Jul 30, 2020
Operator
Good morning, ladies and gentlemen. Welcome to Vale's Conference Call to discuss Second Quarter 2020 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 Investors link. This conference call is accompanied by a slide presentation also available at the Investors link at the company's website, and is transmitted via Internet as well.
The broadcasting via Internet, both the audio and the slides change has a few seconds delay in relation to the audio transmitted via phone. 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.
Eduardo Bartolomeo, Chief Executive Officer; Mr. Luciano Pires, CFO; Mr.
Marcello Spinelli, Executive Officer for Ferrous Minerals; Mr. Mark Travers, Executive Officer for Base Metals; Mr.
Carlos Medeiros, Safety and Operational Excellence, Officer; Mr. Alexandre Pereira, Executive Officer for Business Support; Mr.
Paulo Couto, Director of Coal; Mr. Alexandre D'Ambrosio, General Counsel; and Mrs.
Marina Quental, Director of People. First, Mr.
Eduardo Bartolomeo will proceed to the presentation on Vale's 2Q '20 performance. And after that, he'll be available for questions and answers.
It is now my pleasure to turn the call over to Mr. Eduardo Bartolomeo.
Sir, you may now begin.
Eduardo Bartolomeo
Okay thank you, Doe. Good morning to everyone.
First of all, I hope you and your families are doing well overcoming this unprecedented moment. The first think I will like to highlight is Vale continues to face the COVID-19 pandemic with humbleness, discipline, and sense of urgency.
Almost five months, we have been managing the company in a remote way. The pandemic demand has us to make important choices.
It put us our planning to the test. We are learning a lot during this process.
And adjust that planning based on the new situations that we face. As I have said in the last quarter, this work will not be a big one.
So, we will keep our defense high. Finally, our priorities continue intact.
They are safety, people, and a full reparation of Brumadinho. Next slide please.
Well, our derisking plan continues and our response to the pandemic has been incorporated on it. Let me remind you that our risk, the risk focus has four thrones we prioritize.
1) The reparation of Brumadinho, 2) The safety of our employees, our dams, and just work for our committees, communities, 3) The stability of our operations and 4) The discipline in capital allocation. I will tell a little bit each of these four thrones to you in the next slides.
Please, next one. Starting with the reparation.
Our commitment to Brumadinho remains steady. In this pandemic, we are there happy to issue resources necessary for the healthcare of the effected communities.
The indemnifications continue remotely with more than 7600 people covered by agreements which totals about R$3.9 billion with the net emergency aids. Also, we have already entered into a fair number of agreements with the authorities.
Focused on reparation projects from protection of farm and flora to water security in the region. So far, we have invested a R$11.5 billion in the reparation of Brumadinho and actions with them.
That is to say that we have already done a lot and we'll continue to do so aware of our commitment to reparation. Will you please pass the next slides?
Well, I have been saying repeat the delaying. Our top priority is safety.
Speaking of our people, in all our operations we have implemented world-class standards to face the pandemic. In Brazil, in Indonesia, we have implemented mass testing in the operational areas and we have already tested our workforce more than once.
It's important to say that we have strictly followed the WHO protocol for test, track and treat. We continue to meet our daily checklists, any screening to our employees that enter our operations.
I was in Carajas recently and it was very important to see how we are flying, what we learn when dealing with this absolutely new situation for everyone. As what the case, we did Itabira for example.
On another front, we continue to implement the HIRA. Our indemnification and risk treatment program.
In 2020, we have already completed its implementation at 11 sites, we've another 47 planned by the end of the year. We are so implementing HIRA for them safety starting now in August.
Speaking in them safety, we continue to make progress on our de-characterization plan. We are advancing with the work for the completion of the Brumadinho dam and the construction of the containment structures.
Finally, Engineer of Record mentioned in the last call continues to support improvements in the safety standards of our dams. Will you please go for the next one?
Safety also evolves the care for our communities. We continue to support society aware of this special role we're have in the economy.
In the city of Parauapebas for example, in a partnership with the City Hall, we have made mass tests available to the population. Parauapebas was the first municipality in Brazil to do mass testing with the PCR exam.
At the second quarter, we had already disbursed R$470 million in actions to fight the pandemic in our operations around the world. I'll like to stress that is not just about financial resources.
We are working together with the communities and with the authorities as in Parauapebas with the expansion of the capacity of the hospital there and the construction of one field hospital which we constructed and operated. As you can see, our obsession with safety continues with great discipline from our teams and collaboration with communities and authorities.
Would you go for the next, please? Right.
We're doing our new pact with society, we continue to evolve in our ESG judging. Recently, we took important steps with the creation of the nomination committee which aims at the evolution of our governance model in which we work already for the election of the board in 2021.
