Feb 28, 2021
Operator
Good morning ladies and gentlemen, welcome to Vale's conference call to discuss 4Q '20 results. At this time, all participants are in a listen-only mode.
Later, we will conduct a question-and- answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded and the recording will be available on the company's website at vale.com at the Investors link.
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 slide changes has a few second 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 De Salles Bartolomeo, Chief Executive Officer; Mr.
Luciano Siani Pires, CFO; Mr. Marcello Spinelli, Executive Officer for Ferrous Minerals, Mr.
Mark Travers, Executive Officer for Base Metals; Mr. Carlos Medeiros, Executive Officer for Safety and Operational Excellence; Mr.
Alexandre Pereira, Executive Officer for Global Business support; Mr. Luiz Eduardo Osorio, Executive Officer for Institutional Relations and Communication; 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 4Q '20 performance. And after that, he will 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 De Salles Bartolomeo
Well thank you, good morning everyone. First I hope you are all well.
2020 will be remembered as one of the most challenging years in our history. As we are making progress with the reparation of Brumadinho and resuming our iron ore operations, we saw the COVID-19 pandemic changing our lives around the world.
In early December, a few days after our meeting at Vale day [Ph] we all got more hopeful with the start of vaccinations in several countries. However, our priorities remain intact, safety, people and their reparational [Indiscernible].
While the government’s vaccination plans are advancing Vale will keep it’s guard high. The safety of our people comes first along with the reparation of Brumadinho.
Next please. As I have been saying at each of our meetings, Vale is determined to fully repair the damage caused by the Brumadinho tragedy with sites contributing even more to the development of the communities where we operate.
A major step towards this direction was the global agreement announced on February 4, signed with the public authorities who are the legitimate representatives of the people of Mina Gerais. The economic value of the global settlement was R$37.7 billion, which includes obligations to pay and to do in addition to expenses already incurred by Bob, such as payment of the emergency aid and environmental recovery works.
However, it's important to note that with this, we have a clear number on our balance sheet from obligations to compensate and repair Brumadinho, eliminating a great uncertainty related to our provisions. The berline is that this governance allows for a speedy reparation and compensation, the legitimacy of these actions and the legal certainty elements that we have always emphasized in our meetings as fundamental for the settlement.
I invite now, Alex D'Ambrosio, to provide a little bit of more details about it.
Alexandre D'Ambrosio
Thanks, Eduardo Well, as Eduardo was just mentioning, the agreement has two essential components from a Vale’s perspective. First, it brings finality to all class actions, and to all collective lawsuits.
And second, it has what we call legal certainty, to the extent that it was signed by all the petitioners of those class actions. In fact, that was signed by the Attorney General himself, Brazil's Attorney General, and it was ratified by the court of appeals of Mina Gerais which is the highest court in the state.
So the agreement resolves all claims relating to collective moral damages, and to compensation to communities and to the state of Mina Gerais. The agreement was structured with both payment obligations and performance obligations.
Vale’s payment obligations are twofold, we established a fixed amount that will revert to the communities directly that were impacted by the disaster, and will be distributed and invested according to criteria to yet to be established by the public defenders in consultation with the communities. And another fixed amount will be used by the state government for infrastructure and mobility projects in the regions that were most impacted by the disaster.
These amounts represent approximately two thirds of the value of the agreement, these are the fixed amounts, and Vale will deposit these amounts in a judicial account to be managed by the Court of Appeals. Vale is then released from payment obligations upon depositing these amounts in the court, and we will have no further influence in how these amounts will be employed or dispersed.
So all we do is deposit these amounts and we are released from that part. The second part of the agreement relates to Vale’s performance obligations.
And these are essentially environmental recovery obligations, monitoring water quality, and the continuity of certain health and safety programs. And these obligations were constructed by jointly with the petitioners and are based were based on independent technical studies, which became part of the agreement and were validated by all the parties involved.
So for that reason, we're confident that these measures these obligations are adequate and sufficient to address the reparations for the region. Vale will be released from these performance obligations once we show evidence of completion step by step to the court.
So I think that wraps up, that explains the global agreement in a nutshell. So back to you, Eduardo, thank you.
Eduardo De Salles Bartolomeo
Thanks, Alex. Finally is important to note that the reparation of the individual damage will continue.
It's not part of the global settlement. Since 2019, almost 9000 100 people have entered into civil or labor indemnification agreements with Vale, which totaled more than R$2.4 billion.
