Jul 27, 2017
Executives
Fabio Schvartsman – President and Chief Executive Officer Luciano Siani Pires – Chief Financial Officer Gerd Peter Poppinga – Executive Director of Ferrous Minerals & Coal Jennifer Maki – Executive Director of Base Metals
Analysts
Carlos De Alba – Morgan Stanley Jon Brandt – HSBC Amos Fletcher – Barclays Andreas Bokkenheuser – UBS Daniel Lurch – BNP Alex Hacking – Citi John Tumazos – John Tumazos Very Independent Research Thiago Lofiego – Bradesco BBI Marcos Assumpcao – Itau Corretora de Valores
Operator
Good morning, ladies and gentlemen. Welcome to Vale’s Conference Call to discuss the second quarter of 2017 results.
[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 August 2, 2017, on 55 11-3193-1012 or 2820-4012, access code 977-5487#.
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.
Fabio Schvartsman, President and CEO; Mr. Clovis Torres, Executive Officer and General Counsel; Ms.
Jennifer Maki, Executive Director of Base Metals; Mr. Luciano Siani Pires, CFO; Mr.
Luis Eduardo Osorio, Sustainability and Institutional Relations; Mr. Peter Poppinga, Executive Director of Ferrous Minerals and Coal; and Mr.
Juarez Saliba, Director of Strategy, Exploration, New Business and Technology. First, Mr.
Fabio Schvartsman 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. Fabio Schvartsman.
Sir, you may now begin.
Fabio Schvartsman
Thank you. Good morning to all.
It is a pleasure to have this opportunity of presenting my first conference call of Vale for second quarter of 2017. As this is my first time, I will make it slightly different than normal.
Instead of starting with discussing the results, I will comment on the points that I know that many of you are interested in understanding how we have been moving forward in general since I joined the company. Well, let’s start with this very recent diagnosis that was made, we call it internally a 60-day diagnosis.
It was just delivered. I received it this week.
It was far expecting my expectations, I’m sorry, rather than my expectations, we’ve had a lot more detailed vision of what to do with Vale. So – but it is important to understand how the sequence, which or in other words, which will be the schedule for delivering information on the diagnosis.
First, we are going to present this diagnosis to the Board of Directors of this company. And this presentation will be made in the next board meeting in 1 month’s time.
That means that just after that and if this diagnosis gets approved by the board, we are going to start delivering to the market, the information that could be delivered that are not confidential regarding the diagnosis that was made. Nevertheless, I would like to mention a few points that I can because we’re not in a conflict with anything that requires approval.
First, in iron ore we have a very strong diagnosis towards cost efficiency, cost reduction, sustainability and so forth. And here, we have the work of Professor Falconi just starting.
He was just hired. And he is going to make a simple case out of the Pellets division.
And if successful, it’s going to be to rollout for the rest of the division. The benefit expected from this work will be up to $1.50 per ton once all the division is covered.
These are very rough estimates because I basic taking the estimate that was made in the Pellets division and I’m ruling out on average for the rest of the divisions. So I must say this is most likely a very conservative scenario of how much we can address costs in the company.
Another very important aspect that was already announced in Vale Day of last year is the center of integrated operation through which we have tried to integrate everything, all the systems, all the railroads and ports and ships in order to optimize the global operation of Vale and therefore, bringing cost down and efficiency up. But the most important thing that was clearly made through this diagnosis is the issue regarding base metals.
Base metals in the last few years was heavily concentrated in the idea that prices of nickel will be very high in the future. And with this in mind, the investments are always possible and the return would be there if the prices went up.
Unfortunately, the prices kept low and we have changed entirely the behavior of base metals now towards trying to get the most of the existing scenario, not believing only in the future scenario that will be very favorable. And now the objective is to make money in the existing situations, instead of using money for building an uncertain future, much on the contrary to start to be profitable in return on investment in the model that we have today.
You know that we have several different sites where we produce nickel, and it’s very clear that the biggest problem is Nouvelle-Calédonie, where Vale has invested billions of dollars in the last several years. And with very poor results and actually our costs there are still much higher than the price of nickel as of today.
So here the issue is much more complicated. And we are looking to find a way of having an operation where we can – where Vale can have a sustainable model without having to put more money to work in this business.
Let’s make it very clear. Our main goal is to find a sustainable model.