In the announcement of our chief compliance officer responsible for managing our third line of defense is strengthening or evolving us. Also, we are doing firm in the ESG gaps closure plan.
We have a target of closing 10 gaps this year of which we already closed three. The formation of the audit committee, the disclosure of management compensation and the release today of our tax transparency report.
On the environment front, our mission regarding climate change is even more up-to-date. We announced last quarter that we work to reduce 32% of our emissions in scopes 1 and 2 in line with the Paris Agreement.
And very important, we have an ongoing roadmap to achieve these ambitious goals. When we're looking at scope 3, we recently announced a non-binding agreement with Kobe Steel and Mitsui to establish a new company targeting on supplying low-carbon metals to the steel industry.
This new company we'll use existing and new technologies such as our Tecnored and the Midrex Process. And reais prioritizing ESG factor is so important.
Because we believe that integration of ESG in our routine we would be essential for Vale's de-risking. Please, the next slide.
As a third point of our de-risking, we continue to stabilize our production and meet the restrictions that were imposed by the authorities due to the pandemic and our own safety measures, this processes has been very challenging. And example of this, is that we operated with four steps and pace them to protect our employees.
As a result of what I explained about testing, tracking and treating people. We know those who did not test positive but have contact with positive cases were quarantined.
Our vision was impacted, so that we could maintain a safe work environment and continue to operate. We put news that since June, we have been able to plan our production and maintenance without any restrictions.
Also, we had important achievements in the resumption of our production in Iron Ore. We had to restart Timbopeba and then speed up of the production phase in June and July.
We have moved onto a very strong second half aiming to meet the guidance for the year. We still have some steps to follow in the resumption plan and in this scenario we'll give more details about them soon.
BASE Metals, we continue to bear the fruits of the good work carried out in North Atlantic. With robust nickel production since the fourth quarter '19.
Voisey's Bay mine operations resume safely one month ahead of schedule after three months in care and maintenance as a preventive measure or for COVID-19. In relation to VNC, we continue to negotiate the definitive sale of that asset to New Century.
The transaction that guarantees the continuity of VNCs by this new operator. For this, we have negated a commitment of $500 million in the financing package for that VNCs continuity.
In Coal, we changed the challenge quarter highly impacted by demand which in turn impacted in our production. We continue to be prepared to start the revamping of the assets as soon as possible as we can guarantee, as soon as we can guarantee the logistics for renting new equipment and materials on the side.
Looking a little bit further to conclude with this sublime and highest safety standards, we will resume our production capacity of 400 million tons of iron ore by 2022. Will you please pass the next one?
Lastly, casual discipline is fundamental to the de-risk of Vale; a point that we have reinforced on several occasions. We do have capital allocation.
It mainly serves three purposes. 1) Our commitments.
For example, Brumadinho and our own financial debt. As I said, we are making progress on all those response.
Brumadinho specifically we have provisioned $3.4 billion having a rate span $2.6 billion in the reparation which has been progressing consistently quickened and with quality. Next is safety and operational continuity.
And for these aspects we have any investments around $4.5 million to $5 million for the next years. Of course, includes replacement projects and some growth initiatives.
And finally, the remuneration of our shareholders. Therefore, we believe that Vale fusing the necessary conditions to resume the payments of dividends.
Our commitments are ongoing, our financial position is robust to meet this commitments. For this reason, Vale's board of director with the support our executive board restored the shareholder remuneration policy.
Well, to conclude our commitment is to continue to do everything we can to ensure the safety of our people in our operations. Finally, I'll like to thank all of our employees and partners for their efforts in recent months.
I'll now pass the floor to Spinelli who will give more details in the Company's resumption plan and afterwards Luciano will give some details about our results in the second quarter. Thank you very much for your attention and let's get back to you on the Q&A.
please, Spinelli.
Marcello Spinelli
Thank you, Eduardo. Well, we know that you have some questions about iron ore production.
I want to address the answer in three blocks of information. So, firstly, it's important to emphasize that we have a plan to resume capacity to 400 million tons by 2022.
We are sticking to the plan and we know what to do that we have to do. Secondly, we have obviously we had an additional challenge after COVID.
So, we had to change many things. I want to remind you that four main issues that we faced in after COVID.
So, first one was related to absentees. So, now we are 1/3rd of the peak that's happened in April.
We are dealing really well in the North even now in the South Eastern and Southern system there. The problem is growing but we so far so good.
We had this stoppage of Itabiruçu and we lost 1 million tons with this and we learned a lot and improved our controls after this case. Those in pact as those two ones represents 3.5 million tons.
