost and expenses achieving lower cash cost in iron ore fines continue to divestment program and reduce our net debt position. We remain focused on keeping our operating discipline in preserving our balance sheet as we complete our investment cycle in the next few years.
Thank you for your attention and now let's open this webcast for your questions.
Operator
[Operator Instructions] Our first question comes from Wilfredo Ortiz with Deutsche Bank.
Wilfredo Ortiz
Yes. Good morning, everyone.
Just wanted to ask about the cash flows for iron ore given the progress you have been able to achieve thus far. Where do you see the cash flow is going towards the latter part of the year and then once you have the ramp of S11D and specifically where were the Carajás cash cost as of now and where do you think S11D’s cash cost to be given all the progress you have been able to do and with FX being right now in your favor?
And secondly I wanted to ask you also regarding your freight strategy following the sale of some of the Valemax vessels and the current marketplace how sticky would the freight rates be given that you sold some of your vessels and the market is one way and perhaps you have some contracted business and some of them and how you viewing that? Thank you.
Murilo Pinto de Oliveira Ferreira
Thank you for your question Peter and Luciano.
Luciano Siani Pires
Hi. Thank you very much for your question.
So if you look at our cash cost this quarter $12.7 and this wasn’t only because of exchange rate and volume there was a real gain in productivity as we had our along – already if you imagine, if you look at our Carajás operation today and also the Southeast system which is becoming very competitive because of the new Itabirites project already in production. To-date both systems are already around $10 a ton C1 cash cost.
And so when you look further down the road you can easily imagine that with the S11D coming which we know will be distinctly below $10 at an exchange rate of 3.5 plus with an optimization of our sales system because there we have some we have still some work to do you can imagine that at 3.5 exchange rate we will be around $10 a ton C1 cash cost for the home value.
Gerd Peter Poppinga
Luciano on freight I would we see three livers for reducing freight cost going forward the first one is we still didn’t accrue all the benefits of the lower bunker prices there is a lag because of the length of the voyage of the ships, the refueling cycle and process so we still had in the quarter markedly higher bunker prices than what we have at the end of the quarter. So you should expect for this effect only lower bunker prices and thus lower freight rates going forward.
The second one is we believe our mix of contracts and even the spot usage of spot rate will improve going forward and the lower spot rate also enables us better negotiating conditions going forward towards the renewal of existing contracts. So this should improve the mix overall and also lower freight going forward.
And finally we have logistics optimization most noticeably the working of Valemax directly into China avoiding the stopover in the Philippines for instance that reduces also the freight cost going forward. So we have a positive view on the behavior of freight for the next few quarters.
Operator
Our next question comes from Carlos De Alba with Morgan Stanley.
Carlos De Alba
Yeah, good morning everybody. So the first question is if you could give us some comments on the timing and the amount of the Nacala finance transaction that you expect to close I guess in the coming months?
And also if you can highlight any other divestitures and perhaps hopefully expected proceeds that would definitely help you to give on sustaining your net debt levels or improve them. And then also if you have any detail guidance or more specific guidance as to when in production should start either next year or in 2017?
Thank you.
Luciano Siani Pires
There hasn’t been any change on the perspectives for the project finance so we're still looking at $2 billion plus and closure of it at the end of the first quarter of next year. In terms of divestitures we see less of a need for divestitures just for the sake of closing any cash flow gaps because as you can see we are increasing our competitiveness and lowering CapEx sustaining investment.
So this quarter we had was a coincidence EBITDA exactly equal to investments and we expect to, going forward to have a surplus on this simple measure going forward. But we keep on looking forward let’s say opportunistic transaction of a smaller amounts we -- as we said before we keep on looking into sale of ships these have been commanding good prices it’s a good transaction to release capital.
As you saw also on the press we received a non-binding offer from Hydro for MRN still it's an early step so there is a lot to do to see if we are going to have a transaction but it’s an encouraging sign as well. So therefore we keep on looking forward to optimizing our capital structure and simplifying the portfolio, but I would say with less of a pressure from cash flow perspective.
Okay for the startup of S11D I think we commented on the other Portuguese call that we are going to start doing the test with ore in September next year and the same time running the first trains on the rails for again in September of next year.
Operator
Our next question comes from Andreas Bokkenheuser with UBS.