Obviously, if we cannot find it, then we have to face the possibility of shutting down this mill. But this is the sequence.
The sequence is we are going to queue the end of the possibilities of finding alternatives or having sustainable business model for you. Regarding the team and a group of executives of the company, I’m very pleased to let you know that we have the new group of officers, executive officers, almost complete.
We have just announced 10 promotions as of yesterday for our new position in the executive committee. So we now have a very strong mixture of officers that were already in the company plus a small number that came from outside plus some internal promotions.
Now we have a group that is almost ready to start to work from now on for building the future of Vale. It’s important to make a quick remark on the issue of the new headquarters of Vale.
We just announced that we are going to move everybody to the same building here in Rio de Janeiro in order to have a better integration among everybody that works for this company. This building is in the north of Fogo and it is in the landmark building that was built by the last project of the late Oscar Niemeyer, probably the greatest Brazilian architect.
One word about some ARPU. It’s very important that you understand that we together with some ARPU and together BHP, we are doing everything that we can to restart the operation of this company.
Nevertheless, the truth is that this is not totally under our control because it depends on approvals and licenses and permits and that are very hard to get after the accident that we had there. So the only reason why some ARPU didn’t start so far is because we didn’t get this permit.
And it’s impossible to say when we are going to get it. The only thing I’m pretty sure that we are going to get it – we are going to get them, and then the company will restart.
And the problem is we shouldn’t promise when it’s going to happen because we certainly don’t know. I want to make a quick announcement as well in this capital restructuring of Vale.
The operation is coming to a very important phase, that ends in August 11, the conversion of shares from PN shares to ON shares. And it is my pleasure to tell to the market that the results so far are far beyond our best expectations.
We are getting a lot of traction with Riteo that we were not expecting. And we are getting indication from the index ones that they will convert.
So it means that most likely, we will have a very good scenario when it comes to August 11, because beside this people the vast majority of the market was supporting the operation. So it’s important to say that we expect heavy concentration of liquidity of our stock in the ON shares after this conversion period.
And it will represent a very important step forward in the direction of preparing this company to become a true corporation with better governance and less government interference, that’s the aim of all of that. Another issue that is important to emphasize is the issue of the royalty.
That was recently raised by the Brazilian Government as recent as this week. Vale is clearly not satisfied with this increased environment, not only because it represents further costs for the company, but even worst it brings a lot of legal uncertainties because this royalty was now extended to freights of the iron ore and to the operation of pellets that is clearly an industry operation, not a mineral operation.
As a consequence, the legal uncertainty is growing and this is the worst possible situation because nobody knows which is the real impact of this measures that were announced. Now very finally, a very quick comment on the result of the second quarter.
It is clear from my understanding that it was a weak – weaker result than expected for everybody. Nevertheless, the main factor for this weak result was the lower iron ore price during this quarter.
But we have some factors that were internally cost. As for instance, we had more production than sales because we have been building inventories in China for the purpose of blending and this as a consequence translated into lower sales than expected.
And we had steel, a tail of sales of low-quality iron ore with high silica content that this affected our net realized price and this affected negatively our result as well. On top of that, we had a number of oneoffs issues that affected the results.
The good news that we have is that now we’re facing for the next quarter a completely different situation. First, the price scenario is on the higher prices and more stable that we had in the last quarter.
Second, we are reducing in a very meaningful amount, the production of lowgrade iron ore of high silica content iron. Finally, we are not going to have the oneoffs that we had in this year.
And we are not going to build further inventories because we are almost at the level that we wanted to be. The consequences by any means, the results of the next quarter should be more meaningful than the results that we had in the last quarter.
Well, this is probably lucky of a hookey, that’s I’m very proud of having this kind of lucky right now. Finally, when we had one good thing in this last quarter is the very strong cash generation of the company that allows Vale to pay large dividends to pay for the production that we had to pay in it and reduce debt altogether in this quarter.
This clearly indicates that with the trend of reducing debt is here for staying and we are going to see an acceleration in the reduction of leverage of the company in the next quarters putting behind Vale the issue of high indebtedness. So this was basically what I had to present to you.
And now I’m going to Luciano that will give a more detailed explanation on the second quarter. Thank you.
Luciano Siani Pires
Good morning, everyone. So my goal here is to just highlight a few specifics on the results.