For loss, flexibility in our production, you know very well any buffer now we need to deliver, I just give an example that we moved one maintenance from the wet season to the dry season, so we lost more. We are planning to less more production the second half because of that, as already planned.
And just remind you, we already said that we choose to keep our operations running rather than some constructions to improve capacity. So, all those impacts represents a 10 million tons, part of that is already done, part of that is our in our plan.
Well, the third information, the third block of information, I'll drive you in this slide line-by-line. It is important to show that we have a different roadmap for each system that we have in Brazil.
So, but it's important you see once you drag your attention about this. We have some options, rear options not only return or give more efficiency to the system, we'd have new assets that we can give more confidence to return our operations in this year and next year.
So, Southern system, what kind of challenge we have there. We are more exposed to the upstream dams.
So, we have this sequence that we already told you many times that we need to test impact of the operations in the dam, return to dry operations, the wet operations and the blasting. So, in the first half, we improved our operations in Vargem Grande.
We are now back in our full capacity in the mine side. But we still have restrictions to deliver this to the pipeline because we have some one part of the conveyor belt is close to one of the dams.
The second half, we have two main improvements here. First point is, we need to move and go back to resume the operation of Fabrica.
We didn’t do this yet, we have the plan. We need some authority's authorization from the -- and the prosecutors.
We already have this plan with them. We are not counting on this production for this year but we'll be back in next year.
The second point here is about Maravilhas 3 dam and again then once you drag your attention about this, this is a new asset that we give the possibility to return to try production for Vargem Grande and we can have the full operation in 2021. Second line is about Southeastern system.
It's a little bit different problem that we have here. The challenge is, the problem with upstream dams is now behind.
So, we already resume the operations in Timbopeba we are running the operations and wrapped a processed. We had some trouble with COVID.
And what is the main points that we need to address into second half and next year. I want to remind you that we are moving from a common operation that use dams to an operation that we need to future the tailings and thrice tag the tailings after that.
But there is a construction for that and with the implementation that will be ready only '22. So there, we use the dams that we have and we lost capacity when we as are as we are assessing two main dams in this corridor.
One is Itabiruçu and the other in Itabira and the other reside in Laranjeiras and Brucutu. We have -- we are really almost done in Itabiruçu in some in a few weeks we're going to have the full assessment and probably right to return the operation and actually return the construction of the improved and the capacity.
So, we need to play in these when you're going to have the full report of the dam. And Laranjeiras is a little bit high.
We still have to improve our assessment, we are trailing some tests. And as soon as you have information, we're going to have the plan to resume these operations.
But it's important to say we also have another option for operations in Brucutu. There is a new dam called Torto that is under construction.
We are not counting on this capacity for this year. Remember that we had some delays or the COVID but waiting to have and that we have a high expectation to have the two operation of the Brucutu next year.
So, there is that. After that we'll have to bridge with the capacity of the dam and the 2022 we move to the dry stacking operations.
The third one is the Northern system. And this is a total different game.
The name of the game here is new pit and the ramp-up of S11D. We had a problem in the first half with a very heavy rainy season.
We had some trouble with COVID and the delay of Morro, that's a new pit in north ranch. What we have in the second half, two operation of north ranch where the S11D is running amazingly well.
We yesterday we had our daily records a 370,000 tons in one day. It's an amazing record.
We are running the run rate of S11D is 111, a 110 million tons for the last 20 days. We and we also have another well that is called Serra Leste, its east range that is coming again.
So, we quit this operation in the beginning of 2019. And now we already have the first permit for the resumption.
And the final permit is expected to August. So, we are running to have the 230 million tons in the next years.
Just to conclude, the last two actually half, two month and a half but we are planning we are delivering our production. That’s when we have many challenges after COVID but from the last 20 days almost 30 days, we were delivering more than 1 million a day.
So, we are committed to deliver our guidance in the lower level of the guidance. We have many challenge but we have great assets to make it happen and the right people.
So, I want to pass to Luciano.
Luciano Pires
Thank you, Marcello. So, a few highlights on the financials, starting by iron ore performance and costs which was the negative highlight of the quarter.
Cost increase from 16.2 to 17.1. And the major corporate here is low production.
Low production has several consequences. So, it reduces the cost dilution and it because of the production below plan, we had many ships awaiting at the port to being loaded.
And the demurrage cost skyrocketed. We had one of the worst quarters ever in terms of the demurrage.
We paid US$81 million for the waiting of those ships, an increase of US$28 million from the prior quarter which in itself is an increase of US$0.50 low per ton in terms of costs. So, we expect for the second half that this will all revert.
So, cost dilution will take off about $2 per ton from costs and the fall of demurrage towards normalized levels will take another US$0.90 off costs. That's why we're guiding towards 14.5 for the second half which is slightly above the 14 we said a quarter before.