This is evidence that we will spare no effort nor resources for a fair and quick reparation for Brumadinho and the region. Next, well, we are committed to transforming Vale's culture into a culture that puts people and safety at the center of every decision we make.
We have our levers to accelerate this transformation. And I highlight the role of our management model the VPS in this process.
At the end of 2020, we have completed the first global assessment of the VPS implementation. And now we find the plan to address the gaps identified.
We also continue to accelerate the implementation of our new tailings and their management model and other process safety tools, such as here previous mentioned year. The message is clear.
We do not tolerate deviations in conduct and procedures which expose people to safety risks. The quarter transformation, which is underway has the full commitment of the executive board and our board of directors.
Next, as you know, we have a plan to address our ESG gaps, which was built based on what we heard from communities and society. This first plan, first link compares to 52 gaps, with 37 already addressed, of which 11 were resolved in 2020.
Continuing with our open dialogue and active listening, we identified a 11 more opportunities for improvement. Some important gaps in governance have already been sent by the board of directors for shareholders decision at the extraordinary general meeting called for March 12.
One of the gaps for example, deals with expanding the number of independent members of the board, which currently has three members reportedly independent, and according to the proposed amendments of the bylaws, we will reach at least seven. The proposed chains seek to align Vale with international governance practices and are the result of a process of listening to our investors.
On another note, to support Vale in its bold commitments regarding the ESG theme, the Board of Directors approved the creation of an executive office dedicated to sustainability. Maria is a fiverr who has extensive experience in making this happen.
We will lead this front and we report to me from March 15. I take this opportunity to welcome Maria Luisa.
And to thank Mr. Osorio for the important advances he has brought in the topic of sustainability.
Osorio will continue with his functions as Executive Director of Institutional Relations and Communications. As it can be seen, our ambition is to transform Vale into a reference in ESG practice.
With these actions, we will contribute to a more sustainable mining and will act in accordance with our new practice society. Well, now talking about the operational performance of our business.
We ended 2020 with the partial resumption of all iron ore operations that were halted in 2019. We are on track to reach the capacity of 400 million tonnes per year by the end of 2022.
In December, we resumed Serra Leste, and dry processing, Fábrica. In January, we resumed pellet production in Vargem Grande.
We ended 2020 with a production in line with 2019, but stronger than we were when we started the year, in a very complex condition given the pandemic scenario. We managed to replenish our inventories ensuring the maintenance of our product portfolio and we expect more robust sales for 2021.
A fact that you have already noticed in our fourth quarter result, which became our second best in the history of iron ore, which was obtained by strong sales and prices. In the long term strategy, we were granted the necessary licenses to implement the Capanema project, which should start operations in 2023 and will bring 14 million tonnes of capacity value in the first years.
It's a project of almost half a billion dollars, an important step towards the creation of Vale’s capacity buffers. In short, we are taking the necessary actions to ensure the stability we need to operate efficiently and the growth options required by the market.
On these topic, Marcello Spinelli will present more information to you ahead. We also had an excellent quarter in base metals.
I would like to highlight also Puma’s record production and EBITDA in copper we also had a record EBITDA. And in Salobo we operated with cash cost at the lowest level in its history.
Mark can give more details about it in the Q&A sessions. To conclude, we remained firm on the risking Vale to build a better Vale.
Summarizing for you the most important recent advances, I would like highlight would be first, the global settlement for the integral reparation of Brumadinho. Second, the progress of Vale’s cultural transformation into a safer company.
Third, the continuous and consistent resumption of our production under safe conditions. And finally, keeping the focus on capital discipline, addressing our cash drains, prioritizing organic projects in ferrous and base metals where we are competitive and allocating an important portion of our cash generation to the payment of our shareholders.
About this last topic, we resumed our shareholder compensation policy last year. We announced together with our results the approval of [Indiscernible] in the amount of R$4.26 per share, referring to the second half of 2020.
This decision reflects our confidence in Vale’s cash generation capacity, our healthy balance sheet, and above all, our commitment to return value to Vale’s shareholders. Finally, we intend to continue creating and sharing value with our stakeholders.
Most importantly, I assure you that we are doing and we will continue to do everything we can to ensure the safety of the people in our operations in our communities. Also, I would like to thank our 123,000 employees and contractors, our suppliers and customers who made it possible for Vale to overcome a 2020 with all the challenges brought by the pandemic.
Thank you. And now I give the floor to Spinelli who will provide more details on the iron ore production resumption.
Thank you.