So starting by the free cash flow. Remarking to you that capital expenditures were the lowest for the quarter since the third quarter of 2006.
And looking forward, we see the strength to continue. We are almost at the end of spending money with S11D.
In this regard, we are even ahead of schedule. We should conclude the works on the logistics by the end of ‘18, instead of going through ‘19, as we expected before.
Some large expenditures on, for example, in Canada, in the atmospheric emissions reduction program, they are coming to an end as well. And because of the review of the Base Metals business, it is likely that some of the capital to be spent will be deferred.
So in the end, capital expenditures continue to trend down and cash flows will continue to trend up. And even in an environment of lower prices, we are spending today in a quarter what we used to spend 2 years ago in a single month in capital expenditure, so it makes a big difference.
Other offenders of the cash flows they have gone, for example, the hedge cash expenditures that we had very intensely last year they are gone and opportunities are in the short term, for example, preoperational expenses are bound to decline. One example of this is that Long Harbour, the Long Harbour refinery for example, in June, we had no preoperating expenditures.
The refinery had reached 60% of capacity. And S11D expenditures are supposed to decline as well in the future.
So very good perspectives for cash flows. In terms of the composition of EBITDA, no news here.
Still highly concentrated on iron ore. However, I would like to remark the performance of coal.
As you saw, we generated $157 million of EBITDA, of which $182 million was generated in the Nacala corridor and there was a loss in the other inefficient quarter beta, which is not the longterm future of the company because we will manage our exposure to beta after the end of the contract. The costs the total operating costs continue to decline.
We have reached $74 per ton, and we are bound to be below $60 per ton in the very near future. There was, yes, an increase in the absolute cost because of the entrance of Mitsui in the quarter.
There is now $15 tariff, but just to remark that of this additional $15, $13 come back to Vale through the repayment of loans granted to the quarter. And this goes into the financial income in the balance sheet.
In terms of now going to iron ore, in terms of costs, you saw that the breakeven landed in China is now $34.07, a big increase we expect through the end of the year with dilution of fixed costs and other measures to be back. [Technical Difficulty] Earnings between Brazil and China so we haven’t captured yet this recent decline in freight rates, but we should in the next coming quarters.
So we are going to be back likely to the range of $32 to $33. And because of all the cost reduction initiatives that we announced in Vale Day and now this iconic program that Fabio has remarked, we strongly believe we will be back down lower than $30 per ton in the near future.
In terms of iron ore price realization, just to call your attention to one phenomena that we were impacted in terms of EBITDA this quarter because of the adjustments on prices from the past quarter. Because we’ve recorded at $78 per ton, the outstanding sales with provisional price in the first quarter and these sales realized at lower prices.
On the next quarter, this effect will reverse because we have recorded the provisional pricing sales for this quarter at $62 per ton and now we’re almost at the end of July and the prices are higher than that. So not only the average prices for the quarter will be higher, but also will have a kicker from these price adjustments carrying from the second to the third quarter.
I’m certain we will talk a lot about these inventories build up and this correlation between production and sales. So I will leave it to the Q&A.
On Base Metals, we had a good performance on costs, they improved from the first quarter. So offsetting a little bit the decline in especially nickel prices and cost performance tends to continue to be good in the following quarters, especially in the third because we are going to have 2 furnaces operating in Sudbury.
And as I mentioned, Long Harbour is in very good shape to continue to reduce costs. On the divestitures, we just received news yesterday that on the project finance in Nacala, ECIC, the ECA from South Africa has approved the project so joining now AFDB, we expect Javic and Nexi approvals for September and disbursement shortly thereafter.
On the fertilizer sale, we are now waiting for the final decision by the anti-trust authority from Brazil, should come soon. And we are also fulfilling the other precedent conditions so therefore, we expect closing by the month of November and proceeds to come still in the fourth quarter.
The sale of Vale Valesul is progressing. Potential buyers are doing due diligence right now.
And we expect to receive additional proceeds from the sale of 2 ships in August and another 2 ships in October, therefore completing the divestiture program. On the debt, you saw we had still in the first quarter very high gross debt.
It has declined in the second quarter. We have started to repurchase part of our debt and that should accelerate.
We aim at reducing financial expenses going forward. So doesn’t makes sense to pileup cash.
We will accelerate the repurchasing of debt. So in the end, as you can see, we are very much derisking the Vale equity story and being ready to ride this future journey under the leadership of Mr.