And the reason is because of those delays on resumptions for the fourth quarter which would further dilute costs. Now they're in to '21.
So, we will not get that full benefit. But the FX the evaluation already had positive effects in some other parts of the iron ore business.
For example, stoppage expenses, I don’t know if you noticed, they fell from US$3 per ton to US$2.2 per ton mostly on FX. The pellet margin expanded substantially US$22 per ton in the quarter.
Okay, we had US$5 per ton in price, we had US$7 per ton in dividends that only come every other quarter. But half this margin expansion for example about US$8 per ton can be attributed to FX and lower cost performance of our pelletizing plants.
So, once we normalize the iron ore fine situation, we should also see important boosts in our competitiveness from FX. In Base Metals, the results are self-explanatory, great performance production wise for the assets but low sales because of low demand.
I wonder highlight for opportunities for Q3 and after thereafter for improvement of results. First one, sales will be above production.
This is obvious, we've been building inventories substantially and now we intent according to market condition to offload us inventories. Second thing, gold is going up substantially.
Average price 1700 for the second quarter, now approaching US$2000 per ounce. Every US$100 per ounce means an additional a US$11 million in quarterly EBITDA.
So, it's a boost. Also Puma is coming back after finally we were able to do the comprehensive maintenance in July.
It should come back at a rate of 25,000 tons of nickel per year and generate EBITDA. Because today it's a marginal operation.
So, this will boost results as well. And last but not least, Voisey Bay ramp-up.
It was stopped generating expenses, now we will come back and copper production will increase and expenses are going to come down. So, watch out for these factors going forward.
Cash flows, they were modest. Very leveraged on volumes.
The performance only started to improve on volumes by June. As a result, we finalized the quarter with lots of outstanding sales to be collected.
These sales were collected in July already. And just to give an example, in 15 days in July, the cash flow generation of Vale was as large as in the entire first half.
So, the pace of cash flow generation is very different now in the second half than it was in the first half. About the revolver, as we're resuming the dividend policy, we also said that we would repay first the revolver.
We already gave notice to the banks but we're discussing a few small amendments to the contract before we repay and that process should be concluded in August. Finally, I want to highlight an important accomplishment yesterday towards the risking of Vale which is the approval by the Brazilian Controllership Court of the renewal of the concession agreements on our railways both in the North and in the South.
This is very important those concessions were due to expire in '27. They now have another 30 years beyond '27 extension.
It's still not the final milestone, we still have some minor adjustments that will be made by the agency and the ministry but this both Vale was the final major roadblock towards the approval and now we're very positive that we may sign the agreement this year. There are some associated investments.
Those investments are known by Vale since the proposal was crafted two years ago. So, no surprise here and it's already incorporated in our long-term planning; both the sustaining investments and some capital investments to build assets for the federal government.
That was my summary and now let's move to questions and answers.
Operator
Thank you. [Operator Instructions] Our first question comes from Timna Tanners, Bank of America Merrill Lynch.
Timna Tanners
Yes hi great, thanks to the opportunity. And good morning, hope everyone's doing well.
Good afternoon. I wanted to just ask a little bit more about the production outlook.
Clearly the 400 million is the medium term goal and you laid out some challenges in the short term. I was just wondering if how the if you're concerned about the shortfall having added to the mobility of your customers to find alternatives or to produce their own mines or to add to their own mining plans such as encouraging cement deal.
Could you just talk about that and your concerns about the high iron ore price there or the shortfall in supply? And then I was just wondering if you could lay out a little bit more in terms of timing for when we could expect to see further updates on your divestiture plans in coal and VNC.
Thanks.
Eduardo Bartolomeo
Okay Timna, thanks for your questions. I think Spinelli can detail the iron ore perspective.
Of course I think prices are in a sense coalition of leads, so attracts of course, investments that wouldn't be. So, I believe that the supply demand balance is key.
But we see some medium term losses in the supply as well. But Spinelli is the most fit to answer that and I'd come back with the divestitures.
Okay.
Marcello Spinelli
Hi Timna, thank you for your question. Firstly, Vale is the only company that can bring back almost a 100 million tons in the next two years.
So, as I mentioned, if you have some problems, I'm talking about delays of some month but we'll be back. So, this is a very important information.
I don’t have any restriction to high restriction to come back. Secondly we I think we have if we need to supply more, if you have a demand, remember that we have a varied policy that we are really stick with that is the value.
If you need more capacity, that’s when we have the best products to put to happen. We are developing another possibility to some another 20 -- its S11D.
We are under finalizing the project and we're going to submit this to as soon as possible to our board. Again, you're right that the price is high, we don’t see a support for the price and the short-to-midterm actually, remember that we are now bring in more than 50 million tons to the market than the second half.