Marcello Spinelli
Thank you, Eduardo. Good afternoon to all.
Well, we've been talking about the reception plan to reach the 400 million tonnes. It's always a good time to reinforce our commitment to reach this goal next year.
And I want to emphasize Eduardo also said that, that we have another an additional 50 million tonnes that's our buffer capacity in Capanema product is a good example of an action in this direction. Well, our production guidance for 2021 is a range between 315 and 335.
We are really confident to deliver this this goal this this year. So you had a chance to see the production report.
I don't need to go in real details here. But you saw that we, we have a checklist so we can follow up all the achievements, one by one in the checkbox in the production report, but I want to draw your attention for five points here.
The first one, as Eduardo said, we, we bought back all of our sites of our operational sites, that's a good sign that you're ready to grow now. Second, we we've been progressing, bringing the authorizations and permits to test the operations in the south eastern system.
So now, Fabrica is already operating in dry process in now, we already have the license to test the wet processes, it's so very important information because we can increase volumes in quality in this site. The third formation, you saw this week, we just announced that we brought back the Itabiruçu dam, its Itabira complex.
Itabiruçu will be really important, we have a remaining capacity. And we have to breach these operations today to the filtration process, that will be in place in early 2021.
We also need to finish, finalize the raising works that we have in Itabiruçu dam. We are not in a rush, it's important to emphasize that this capacity in the future in Itabiruçu dam is not in the critical path for the full operation in Itabirea.
And the way to do this in with a very safe mode, we need to go into days, and check the mode we are doing this operation. So we don't not in a rush to do that.
The fourth information is about the North. In the north range, we've been talking about that we need always to bring new beats online.
And this is a new information here, we just approved in our board of directors. The N3 mine, it's N3 pit.
It's like [Indiscernible] we are now with all the contractors in moving forward the government actions activities, and we're waiting for the final license in the first half. To finalize this section, I’m going to talk about Chimba Pebble.
Last year, we brought back three lines in a six. Now operating in, in wet processing.
We have a milestone to the end of March to bring back the remaining three lines, we are already testing those lines and we expect to bring earlier than then we have in our plan. But we will let you know as soon as we have the full operation there.
In the next slide. We have the roadmap for this year.
So I'm not going to talk in details about this. But if you have any question please let me know in the Q&A.
But I want to give you two more information. Last year, we mentioned the linear effect.
So we were worried about this. The fact that in the consequences in our operation we had in the end of the year last year, a impact in our operations with a rainy season we call the winter in the north, we start the rainy season heavy rainy season.
But suddenly in January, we had the great opportunity in the north with a dry month. So we could take advantage, increase our production in this in this month.
So just to conclude with all this new assets, resumption in many operations and also this possibility to increase patient in the north in the dry month. Now we already have now the winter in place since we since the second half of February.
Combining all these we are really confident that we can deliver higher volume in Q1 this year, compared to Q1 last year. So I’ll pass to Luciana.
Luciano Siani Pires
Good morning and good afternoon, everyone. Great results, second largest EBITDA ever.
Interestingly, once we saw the reports of the other mining companies of this their second half results, Vale’s EBITDA was actually the largest in the industry. Obviously, there are circumstances to that because of the relative prices of iron ore to the other commodities, but it shows the potential of our business because we are also operating under a lot of impairments in our operations.
And still we posted the highest EBITDA in the industry for the second half of 2020. And we've got a lot of momentum.
Cash flow wise, for example, we increase our accounts receivable by 1.3 billion in the fourth quarter. We already collected all those proceeds in this quarter.
Together with the sales of the quarter the volumes are better than they were last year. So there's a lot of momentum, Carajas premiums are very good right now.
They ended the fourth quarter at $12, $13 per ton, they now stands at $25 per ton. Pellet premiums are on the rise for the second quarter, they will be above $40 per ton, and they were very compressed in the fourth quarter.
So there's a lot of positive momentum for the business in the first and second quarter of this year. Talking a little bit about costs, just a highlight.
Although you saw costs increase in a quarter, from 14.9 to 15.3. The relevant measure for costs is costs without the purchase of third party ore because of the increase in ore prices.
Now we're paying over $60 per ton in our opportunistic purchases of iron ore from third parties. When you average all of this, costs have increased.
If you strip out this effect, we have cost stable at below $13 per tonne. It's a better measure of our productivity.