Schvartsman. Now we will open for Q&A.
Operator
[Operator Instructions] Our first question comes from Carlos De Alba with Morgan Stanley.
Carlos De Alba
And first question has to do with the discrepancies or the gap between iron ore shipments and iron ore production. What can we expect going forward on these metrics?
I understand from the release that it’s around 5 million tons, which seems a little bit short relative to the gap that we saw in numbers, but if we can help us understand how these GAAP will evolve in the next few quarters? And maybe next year, that will be useful.
And the second question, we saw news announced by another producer that Vale sold a couple of autoclaves to them for around $7 million. My question is does this have anything to do with what Vale would do at VNC?
Does this mean that the company will – I mean this autoclaves VNC equipment or not?
Gerd Peter Poppinga
Carlos, this is Peter speaking. Yes, this gap between shipments and this happened in the last quarters and is now at its, in my opinion, at its peak in Q2.
We will – you know the reason for that, we have a running strategy, which is not only Malaysia and Oman, but also other offshore locations, mainly China. This is CapEx avoidance and it’s about price realization and it’s about sales distribution, new sales channels.
So all this comes into this positive strategy. But this year the blending in Malaysia was – will be around 25 million tons.
The blending elsewhere, including China, will be 45 million tons. And we will have the 70 million tons blended.
So stocks are building up and probably what I can tell you is that in 2018, what you’ll see is the conversion in the shipments and the sales volumes. There can be 1 or 2 quarters up and down again, actually the trend towards the end of the year is to slightly reduce the stocks we have today, but I would say that during the year of 2018, we will have very much a conversion, a very narrow correlation, and narrow gap if any between sales and shipments.
Jennifer Maki
Thanks Carlos. Those autoclaves in question that were sold relate back to our Vermelho project, which we had in Brazil a few years ago, which we didn’t proceed with.
So it’s unrelated to Vale and Caledonia.
Luciano Siani Pires
We are coming full circle. If you imagine this was a project approved at the Board of Directors of Vale in November 2005, and here we are 12 years later putting a lid on it, selling 2 autoclaves for $6 million.
Operator
Our next question comes from Jon Brandt with HSBC.
Jon Brandt
Two questions for me. First, on the overall strategy.
So I understand that you want to continue focusing on deleveraging. I noticed that there wasn’t really a mention of the $15 billion to $17 billion net debt target like you’ve mentioned previously and that using the language that you wanted to be in a more comfortable leverage situation by the end of the year.
Have you moved away from the $15 billion to $17 billion target? And then I guess sort of related to that, once you reach what you deem is comfortable should we continue to expect the rest of the free cash flow to be paid out in dividends?
And then my second question relates to VNC. Fabio, I know you want to take some time and have this be more of a sustainable project.
I’m wondering how much time you’re willing to give this, and if you’ve analyzed potential shutdown costs if you have to go that route?
Fabio Schvartsman
Jon, thank you for your questions. First, in the initial leverage.
Well, we can say that we are reducing the target. Actually, we want to have less than $15 billion to $17 billion debt.
And my reasoning here is very simple. Vale is too much dependent upon one single commodity, iron ore.
And this is a very volatile commodity, doesn’t go well with any kind of debt. So in my point of view, Vale has to have the lowest possible debt.
And we are moving in this direction. By doing that, we will be improving and making our balance sheet stronger and this will be one of the measures that we are looking for besides improving performance, besides improving governance, besides improving execution.
If we can put everything here together, it will probably represent an improving perception value of the company. And therefore, we will be able to use in a broader way the stock of the company.
That’s my goal here. Actually, I don’t want to use debt in the future in this company based upon that.
I think it doesn’t work to follow this road. Therefore, we are going to keep the dividends and we are going to keep the leverage in the company.
As a note, even in my former job in execution of the largest product of the entire life of the companies I worked for, we have been growing dividends throughout the construction of that big investment there. So it gives you an idea how do I feel about dividends.
Second, regarding VNC. I said exactly what I meant.
We are clearly looking in a deep way how and if we can transform it in a sustainable business. And then and only then, if it’s not the case, we are going to look into shutting it down.
As a consequence, we are analyzing and evaluating all the scenarios. Calculations are being made, but I have no idea, which is the results – which are going to be the results of this calculation.