You are right, that the demand in China is amazing. They have many stimulus for even for second half related to infrastructure.
That we see that all those information that there is now support to keep so high the price. Eduardo?
Eduardo Bartolomeo
Yes, thank you Spinelli. I think just to add in this Spinelli's point, I think we are the growth option that is the obvious one and the cheapest one, that's why we're going to announce we're going to submit by the way to our board the expansion of S11D.
We are to use our logistic capacity. And of course we have to remember our mantra, value over volume, not to mix up the mix.
So, we're going to be able to, doesn’t mean we need to. And on the Clover Montes, it's the same, there's no updates, there is only the unfortunately we weren't able to start the revamp because of COVID.
I think by the way coal was the most impacted by COVID. Now all that means is probably main production but not for COVID.
We had no COVID problem there. But the fact that we were not able to enter the asset to fix it, we will take a while.
So, our first strategy as we've been saying is fix the asset. Then we're going to decide what to do with it.
By then we see, we have good news, I think we had just added more a little more time to New Century to Clover some due diligence and some papers. And but we're very confident that we are going to be able to close the transaction.
That's why we did the relevant fact yesterday. But I think I would like to have Mark to add some color just to give clarity.
Because it's very important to understand that we want and we need solution for VNC, but we want to lead that.
Mark Travers
Yes. So Timna, I believe your question was around the timing and as Eduardo was saying.
We feel that we're in very good position to sign documentation with New Century as well as the French State before the expiry, the exclusivity, in early September. We feel like we're in there in the position to do so.
And then we will go through a period of primarily the conditions around financing, concluding the financing. And we expect that the closing would occur before well before year end.
So, that's the timing. And in terms of its maybe some additional color.
The financing package is I would say is quite well defined. In terms of our current discussions, Luciano was already said that would some of the parameters or the financing package that was said out in our press release, a total of 900 million, €200 million from the French state, 200 million from New Century, 500 from us.
Just an important note about our contribution is that it is starting as of July 1st, so there are expenditures that we're already incurring and will incur up till closing which would be deducted from that 500 million. There is also a differed compensation component in the discussions where we could earn money back based on price in the future years.
And other than that, I think it's shaping up quite well and New Century is coming to the table with a very robust package to continue to hand off this asset to them with us handing it off other than the contribution to the financing. We would pass off the obligations and liabilities to levy to the owners going forward after closing.
Operator
Our next question comes from Carlos De Alba, Morgan Stanley.
Carlos Alba
Hi, hopefully everyone is doing fine. So, my question is maybe Eduardo you can comment on any update on the potential compensation agreement with the authorities in Brazil regarding the Brumadinho particularly the legal exposure and any other provisions or money that the company may need to pay on that front.
And then, for either Eduardo or maybe Luciano, just wanted to confirm the dividend situation. So, the way I understand is the company will pay in August 7, the interest and show this equity announce in December plus then in September subject to board approval, there might be another dividend on the back or the first half performance.
And then next March another dividend on the back of the second half 2020 performance. If you could confirm these that'd be great plus any comments that you may have on outside or potential especially dividends and your share buybacks, thank you.
Eduardo Bartolomeo
Hi Carlos, thank you. I'll address quickly the first one and then Luciano can give some more color on the dividends but you're almost there.
I think we engaged yes with all the stakeholders at Minas. We are actually there's a meeting even today.
So, just to be clear but it is a convergence right, there's many stakeholders and we're not the government of Minas is interested, Vale's interested, well everybody's interested in them getting to a more broader agreement as we mentioned. The big one is really just to get the legal certainty, the governors and the scope correct.
And I think we are how can I say that, we are advancing on that sense because as I mentioned there is interest on the government there's interest from the prosecutors there. So, it's just a matter of trying to meet those stakeholders needs because of what each one has his own priorities and we need to converge.
So, I cannot give you that how can I say timeline for that because it depends on this convergence. But one thing I want to highlight and maybe get to your point in that and in that end that we are doing the reparation because as we speak it's our obligation and we as we are progressing now on that front.
We're doing indemnification, we're doing the reparation there the environment of how can I say that reparation that had a solution for the hybrid problem that they had there. So, I think things are advancing well and of course it's desirable that we can converge and close this to give like a cap in.
And the fact that U.S. I think is important to mention that we already put in a foot note in our balance that we expect an arrangement of I think it will send to help me here, it's just change the dollar, right.
So, around what is in our provision, Luciano?
Luciano Pires
730 to a 1.5. It's on the footnotes.
Eduardo Bartolomeo
Yes, on the foot notes. Yes, we believe those numbers they talk to the projects that we listed with the government.