We can discuss further the trends of costs in iron ore. In base metals, as Eduardo said on Onca Puma first full quarter without any problems on the operation be it in junctions or problems of maintenance in furnaces or whatever $50 million in EBITDA at today's prices, it could be generating as much as $70 million in EBITDA per quarter.
So from zero in the past two years. So this is another contributor to EBITDA going forward.
Negative cash cost in Salobo for the second quarter in a row. So pay attention to the prices of by-products very good for copper not only for that in Canada, there's lots of byproducts that are selling at good price prices.
And that's the reason why also the EBITDA for base metals was above 1.1 billion U.S. very good performance.
We had a very interesting quarter in reshaping our business. A lot of movements in our portfolio.
We collected more than 600 million in divestitures this quarter. For example, we sold a 25% stake in a coal mining China, a stake in a pelletizing plant in China.
We sold our Palm oil company with over 3000 employees Yes, Vale had a palm oil company not anymore. We finally left our Potash Hill Colorado project in Argentina.
We collected the proceeds from the divestiture of PTVI. And looking forward we also signed the agreement, the binding port option agreement with a consortium with the presence of Trafigura for the sale of VNC which we shall discuss in the Q&A.
We are hopeful that this may come to a good conclusion. We also signed the heads of agreement with Mitsui, we're working into the definitive documents for the exit in Moatize.
So a lot happening in a portfolio. And for those of you who also look at the portfolio and do some of the parts, valuations of Vale, we have this company that just general cargo company called VLI, which we're studying the IPO of that company in Brazil, in the NDS, the Brazilian Development Bank exercise an old option call option that they had against us.
And that option that they exercise values or stake in this general cargo company at around 1 billion U.S. dollars and probably more given that the Development Bank exercise because it sees prospects on this investment.
And also our stake in mosaic with the very good performance of mosaic very good improvement in margins costs coming down lots of they're doing their homework, it's now worth also more than 1 billion US to speak. And finally one last comment on the from a financial perspective on Brumadinho, the definitiveness of the provisions.
You saw we added provisions on three different lines. First de-characterization of them 617 million U.S.
They mostly relate to the end of the studies for de-characterization we determined where we need new backup dams to be built. So these were accounted for.
Future changes in those numbers should be marginal. There are a few small tweaks that need to be also assessed the cost of the characterization and minor engineering adjustments could be made.
But pretty much in terms of big numbers, we are now very confident about the numbers for de-characterization. In terms of the global agreement, you saw 3.9 billion US being added to our provisions, as Alex described, two thirds of that amount to be spent is a fixed amount.
So there's no uncertainty around those and the other remaining third relates to performance obligations. Obligations, which by now have been widely studied, technical studies were mentioned.
And if the -- if changes, if there are changes, if any, they are towards just a third of the amounts to be spent, not to the full amount. And finally, we added there are additional provisions beyond the agreement beyond the characterization which relate to individual indemnifications.
And which relates to kind of ARO, Asset Retirement Obligations on the old site of the the mind that collapse the dam that collapsed. So some geotechnical studies, we need to recover the area.
So we added another $US237 million now we're also concluded those studies. And within those 237 there are also three months of extension of the emergency payments as a precedent condition for the agreement.
So bottom line is unless there are minor or engineering adjustments on your techniques or performance obligations, which are a smaller proportion of the whole. The provisions in the balance sheet now are pretty much done as regards Brumadinho.
And now let's move on to Q&A.
Operator
Thank you. [Operator Instructions] Our first question comes from Timna Tanners, Bank of America.
Timna Tanners
Hey there, Happy Friday. Thanks a lot.
Wanted to ask just two if I could. One is, you know from the slide deck, it's clear that you're running at already within your range, even though the first quarter tends to be seasonally weak.
So I was just wondering if if, you know you continue to progress. If it's safe to say that we should assume you'd be closer to the high end of your guided production range.
And then my second question is just, we got a lot of questions recently about potential government intervention and higher taxes. I think you know, why?
Wondering if you could comment on that. Thanks a lot.
Eduardo De Salles Bartolomeo
Okay, Tina? Oh, I'll let Spinelli bring your first question.
Happy Friday, by the way. And, and I'll get back to the government discussion.
Marcello Spinelli
Hi, Timna, thank you for a question. So we are yes, we are really happy about the this quarter.
We are much more prepared for the rainy season than ever. We, every time we learn with this, and we can bring other lessons from the past show.
So everything is in place. And we expect to deliver this as I mentioned this quarter better shape than the quarter before in the first quarter last year.