Because the priority is to find a sustainable solution. Closing is the last resort.
Imagine, after investing billions of dollars there, I just cannot go bear and close it without take into consideration all the efforts, all the jobs that we have, everything that is there. Only if in the end we cannot continue.
One point is clear, we are not going to put more money to work there. So we have to find a solution without putting more money there.
And we are focusing on that.
Operator
Our next question comes from Amos Fletcher with Barclays.
Amos Fletcher
Good morning. Congratulations on this funding free cash generation quarter.
In particular, you had a very strong $1.4 billion receivables in flow and can you explain what was behind that? And then secondly, on line , or you mentioned on the Portuguese call, that you went 400 million-ton next year, could you clarify when you envisage reaching the 400 million-ton level?
Thank you.
Luciano Siani Pires
Amos, Luciano. I understood from the first question – the line was a little creepy – that you want some comments on the free cash flow on the highlights for the free cash flow, is that it?
Amos Fletcher
Yes. Just to clarify there was a $1.4 billion receivable in flow, just sort of explain what was behind that?
And whether there was any kind of receivables within that carry forward? Thank you.
Luciano Siani Pires
Okay. Part of that reduction is a natural consequence of the declining prices.
So you collect sales at the beginning of the quarter at higher prices and then you record sales at the end of the quarter at lower prices. So that explains a little bit of the disconnect between EBITDA and cash flows, which goes through the – you see the accounts receivable reducing.
The second topic is because of the very steep increase in iron ore prices at the end of the fourth quarter and going through the first quarter, there were lots of outstanding invoices of the provisional price adjustments, who weren’t immediately collected because of the sheer volume of those. So there was some inefficiency in the collection of provisional price adjustment invoices, and we’ve resolved that so that explained a little bit also the reduction of accounts receivable.
But we believe now we are at a more normalized level of accounts receivable. So going forward, only eventual price frames will explain the ups and downs.
Fabio Schvartsman
Regarding the 400 million tons annual production question. We have stated repeatedly that although we have a 450 million tons capacity, it doesn’t mean we are going to use it.
It depends on market conditions and more importantly, on our margins maximization optimization efforts. If you take our recent ramp up schedule, which was revised the last Vale Day instead of 2 years ramping up in 4 years, and mainly concerning the logistical corridor, then you reach the full ramp up of the S11D at 2020.
It may be if market conditions are right, and if we are maximizing our margins that means that we are reaching in 2019 or in 2020, our goal, our target of 400 million tons. It will not mean that we go beyond that.
And again, like we said, we are – this is our optimum level of operations, and we think it fits well into the midterm market. And so to answer your question, reaching probably to 400 million tons, either in ‘19 or in ‘20.
Operator
The next question comes from Andreas Bokkenheuser with UBS.
Andreas Bokkenheuser
Yes, thank you very much for taking my question. Two questions actually.
The first one is that as Mitch has talked this year, and I think you reiterated some of that this morning, that management may be looking to diversify out of iron ore to watch other commodities over time, not to be so dependent on a single commodity. How do you think about that in terms of a comfort level?
Would that be for example, iron ore shouldn’t account for more than 60% of EBITDA? Is that the way to think about it?
So if you could give us some clarity there, that would be great. And the second question is potentially financing this diversification.
Given that you’re also trying to delever the balance sheet, would you consider potentially selling some of your iron ore assets to effectively refinance and move into other commodities? So that would be my second question.
Fabio Schvartsman
Andreas, thank you for your questions. First of all, the idea of diversifying the company.
As we reiterated our intention of diversifying the company to become less dependent of this one commodity that we have today. But in our way of seeing things we are going to do it in a very cautious way.
The first step being trying to get the most of what we already have, especially to make the operation profitable and in a meaningful part of our portfolio. Today, we are not getting much of this huge investment that was laid there.
So for starters, we have to stress the keys that we have in hand. Second, sorry about the guidance, 50%, there is no magic number.
We are not looking for numbers. But we really want to have very good and competitive situation in anything that we are – we get involve to.
Regarding financing. If there is no chance whatsoever, in any case, that Vale will sell in any of its iron ore assets to do anything, other than iron ore.
Look, what we are going to do, we are going to use as I’m saying time and time again that we are going to use our only tool that is for real for this. This is the stock of the company.