So, we don’t see any other provisions coming from that discussions, okay. So, Luciano can give some more color on that.
Specifically about dividend, I think it's important that we resumed the policy because we're confident in our business and I think it's in the press release, so I don’t need to go over that. It is that we are going to pay now in August the interest on the one that we announced on December.
There is a second, the first half is the September and then powers on the what you call the creditability that we want to have in the policy. We haven’t discussed yet any extraordinary dividends because Luciano will give you more clarity on how mindset are but of course there we need to know what the how the world our business is in September.
How much you're going to pay March and etcetera. I think you can help me on that, Luciano.
Luciano Pires
Okay. First on the provisions.
Why do we separate on the footnotes that amount of money and why don’t we incorporate in the existing provisions. The list of initiatives and programs and projects being discussed with the government is very adherence to the provisions that we already have in the balance sheet.
So, no change here. The thing is the icing in the cake like the major gift for example for the people of Minas Gerais with such an agreement would be some major infrastructural works already in the identify that have no relationship to Brumadinho.
And then, if and when we get the legal certainty, all the conditions that we want, we would be willing to do those extra up and above infrastructure works in order to have closure on all of this. But if you look strictly on the reparation of Brumadinho, the estimates both the ones we have on the balance sheet and the ones being discussed with the government, they are very similar.
On the dividends, yes, the interest on capital that was the clarity '19, and it's due to the shareholders back then in December '19 will be paid in a week, like next week. And in addition to that, the minimum dividend related to the first half performers will be paid in September.
And it will be decided in September because the board has always the prerogative to increase and pay an extraordinary dividend. And again as you said, in March there will come another dividend related to the second half performers.
When September comes, we will look into our cash position trajectory of the markets, we will have a better idea of the performance on the second half and therefore of how much we will need to pay in March. Remember that first quarter is usually a weaker quarter in terms of cash flow.
So, you need to look at your balance sheet already considering probably the commitment to pay another dividend in March. We'll look at the share price.
For example, in order to make a decision of buybacks. So, all those variables will be considered and towards a decision if any on extraordinary dividends or buybacks.
But let's remember guys, as we're seeing today in the headlines, this is a very uncertain world. So, a little bit of caution is the name of the game here.
Operator
Our next question comes from Alex Hacking, Citi.
Alex Hacking
Right, good morning everyone, I hope you're doing well. Luciano, just a follow-up on the dividend question.
Could you remind us what your balance sheet targets are in terms of net debt? I remember at one point you were kind of targeting net debt of 10 billion but that feels like a lifetime ago and obviously a lot have changed since then.
And so, I'm just trying to remind myself about how you kind of thinking about that thorough the cycle at this point. And then the second question would be I guess to Marcello.
On the 400 million iron ore target kind of midterm, is there any flexibility or latency in your in Vale's ability to achieve that 400 million tons. Or effectively does every single thing have to go correct?
So, those would be my two questions, thank you.
Luciano Pires
Okay Alex, thanks. We said US$10 billion, we continue to stick to it as the target absolute net debt.
Perhaps and maybe in a circumstance like the one we're living right now, you could be a little more conservative. But the way to make the correspondence with the situation we are in right now is our net debt is 4.7 today.
So, it's well below 10 billion. However, we still have 3.4 in Brumadinho related liabilities that we didn’t have when we established that target.
So, in comparable on terms would be at eight for example 4.7 plus 3.4 and that would compare to 10 and that would say okay we are where we want to be, perhaps even a little better which means that pretty much all the accident extra cash flow should be returned back to shareholders. And this is it, that's the way we think about it and through the cycle.
Again, I would say the only circumstance which is different right now is COVID which may warrant a little bit more caution but nevertheless we are where we want it to be.
Marcello Spinelli
Alex, thank you for your question. But talking about flexibility, that's a midterm plan.
But I luckily remind you some new acts and capacities that we worked here before Brumadinho. So, we are we have Gelado that is coming in the North operation.
The plus 10, the expansion of S11D to 100 million tons, we also have as I mentioned the two dams that we give flexibility in our operations in the Southeastern system. We also have new pits are coming into the North ranch, and small pits that can stabilize your operation there.
And say how last years is the East range that wasn’t here before Brumadinho. So, all those assets and improvements are weren't even considering the operations before but obviously we have challenges.
And then if you consider the COVID today, sometimes we have some bumps, sure to make it happen. But some midterm we have also this new capacity that can give us some flexibility rather we wait for the return of the Coleman operation that used to have in the past.
Luciano Pires
And Marcello, and just to reiterate, the 20 million tons that we will submit to the board would add to that package of flexibility as well.