And we are in the guidance. We are confident to deliver the guidance, the beginning of the year, obviously, but we are really confident to deliver the guidance.
Eduardo De Salles Bartolomeo
Okay. Timna, by means of government intervention, we have to understand the trajectory that Vale has been going since we went to the new market, right.
Four years ago, we started to establish several changes inside the company. As we speak, in November last year, the shareholders agreement has ended.
So, we are under what we call it through cooperation. Obviously, the new the new election of the board that is coming on April will consolidate that movement, but that movement has to be understood.
As I mentioned before, historically, when we started the new market, then when we brought to independence, then we had the third independence. We created the nomination committee just recently, the nomination committee, as I mentioned in my initial speech was called an a general assembly, extraordinary, extraordinary general assembly, to improve the governance to prepare ourselves and the company to this next step, we are going to have as just an example seven in the panels on the board.
So we don't see any kind of possibility of government intervention involved, because we are as a diffused control company, by the guided by our shareholders and by who has the interest on the company. So I don't I don't think there is any issue for Vale.
The fact of tax increases, of course, sometimes there are some noises. I would like to ask, Alex, just to clarify one, one recent noise because it's natural that there are some, some tax movements that we are we are talking about the tax reform.
But the tax reform that has been played by the government, the federal government is always on the principal, there's going to be an equilibrium. Brazilian is already really burden on taxed.
So taxing is not the best way to improve our economy. But I think if you're referring specifically to CSLL, I think Alex can give some more color on that.
Alexandre Pereira
Yes, thanks, Eduardo. That's a very good question that Timna, Timna raised.
In fact, as Eduardo said, there every now and then we see the initiatives for increasing taxes in the mining sector. And recently, we saw a new tax bill proposing to increase this, what we call the social contribution tax, the CSSLL.
And that's been brought in the lower house of Congress. We're very confident that this bill will not succeed because we view it essentially as unconstitutional.
It violates the constitutional principle known as isonomy to the extent that it adds another layer of taxation on a sector that's already very highly taxed, and effectively that it discriminates against this sector. Also, it doesn't, it's not clear in the proposal about which entities will be taxed, and which will not.
There is no justified reason, in our view, to increase taxes on the mining sector, much higher than in any other sector. So and also, the project fails to take into account global benchmarks for taxation in the mining sector, which has always been a rule in defining the amount of taxes in Brazil.
For these reasons we're very confident that this new bill will not evolve. But I'd like to take the opportunity to address a point that on the other part of Timna's question about government intervention and to add just to complement what Eduardo said, everyone knows that there are some golden shares that are still at Vale that are held by the government and the opportunity to clarify that these golden shares have veto power and very limited amount of matters and I will state which matters these are for clarification.
First, the government the federal government with these golden shares can veto a change in Vale’s name, a change in Vale’s location of Vale’s headquarters, change in Vale’s corporate purpose with regard to mining activities, meaning that we cannot cease to be a mining company. Any liquidation of Vale the government would have veto on and disposal or winding down of activities in any part of Vale’s iron ore mining integrated systems, mineral deposits, or deposits, railways, ports and maritime terminals.
And also we can't, Vale cannot change the bylaws with regard to these golden shares, which would otherwise defeat the purpose. So that's these are the only matters which golden shares have veto power.
And that's the limit of government intervention in any of the voting processes. So I hope we answered the question.
Thank you. Back to you, Eduardo.
Eduardo De Salles Bartolomeo
Thanks, Alex.
Operator
Our next question comes from Carlos De Alba, Morgan Stanley.
Carlos De Alba
Hello, good afternoon. Good morning, everyone.
And thank you very much. So a couple of questions.
One is the capital generation was really strong in the first quarter and I know prices remain quite high. So I wonder if you could elaborate as to how you see capital returns to shareholders in the coming in the coming months or should we only expect another dividend in September as per the traditional policy?
And what about share buybacks with some of your former controlling shareholders selling or potentially selling the stake, the store may have been under pressure because of that. Any plans to maybe come in to the market and do a buyback given again, the strong balance sheet and the solid cash regeneration?
And then if I may ask a question on the Brumadinho process, obviously, a very solid comprehensive agreement with the authorities. Just one question on something that was it doesn't seem to have been included there, which is the lawsuit that the prosecutor brought against Vale under the anticorruption law, any update there?
How should we think about that particular process? What are the next steps?
And I guess, what is the company's position towards that? Thank you very much.
Eduardo De Salles Bartolomeo
Okay, thanks, Carlos. Good, good morning for you as well.