If we are going to move forward, and when we are going to move forward, depends upon the capacity of using in a negative way shares of this company. So this is the only financing tool because Andreas, we know by experience that diversifying is a very difficult thing.
And if you do it in any other fashion than using your own stock, you are just adding risk to the process. And we are not going to do that.
Operator
The next question comes from Daniel Lurch with BNP.
Daniel Lurch
Couple of questions on strategy and then iron ore. Maybe a follow up from my previous question on your organic growth and strategy potentially diversified the business.
Is there still a focus on allocating some CapEx on any organic growth projects? What I’m thinking about here, for example, Salobo III, which is exposure to copper and currently going very well?
And my second question is could you on iron ore. On S11D, you mentioned the progress there, and can you give us a bit more detail on how the operation is running at the moment?
And how much you are planning to produce this year? And on iron ore cost, lastly, you were highlighting that you expect costs to go down to BRL 46 million to BRL 47 million in the second half.
Can you explain how quickly you expect this to happen? Is it a more gradual process or is it towards the end of the year?
Fabio Schvartsman
Thank you for your questions about organic growth. Yes.
Obviously, organic growth is part of the strategy of any company, that’s no different in Vale. The issue here is that we have to be very careful not to spend capacity to put money to work in markets that are already oversupplied.
But having said that, there are some commodities and assets that Vale have already like copper, where we can continue to invest in organic way because the market can absorb it easily. So the decision here will be very simple.
The assets that can be profitable in areas where clearly there are no evidence of oversupply, Vale will invest organically. Now to Peter to answer about S11D.
Gerd Peter Poppinga
Daniel, thanks for the question. So for S11D, more detail if you want.
So you saw that we are already at in minus 99% improvement. And 90% overall in the project.
We have not encountered any major problem in terms of commissioning, but we are now of course, we are producing and commissioning at the same time. Where are we raised in the fields of this.
It’s in the mine, where we actually couldn’t have test the total capacity of the contractors because we are producing and commissioning at the same time, like I said. The long-term conveyor is going well, was tested.
The mobile crushers were tested. Some smaller issues in locomotion.
A pleasant problem that actually capacity of the MSRs are actually exceeding our expectations. So – but all this means interference no major problem, that’s why in the second half of this year we expect to focus more on production and then the commissioning will be less and less.
The nominal capacity as you know is 90 million tons. We have already have produced around 10 million tons this year and we expect to – for the whole year, we expect to have 25% of the nominal capacity.
And probably being in the pace of 40% to 50% at the end of the year. Now that’s for S11D.
On the iron ore cost, yes, you saw the increase in costs, mainly was the merged increase and that was related to the maintenance of the peer 1 and PDM. We are changing the big bad conveyor there.
And since peer 4 is still not ready yet, it’s still being tested, we couldn’t compensate there. So also we have some railway problems in the Torremolinos railway, which also increased the costs a bit.
Our one-off events, which will not repeat. We had an increase in our freight costs because of the – was caught by surprise in some of our contracted freight running out and at the same time we had to go to the stock market, which was high.
This could also be – this will be overcome in the midterm by our second and third generation ships, Valemax being delivered. And all the focus on the cost reduction is more and more on the integrated supply chain management, not only in terms of efficiency but in terms of price regulations.
That’s why the biggest cost advantages and cost reductions will happen in the future. Thank you.
Operator
And the next question comes from Alex Hacking with Citi.
Alex Hacking
Hai good morning and thank you for the question , My first question is a follow up to Peter. You mentioned earlier that Vale line of capacity will be 450 million tons.
My question is does that include the 50 million tons of high silica capacity, that’s been closed and is in the process of closing, being the $50 million that was closed last year, and $90 million that is closing in the second half of this year. And my second question is on the cost structure of the Coal business.
Can you remind us, how much coal are you shifting through Europe today versus Nacala? What is your contractual obligation to ship in Europe?
And once that’s contractual obligation is over, should we assume that you will ship 100% of the margin coal through Nacala? Thank you.
Luciano Siani Pires
The 450 million tons capacity is when you add all the 4 ports together, right. And this includes the domestic markets.
It doesn’t mean export, okay. It includes the domestic markets when you have – where you have around 30 million tons to 40 million tons capital markets.
So the 450 million tons is when you add all the export and deduct the domestic market. The southern systems have some high silica, but also some normal silica normal quality iron ore.