Eduardo Bartolomeo
And then Luciano, just to remind as our old gold time or good old times when Jesus used to be our one big barrow and axle, there's nothing more on that. So, we can go up on that not need them and little bit more longer to 260 on the North because if we needed right.
So, there is a not in his two to three years' time horizon but for sure we have a huge flexibility on the infrastructure both on the South and then the North. We just got and need to get back the mine, the mine fronts and the dams in the South as we move into -- and explain on the immediate term and on the medium term.
So, I think we used to have even more than 400 million tons of the available capacity. So, we need to, we do have flexibility.
Operator
Our next question comes from Jon Brandt, HSBC.
Jon Brandt
Hi, good afternoon. Thanks for the opportunity.
Luciano, first I wanted to ask you about the working capital. I know there is about US$1 billion in working capital increase and I know a big part of that was because of the production in the sales in June plus a higher percentage going to China.
Should we and it sounds like a lot of that is reversed out in the first 15 days but I guess I am wondering should we expect the complete reversion of that US$1 billion in the third quarter even as production continues to increase into the second half? And then my second question is just related to the US$560 million provision that you took for Samarco and Renova.
Could you just maybe give me a little bit of clarity as to what was driving that, was it just sort of broad based increase across the variety of different things. And then if I could just confirm the 400 million tons in production that you are expecting in 2022.
Is that for the year or do you expect to reach a run rate of 400 million tons by the end of 2022? Thanks.
Luciano Pires
Okay. Just a color on working capital.
So, we had sales outstanding of about 5 million tons at the end of the first quarter and then we have at the end of the second quarter about 11 million tons. So, 6 million tons times the current price, just that we have over 600 million of buildup in working capital in terms of accounts receivable.
Then you have the provisional price which is very strong, it adds a little bit to that. So, it's basically explained by the better rate of production in sales in June compared to March which is the close of the prior quarter.
So, these collections are already happening. So, as I mentioned most of these sales were already collected in the month of July and the cash flow generation in July is already were approaching the end of the month is already substantially higher than for the full first semester of this year.
And when you look at the third quarter end-to-end, it is expected that there will be outstanding sales also at the end of the third quarter, so therefore I would say what we're seeing here is a kind of a normalization of working capital at a higher level because it's normal times you would have more sales outstanding than what we ended up in the first quarter, right. So, this you will not recover at that working capital but collections will be much higher.
The fourth quarter will be the same. So, we will start the quarter with a lot of collections but we will end the quarter also with many collections.
Maybe only on the first quarter of 2021 when usually because of seasonality we produce less, then you collect a lot of money in January however in March then you have lesser sales but hopefully still better than then this year. So, that's the on working capital.
In terms of we have another provisions, the agreement which was signed with the prosecutors, so and after Fundao, the Fundao tragedy, there was an agreement signed with all of the authorities shortly thereafter the dam breach but the prosecutors only came into the agreement in June 2018. And there were many changes in the agreement including a provision for a re-scoping of the agreement two years down the road which is due in 2020.
So, a review of the programs of the amounts and everything else. That review, that amendment to the June 2018 agreement was not done because of COVID.
So, the dynamics but it's in your early stages. Maybe it's going to be certainly a work stream for the second or the entire second half but we already have a good color about some of the changes which are coming.
So, we already have color about the results of some studies, what the programs will look like when we make this amendment and number of affected people and so on. So, this is kind of an anticipation of that re-scoping that is already provisioned for in the agreement signed in June 2018.
And if I could may jump directly here, the 400 million will be run rates at some point in 2022 we'll get to a run rate of 400 million but not the full calendar year will be 400.
Eduardo Bartolomeo
And more importantly, Luciano, you use it if needed, right. So, there's an another thing.
So, we needn’t build that flexibility that was asked with prior. So, we need to, we're not saying that we're going to shift or sell or else 400.
We're not giving guidance, we're just saying that we are going to put our assets back to a 4 million run rate. We even had large numbers but we believe that is a reasonable target to be in a run rate for 2022.
Jonathan Brandt
Yes.
Operator
Our next question comes from Andreas Bokkenheuser, UBS.
Andreas Bokkenheuser
Thank you, very much. Just two effectively incoming investor questions.
Can you provide a little bit more clarity on how the negotiations where the State of Minas Gerais is going about any liabilities relating to Brumadinho. Also in terms of timing and where do you stand versus what the other part is asking for at this point in time.
So, just giving a little bit of clarity around that. And secondly if you would, just in terms of credit buybacks or bond buybacks, any thoughts as to whether you would think about buying back Samarco bonds given where they're trading at this point in time; those are the two questions.
Thank you very much.
Eduardo Bartolomeo
Okay, thanks Andreas. We'll be pointing out that we are on the table with the people say the agreement is with the persecutors not it's with more people in there, right.