It's true, it's cash generation is really strong. We've been being extremely conservative on how we view our balance sheet, you know that because of the, of the commitments that we had, and we just assumed this commitment with Brumadinho, that didn't impede us to pay a solid dividend on this first quarter, first semester, sorry.
So it's a matter of using of the proceeds against the cash generation. And I don't think we would move from our policy of doing that on September.
But obviously, if we have, if you look, the trajectory, even the expanded liability that we have, we are we are going to be under the 10 billion. And now obviously, any excess cash will be returned to the shareholders.
We have a very well behaved if it's a word in English CapEx. We have no nothing in our horizon besides growing our platform to take profits of the cycle [Ph] we're very bullish on proper.
So we're going to invest. We've said that in Vale there.
We are going to expand our buffers in iron ore. Those are marginal effects.
There's not nothing very big. The liabilities are known as Luciano mention.
So the natural way that the money to flow is to the shareholders is I think this is the natural way, as long as we can keep our business growing and safe, the excess cash goes to the shareholders. Specific about buybacks, we always talking about that we are thinking it's something in our agenda.
We're talking to the shareholders and thinking what they see and what they want and, and truly, in our agenda, but it's not nothing that we had taken decision yet. I would ask Luciano to help me to elaborate on that.
And then we get back to the Brumadinho lawsuit.
Luciano Siani Pires
Just to highlight we were paying $4 billion in dividends in the same quarter that we're taking on our shoulders, another 6 billion in liabilities, right? Because there's not only Brumadinho, there's VNC, for the for the divestiture VMC and Hanover, so it's quite as a sign of disposition to return money to shareholders.
That's one thing. The second thing is on buybacks.
We want to establish a track record of paying hefty dividends. That's a goal that we have, so buybacks are subordinated to that.
The second thing is we don't want to be pro-cyclical. So we're going to be very mindful of where we are in the cycle not to to buy it high.
However, it bothers us a lot. The relative valuation if you compare to other mining companies, and the gap has actually been increasing.
So these are all factors that will be taken into account when making a decision.
Eduardo De Salles Bartolomeo
Yes, together with the board rather soon. And I think about the law that governs corruption law.
We think there's no merit than that. But I'm not the legal counsel.
So I asked my legal counsel to just give some more details to you. Okay, Carlos.
Luciano Siani Pires
Thanks, Eduardo. And then thanks, Carlos.
I was hoping you'd ask that question. So I have a chance to to clarify it.
Well, we appropriately purposefully did not include the corruption lawsuit in the settlement agreement, because as Eduardo said, we view it as having no merit whatsoever. Remember that the charges brought in this lawsuit.
They're not supported by the facts. And in our view, they have no connection with anti-corruption law.
As you may recall, by reading the allegations, the lawsuit contains no allegation that Vale corrupted government official. And that is what defines corruption.
And in our understanding, that's the purpose of the anticorruption law. So we also have legal opinions from the lawmakers who drafted the anticorruption law, and who agree with that position.
So, for these reasons, we believe that the charges or allegations will not prosper. And we saw no reason to include that in the settlement and give any sort of adherence to, to the charges.
So that's why we will fight this and we will win this in court. Thanks, back to you Eduardo.
Eduardo De Salles Bartolomeo
Thank you. I hope, I hope we have answered you Carlos.
Operator
Thank you. Our next question comes from Jonathan Brant, HSBC.
Jonathan Brant
Hi, Good morning good afternoon. [technical Difficulty] my questions.
Luciano, I first wanted to ask you, I guess it's sort of a capital allocation question. You ended the quarter with a very high cash position.
And obviously you have some liabilities coming up with the dividend. And I think you bought back some debt that was announced today.
But still cash generation, this quarter should be pretty robust from, collecting on the working capital and high iron ore prices. So I'm just wondering if you can comment a little bit on sort of how you see the ideal cash position going forward and on the global settlement.
I know there's a timeline of payments, but is in terms of liability management, is that something that you can prepay? Or should we expect that to follow the payment schedule?
And then just sort of secondary to that you mentioned, a potential IPO of VLI, and if you could just comment a little bit on the rationale for doing that just given you don't really need the cash is that just to sort of create an unlock some shareholder value? And then I guess the second question for Mark, just as it relates to the copper projects, and not so much to logo.
But, but really the projects that you have in Southeast Asia, which I understand are pretty attractive, given the high copper prices? Is that something that you're looking to potentially accelerate?