Andreas Bokkenheuser
Yes good morning everyone. Just a quick question from me on the inventory strategy I think you mentioned on the morning call that you might be look to potentially destock some 10% of your current inventories next year what would be the strategy in terms of timing is this something where you are basically waiting to see whether iron ore price are maintaining strength for you to start destocking or would you rather be looking to potentially destock into seasonally weaker volume quarters like first or second quarter, what’s the thinking on the timing there?
Thank you.
Murilo Pinto de Oliveira Ferreira
Thanks for your question, Andreas. To be clear this is not seasonal this destocking is just because we now have the needs to do it we have capacity at the MRS railway plus we have Pico, Fabrica railroad I mean road from linking Pico to Fabrica where we can ship then instead of – we can ship to Tubarão.
So because of this flexibility we can now reduce stockpile it’s really about some good material old material stocked in the mines of Vargem Grande in the Southern System and progressively we want to release that because it’s working capital and if we not jeopardize existing production or existing sales ideal stock level today would be something around because we have floating inventory in vessels we have some distribution centers offshore and in the mines we should go to in the next two to three years we should reach 30 million tons and today we have 65 million tons. So this is what we want to do it is a working capital and we want to reduce and it’s a good opportunity because we have now this flexibility but it’s not seasonal.
Operator
Our next question comes from Amos Fletcher with Barclays.
Unidentified Analyst
Yeah hi there this is Jens [ph]. I just had a couple of questions, first one to ask with respect to the 13 million tons of capacity that you announced you would be taking offline in the production release could you explain will that come will that be seen through lower pallet production overtime?
Then yeah I just wanted to get second question is around – also the timeframe when we start to expect you to see sales in excess of production in the iron ore business? Thank you.
Murilo Pinto de Oliveira Ferreira
Please could you repeat the second question?
Unidentified Analyst
Yeah, second question was just around the fact that in the quarter it looks like you build around 3 million tons of inventory in terms of your sales volumes being above being 3 million tons below production obviously you have been making comments around releasing that inventory over the course of last couple of quarters and I was just wondering at what point will we start to see sales being greater than production? Thanks.
Luciano Siani Pires
So quarter-to-quarter comparison is in terms of stocks I don’t have the detail here but it certainly right that we have in 2016 we will have if you compare December ‘14 and December ‘15 we will have 2 million to 3 million tons less of stock in our inventories that is for sure and the big reduction will come in 2016 where we are going to reduce more than 10% of the existing stock as I said before. Now regarding the 30 million tons, it's a little confusing but let me try to explain it once more.
This is annualized capacity. We stopped some of our not so high margin mines mainly in the southern [ph] system.
But we also bought less third-party but this is annualized. So actually inside the quarter you will only see suite of 2 million to 3 million tons reduction.
Okay, well this is not something we are sticking to that. We said once both together the reductions in the mines and the reductions in the third-party suite could reach an annualized phase of 25 billion tons.
It is not something which we will stick to this year. We are going at this way it depends on the margin optimization and it depends on the markets.
And this year we are in spite of doing this in spite of reducing these volumes, we are compensating the volumes in higher margins mines and keeping roughly the 340 million tons production guidance for 2015.
Unidentified Analyst
Thank you.
Operator
Our next question comes from Jeremy [ph] with Clarkson.
Unidentified Analyst
Yes well, this is John. I just want to just want to follow-up real quickly on your last answer.
Did I hear you correctly, I think previously you've talked about a kind of a range of 340 million to 376 million tons or so of production in 2015. Should we now be looking at kind closer to 340 range just given the curtailment of some of the high cost production?
Luciano Siani Pires
340 is 2015 that's what Peter said. For 2016 I will announce guidance on the Vale day.
Unidentified Analyst
Okay.
Luciano Siani Pires
Thank you.
Operator
Our next question comes from Alex Hacking with Citi.
Alexander Hacking
Hi good morning and thanks for the question. Luciano can you remind of the CapEx guidance for next year and what CapEx rate that you're assuming on that guidance.
And then the second question for Peter if it's okay. Can you discuss maybe the dynamic of the pellet premiums, we can see that the one premium that come up quite a bit recently.
Are you seeing similar dynamic in pellets. And would you consider rationalizing your pellet capacity a little bit like we saw in 2012.
Thanks.