So, there is the state of Minas Gerais and then and the agreement there is the public defenders, there is the prosecutors, and there is Vale. So, we stand exactly in the discussions of how we create a right governance, how we create gaps, and how we create the scope to be executed.
Because most importantly we want to how can I say that to get the responsibility to execute things that can be executed. So, that's one of the most important matters and of course I have legal certainty about the civil actions they are undergoing now.
So, those are the key issues that we on the table converging this four main stakeholders are discussing now. Actually I mentioned there is even a meeting today about that.
So, there is no timeline because they of course there are divergences but not necessarily on value because I think you're asking more concerned about what we perceive as provisions and I think Luciano mentioned that before on the last question that we are very comfortable what has been provisioned. And the footnotes that we put in our balance because we discussed that with the government, with everybody on the list of projects and not only those compensatory projects but on the reparatory as well.
So, we believe that the numbers that we are working in either in our provisions and in the footnotes are more than comfortable to strike an agreement. That's not what impending our agreement now, it's much more on the governance and much more on how we create a legal certainty to be sure that we will be able to execute what is supposed to do.
So, I think this is and I think if Luciano can add a little bit more on that part and then go back to the buyback, I think it's the same as we mentioned before. It will be of course something that we need to assess all the time.
Time is not now because of course we just resume our policy. In September, we can take a look again and I think well of course we can submit to bar but I think there are so many variables right so that I think Luciano can explain again how we see this, how is our mindset around, right?
Luciano Pires
Eduardo, nothing to add on the provisions, you were comprehensive. On the credit buybacks that Andres asked, bond buybacks they will on Vale, they will come back to the table at a moment in time when we -- look many most companies are going through that crisis with a greater cash balance.
And even if we're not talking about net debt levels here, the amount of gross debt and the amount of cash that you want to hold, I would say its higher now than pre-pandemic. So, therefore we need to, we're not in a hurry to continue to buy back bonds or that because of that.
We would prefer at least for the next couple of quarters to have a greater cash balances. On Samarco, I am sorry but I cannot do any comment on this because of the ongoing legal arrangements for the -- with the creditors.
So, I cannot comment on credit buybacks.
Eduardo Bartolomeo
I'm sorry Andreas, I confused the question. I thought we were talking about buybacks from Vale, sorry.
Sorry, for that.
Operator
Excuse me. This concludes today's question and answer session.
Mr. Eduardo Bartolomeo, at this time you may proceed you’re your closing statement.
Eduardo Bartolomeo
Okay. Thank you very much for your attention for the questions.
I think we need to, we had a more comprehensive explanation in the beginning but was necessary I think to give you clarity on how we see. But I want to separate things in two to then, two to length that's more time.
One is the most immediate what people expect about the second semester. And I think we built a very strong basis even after COVIDs to be ready to deliver in our guidance and our commitments.
But I would like to stress that we're not in nice plate in Vale, we are in a marathon. We are looking to de-risk this company profoundly.
And we need to see those five, those four elements that I mentioned in my initial comments as interrelated. They are not separate.
If I say "Oh look, like now we pay dividends, so?" Now, no.
Dividends just show that the Vale management has confidence in their in our business and we see that we can we have robust financial position to face our commitments. We need first of all as I want to again emphasize we need to repair Brumadinho.
We are advancing, we need to do much more and we are doing. We need to improve our safety, we are doing that.
We need to effectively turn around the safety perspective of the company and we are trying and we will do that and we have a name to be one of the safest and maybe give an obligation to be among the safest mining company in the world. Third, is the resumption of capacity.
I think the questions were around that, how much you can do in the second semester but what is our goal in the medium term? We need to get there with consistency.
We cannot just go and set a target. We need to be delivering a quarter-by-quarter consistently and we will do that with safety.
That's what I tried to say when I was doing my initial comments. If we need to postpone, we'll do it but we are pretty confident that we have the assets, we have the people, we have the logistics for that and we will resume as safe as possible or ASAP.
And finally, it's the dividend. The dividends or the capital allocation, I think it's very important to bear in mind that Vale is extremely conservative.
So, we are extremely focused of course on the regulation of our shareholders but we need to look at the word more broadly. So, in this world as just to conclude, is a new world and a new world that exactly we don't know a lot about there.
So, we need to keep our balance sheet extremely strong and of course if there's any excess we will get back to the shareholders. But our commitments as Luciano mentioned are pretty high.
In a nutshell, again I would like to thank you for your attention. And remember, that we have these four elements to de-risk Vale and we are working with our team powerfully to get it there.
Okay thank you and see you in the next call.
Operator
That does conclude Vale's conference call for today. Thank you very much for your participation.
You may now disconnect your line.