So closing down almost 20 million tons of this is not only related to southern system, it’s also relates to southeastern system. So you will have all, if you have in the mines, not closing the mines, but you will have product flows being rationalized and eliminated and by that, you are reducing production on the 20 million tons in the south and southeast on annual basis.
It seems to be today at 365 million tons production this year, and we preferably will go to 400 million tons in the midterm. And I just said to your colleague, I’m not sure if it’s 2019 or 2020, when the margins are good and when the market is permitting.
So that means that we are going to compensate – more than compensate the 20 million tons, which will be eliminated in the southern system and southeastern system. The flows will be compensated by more production in the Northern System S11D and Carajás.
Luciano Siani Pires
On the costs structure for coal, the cash costs through beta is around $125 per ton. So very difficult to make money in this quarter.
We still have transportation obligations of around 200,000 tons per month. Those obligations, they extend to the end of this year and they go a little bit into next year.
Overall, the way to think about it is that there is an 18 million-ton capacity through Nacala and another 4 million tons capacity through beta, which leads us to the 22 million tons, which was the original design for the 2 process plants for coal. So if you want to run the mines at the full capacity, you will need to increase capacity in the Nacala corridor, which means adding a little bit of rolling stock and seeing if the car dumper can run at very high availability to try to reach the 22 million tons just on Nacala.
But the key message here is that beta is not on the plans or the longer-term and therefore, this is an upside for the cost structure for whole Mozambique.
Operator
The next question comes from John Tumazos with John Tumazos Very Independent Research.
John Tumazos
Could you explain a little bit the Sumic transaction? It might be in your footnotes, but there’s a lot of press releases this morning.
And second, could you explain the political process in restarting Samarco permits? Those of us that are far away might not understand all the issues after a couple of years.
I visited BHP in Melbourne this month and I was very pleased at how supportive and completed agreement they were with you?
Jennifer Maki
John, the Sumic transaction is related to a prior year transaction when they left the Goro project and essentially, the payment of that would’ve happened in this past quarter.
Fabio Schvartsman
On Samarco, there are basically 2 environmental permits that need to be obtained. One is for the unexhausted pit, which will receive the tailings on the short on the first 2 years of the restart.
And the other one is the so-called corrective license because the whole operating license of Samarco was suspended. And both of the license, the permits are in negotiations with the relevant authorities and they depend on several smaller issues.
No fundamental structural issue, but several smaller issues. Also on the legal front, there is a preliminary agreement established with the public prosecutors, which leads us to until October 30th.
They will be – they may be part of the larger framework agreement establishing the beginning of 2016 with federal and state authorities, therefore providing legal stability for the restart of Samarco, which is also very important. So these are the 3 main challenges, the obtaining of the 2 permits, which are in the state authority and the final negotiation with the prosecutors expected for October.
And the restructuring of the debt, which again is also going with the banks and loan holders.
Operator
The next question comes from [indiscernible]
Unidentified Analyst
Hai guys thank for the opportunity listen I have two questions related to CapEx. First, Luciano, could you please compare the levels of maintenance CapEx we saw in the first half of the year to the Vale Day guidance that we saw at the end of last year?
And second, still on maintenance CapEx, I would like to hear a little bit from you about the reasons for the lower maintenance CapEx in the second Q, if any of these reasons are the same as the reasons, which you said –which you cited then to maintain in lower looking forward? How should I look at CapEx looking forward concerning these 2 points?
Luciano Siani Pires
So the guidance for Vale Day was $4.5 billion total CapEx for the year. When we announced the sale of the fertilizer business, we removed $300 million, which was the capital for fertilizer from this number so we are talking above $4.2 billion.
We should be very sharply close to this number this year. But as you saw, we had some higher number in the first quarter.
And now we have a small number in the second quarter. We should have smaller numbers for capital investments in capital in the third and fourth quarter, but higher number for sustaining.
So all in all, we should reach the $4.2 billion. The reason being because I wouldn’t give much weight on the sustaining capital variations quarter-over-quarter because they depend on the wide number of factors, but they tend to accelerate towards the end of the year.
The way to think about sustaining in iron ore is basically we’ve been going around the magic number of $3 per ton. So this is a good rule of thumb going forward.