Luciano Siani Pires
Alex thank you for your question. In the previous release you had a table in which we reproduced the capital expenditures guidance given December last year for different exchange rates.
Reason we removed that it's precise because we're reviewing that right now. But you should expect the same ranges of the past table we would still be far away from those ranges.
So the information is on the release. And I believe we were talking about between $6.5 billion to $7 billion on depending on the exchange rates that you look at.
Gerd Peter Poppinga
Yes Alex concerning the dynamics of the pellet market as you know pellets are much more volatile than other products. And you're right there is a temporary weakening in the pellet market.
Although I have to state that what you see published in the index and in the specialized magazines, this is not these are not pellets from major suppliers. You have lots of high silica of specs pellets floating around and also from Ukraine and countries like that.
In our case, we have a decrease in pellet premium compared to '14 by couple of dollars that is correct. And well the pellet market is under stressed, you have Vale ramped up expansions recently and simultaneously we have now no need for productivity in blast furnaces.
And in the VR segment you know that the scrap price is very much under pressure due to the exports of Chinese steels and also there is a gas problem energy digit. So there is a temporary weakness and we are actually taking off some capacity in Q4 which is a cut of around 10%.
And we are going to sell pellet instead, but still we are going to produce in 2015 more pellets than we produced in 2014.
Operator
Our next question comes from Braciano [ph], HSBC.
Unidentified Analyst
Yes hi. Thank you very much for another question.
Just have a question for Peter with regards to premium for Brazilian clients. Do you expect that to maintain overtime for this at least for this quarter.
And given that you have some progress in the spot market. Is that do you have has been a well-received on contract as well.
Thank you very much.
Gerd Peter Poppinga
Well -- it's one of the best surprise we had in Vale our Brazilian plant, which is in qualities likely superior brands than other brands in the market. And we have achieved premiums $4 to $5 a ton.
Even the weakness of the market now they are being kept. And it can only say this plant will grow we will have today we have around 30 million tons of this brand it will come to 100 million tons.
And it will elevate Vale's price realization a lot for that you have to have liquidity and you have to have constant quality. And that's why we are working towards.
Thank you.
Operator
Our next question comes from Thiago Lofiego with Merrill Lynch. Mr.
Lofiego your line is opened.
Thiago Lofiego
Hello, can you hear me?
Luciano Siani Pires
Yes, go ahead Thiago.
Thiago Lofiego
Can you hear me?
Luciano Siani Pires
Yes we can.
Thiago Lofiego
Okay sorry. Just a follow up from Portuguese call to Roger, if I may, on the fertilizers front.
So would Vale consider ever spinning off the fertilizer's business at all just as was the case at some point with base metals, meaning your profitability is robust right now, so with decent prospect. So would you consider eventually selling a stake to the market, that's the first question?
And the second question to Peter, on the third party award purchases. So from the numbers and from your comments as well, it seems like you're running pretty close to zero purchases as if now.
Is it fair to assume virtually no third party purchases for 2016 or do you still have a minimum level maybe due to attractive contracts that you may have in some systems?
Roger Downey
Okay Thiago we'll start off then. What we're working on today is building a model that works and our existing operations into a much more robust and much more profitable business in the fertilizers industry.
Like I said earlier we are in the sweet spot. Brazil is a fast growing market.
We're putting in some very structural changes to the business productivity standards is growing. Our improvement is not just an FX based improvement.
It's a there is a lot of productivity and cost savings structurally in the business that we've managed to achieve. So going forward, the strategy is maintained at building I guess the champion in the fertilizer industry.
We looking at all options, but it's one step at a time and we will look in to every option that we have to build this business.
Gerd Peter Poppinga
Regarding your question on the third party fleet, yes we will reduce it, but it's very difficult to predict how much. There is purchase and purchase we have also some contractors operating mines for us.
So very small amounts which you probably will keep, but it will be reduced. Thanks.
Murilo Pinto de Oliveira Ferreira
Thank you very much. Thank you for your time.
We can say that we remain very focused in all operating discipline, discipline in capital allocation, preserving our balance sheet. And we continue to be very confident about being 2016 and as a new era in Vale with our new project.
Thank you very much. All the best.
Operator
That does conclude Vale's conference call for today. Thank you very much for your participation.
You may now disconnect.