Or how should we think about a timeline for those projects? Thank you.
Luciano Siani Pires
Okay, Jonathan, thank you. Our cash position is way too high, it needs to be to be used.
The first direction could be pay down gross debt. However, most bonds are trading at a very high premiums because of the low yields.
So we are observing very, with a lot of attention to the trajectory of yields, that started to increase U.S. Treasury yields more recently.
So we will be looking into opportunities to perhaps reduce our gross debt as well. So that's one thing.
The second thing that you mentioned, prepayments of values associated with the agreement that that will be looked into. We might be looking into prepayments of our concession fees for the renewal of the concession, because the interest rates, the regulatory interest rates are really high.
We have the project financed to refinance as well. It is an obligation that was contracted at a time when interest rates were higher, and it embeds the Mozambique risk.
So that's something to be looking upon. So bottom line is we are looking into a number of alternatives.
None of these alternatives have any interference with our ability to pay to pay dividends. But the level of cash is too high and needs to come down and yes, you're right, it continues to increase.
And as you pointed out in Brumadinho itself, there are some lumpsum payments to be made over the course of the next six months significant. But still, the reality is that we need to decrease those cash balances.
Marcello Spinelli
Jonathan, just in terms of the projects in Asia, I believe you're referring to our project in Indonesia called Project Hu'u. It's a project let's call it say in the prefeasibility stage.
Based on what we see, already, we see a very large ore body, high potential annual production of copper, let's call it to around the 250,000 tonnes per annum, but we're looking to optimize that with significant gold production as well. We believe it's a potential first quartile cost mine with about 45 plus years mine life.
So we're currently doing some studies to optimize this looking at recoveries renewable energy options and extending the mine life. We're very, very positive about this project.
And one thing we would do is look towards bringing in potential partners to de risk the project for approval sometime around the 2025 period. There's a very significant amount of study work and to get ready for that project approval.
And we believe this can add some great optionality to the robust copper projects to opportunities that we have encourage us which were outlined in the Vale day.
Operator
Thank you. Our next question comes from Andreas Bokkenheuser, UBS.
Andreas Bokkenheuser
Thank you very much. A couple of questions from you today.
One is on your especially your breakeven cost to China, I'm not going to ask you to kind of forecast freight rates and whatnot. But obviously Vale used to be, a breakeven cost, to produce it to China at about mid $30 per tonne.
I realized that obviously, sustaining CapEx has gone up and so on. But what's your long term goal here?
I mean, you think we're going to get back to sort of the mid 30s. And even with sustaining CapEx a bit higher, I would imagine with some cost dilution, as you ramp up to what 400 million tons, there will be some cost dilution and potentially some cost savings there.
Because I mean, potentially, you could probably unlock another two to $3 billion of EBITDA that's achievable. I would think.
So could you give us a sense of kind of how you're thinking about the longer term breakeven cost of China? That's the first question.
And if I may on the second question, obviously, you're thinking a lot, you obviously got to pass it, you're getting to capacity of 450, even though the initial production rate will be 400 by 2020. Well, annualized by 2022, but full year to 2023.
What takes you to 450? I guess, is the question.
And I realized this is not a 2023. Or it's not a consideration until 2023.
But what takes you to 450? Is that a purely an iron ore price consideration where you say, all right, well, if it goes above 100, or whatever, effectively, then you'll push for 450.
And when do you make that decision? I'm obviously asking because I know today is 170.
So presumably that would be something worth considering.
Marcello Spinelli
Okay, Andreas. Yes, we intend to get back to mid-30s even considering sustaining number of levers for that, one is cost dilution for sure.
The other thing is lowering the pre operational expenses, we're spending a lot of money. And this is impacting our breakeven with idle operations, still, there is some components, which are pro-cyclical in the on the cash breakeven, namely royalties and third party purchases, like the higher the annual prices, the higher the royalties, and the third party purchase costs.
And also sustaining CapEx is going through a bump now, especially because of the intensity of the investments in filtration. So it is not expected that we will have a longer term $7 per ton sustaining capital.
So we should go back in two years’ time let's say two $4 per ton was the those investments are are done. So therefore, we see ourselves as a 30, and even sub $30 per ton if the breakdown in China and when you add sustaining a sub $35 in a medium term in two to three years.
Eduardo De Salles Bartolomeo
So know about the 450, just to be clear Andreas, and then Spinelli can help me with that. The idea behind the 450 is much more on creating flexibility and buffers to our situation and creating grow functionalities in the north.