On nickel, there is a more longer-term trend towards reduction. Given that all this single furnace transition, the AER, atmospheric emissions reduction program, they are all charged into sustaining capital.
So you should expect sustaining capital for nickel to reduce going forward. So my – our hopes of declining capital expenditures going forward, they are mostly driven by the reduction of expenditures in S11D and the reduction of sustaining capital in nickel.
Operator
The next question comes from Thiago Lofiego with Bradesco BBI.
Thiago Lofiego
Hi, thank you. Just a follow-up question to Peter.
Peter, could you give us your view on the swing production. So with iron ore approaching $70 per ton and even when no iron ore prices were at no lower levels than $70 per ton.
We were seeing some more volumes from domestic concentrates in China and more volumes from some exotic procedures. So I just want to understand your view on whether your $70 per ton iron ore price assessment for this year really holds?
Whether you think that we should see more feed production coming back to the market?
Fabio Schvartsman
Thiago, thanks for the question. I will give you exactly my numbers we are working with.
So in 2016 we – now I’m talking on a net basis. We had 85 million tons of additional seaborne.
It was 120 million tons coming in and 35 million tons coming out. Now what we are working with is coming in 60 million tons, this is mainly Vale and others this year, right, others in Brazil.
Broyhill as you know, is around 15-plus million tons coming in. India came in increasing with 15 million tons and some others.
So 60 million tons coming in. But seaborne is also coming out.
You see Atlas, South African and other exotics. So – and then China, China surprised us actually, it is a fairly inelastic behavior because it’s underground mines, it’s environmental problems, there’s security problems.
So we thought the Chinese, and we are reluctant to jump in again. So we thought they would come over.
But in our focus, there is only 5 million tons to 10 million tons coming. So it’s what I’m saying, it’s 50 million tons.
If you add all this together, seaborne in 60 million tons, seaborne out 15 million tons and China in, maybe increasing little bit 5 million tons to 10 million tons, you will reach 50 million tons. And 50 million tons iron ore equals roughly to 20 million tons to 30 million tons of steel, and that’s exactly the steel increase we are having this year, the steel production increase revenues.
So that’s why I’m saying. The market is fairly balanced and it shouldn’t be different from the price levels we are seeing today.
Of course, you can have ups and downs according to sentiments. But in the whole year, the fundamentals are what they are.
So $70 per ton also remind that the breakeven of some concentrates in the Chinese marginal suppliers are around $70 per ton. So I don’t see market holding for several months below $70 per ton.
So that’s my model behind that and I hope you see that the market is fairly balanced this year.
Operator
The next question comes from Marcos Assumpcao with Itau Corretora de Valores.
Marcos Assumpção
Hi, good afternoon everyone. My first question is regarding S11D.
If you – when do you expect the S11D to start reducing Vale’s average costs? And also, on the preoperating expenses, when do you expect that to finish for S11D?
And on the coal business, the second question, if you could provide us a little bit more details on the run rate of what is the production and also cost performance in the late this month. You mentioned that production has been ramping up and the cost has been going down.
So if you could provide more updated numbers it will be useful.
Fabio Schvartsman
Marcos, I will try to answer the first question. And left the others for my colleagues if they can check those numbers.
But S11D, for sure, this year will be a higher cost still then because we are not at main plate capacity. Although, we are putting some of the cost as preoperating expenses of course.
And so I would guess that it’s going to happen towards the end of next year that we are going to see real cost reduction on the S11D. On the coal business, I am just stepping in, I’m not so familiar with it now.
Peter Poppinga
Yes, Marcos. We overcome 1 million tons for the first time this quarter per month and now we are heading towards 1.2 million tons, 1.3 million tons.
This is the next target to stabilize production at that level. And I don’t have the due numbers top of my head, but again I wouldn’t place too much emphasis on those monthly numbers.
So what we should see incremental cost reductions going into the third quarter for sure.
Operator
This concludes today’s question-and-answer session. Mr.
Fabio Schvartsman, at this time, you may proceed with your closing statement, sir.
Fabio Schvartsman
Thank you. Again, I appreciate very much this call.
It was a pleasure to deliver my first conference at Brazil. And I hope you would be able to join us for the next one.
Thank you, and have a good day, all of you. Thank you.
Bye, Bye.
Operator
That does conclude Vale’s Conference Call for today. Thank you very much for your participation.
You may now disconnect.