Right. Although we just announced the Capanema project.
It’s not based on the actual prices, Vale is, truly committed to the value over volume, we are always looking at margins, we're always going to look at the way the market behaves, we're not going to be producing 450 always said we want to have the capacity off 450 to have buffers to absorb problems or, else, even if the market demands, we're able to do the 450 if you can, that something else has been added would be great. But they were looking now and I'm looking at the price of now, to get to the 450.
Marcello Spinelli
Exactly this, we -- this is a decision for any spike of price and the way we manage that is the swing capacity. So we can, regulate the operations in the south or in the north.
We can use the portfolio flexibility to improve premium products or not. So it should bring reliability to the plant to the 400 million tons plant and give optionality to if you have a market for that, but margin over volume is the king for that.
Operator
Our next question comes from Chris Terry, Deutsche Bank.
Chris Terry
Hi, Eduardo and team. I had two questions I wanted to ask.
The first is around production versus sales. So I just wondered if you could comment a little bit on where your general inventory levels are at some of your blending sites and how you're thinking about the build of inventory on any of those planning sites and overall grade optimization say selling products.
And the second question I want to ask is just around the exposure to batteries, lithium ion batteries through nickel in particular, and just wondering if you could give an update on your latest thinking on what the company is working on there. Thank you.
Eduardo De Salles Bartolomeo
Thank you, Chris. Go ahead Spinelli.
Marcello Spinelli
Thank you, Chris. You're not you're not planning any gap in our event, or that last year, the third quarter, we had a huge, very important gap to record over this you know all the supply chain order, order to fulfill all the supply chain that would last one year before.
So now we are with our ventures, in an operational level that we can give flexibility to sometimes goes from a specific problem like Carajas or to blend products. So obviously, you see some gaps.
So it's not the number of production, and the number of the sales can sometimes can be different, but not a huge gap during the quarters.
Eduardo De Salles Bartolomeo
And Mark, please?
Mark Travers
Of course, Eduardo. Chris, just in terms of batteries for the electric vehicle space, maybe just to start.
I think we're seeing great evidence that the electric vehicle market is, is here, and it's going to grow dramatically over the coming years. And it's going to be a dramatic opportunity for the nickel business.
While there are discussions in around the form of batteries, lithium ion for sure is going to take a significant portion of that market. And even if the in there are places for things like the lithium phosphate, iron phosphate battery, but we believe that nickel will take a preeminent position in the battery space, and it will be demanded by the industry.
So getting moving to the opportunities for Vale, what we what we see is an acceleration of discussions around creating the value chain or the supply chain in the European and U.S. markets.
And we are seeing lots of evidence and participating in many discussions on a number of different fronts around how we can participate. We have a strong portfolio of nickel, and the nickel that we produce, including our class, one nickel out of our North Atlantic flow sheet and U.K.
and Canada seems to be well demanded or strong demand for that product. And so that's something in the short term, and we are very heavily engaged in those discussions.
Now, that's demand that comes from our current flow sheet. And, and we will be participating in that.
And then I think we look towards the more short to medium to long term opportunities. And we start to look at opportunities within our flow sheet and potential joint ventures and partnerships.
And we're in discussions with that, around that as well. And then just in terms of how we meet, we look to supply that we obviously are very heavily engaged in, in our exploration, drilling activities and, and looking at other opportunities for innovation to participate fully participate in this opportunity.
Operator
Next question comes from Alex Hacking, Citi.
Alex Hacking
Good morning. If I could just follow up on that last question with Mark, I guess first, which is Mark, are you seeing in your discussions demand for sustainable class one nickel?
And if so, how does Vale fit on that spectrum? And are there kind of initiatives that you're undertaking on that front?
And then the second question, I just coming back to iron ore. In particular, in the north Carajas, you know, when S11D was built.
I think it was built for 230 million tons of export capacity. I think the system has never really done much more than 190 million tons.
Now, I know Serra Leste is coming back online. But I -- is there a pathway there for the Northern system to achieve that 230 million ton rate?
And if so, like what when do you think that would be? Thanks.
Mark Travers
Okay, so Alex, thank you for asking that complimentary question. Because absolutely, we see significant opportunity in providing nickel that meets strong ESG standards and we are seeing a lot of discussion, we're hearing a lot of discussion around the type of nickel that's being provided in terms of ESG standards, whether it's low carbon, or coming from well regulated, well run jurisdictions.
And so clearly we can position and we do position our nickel in the top of that spectrum. If you take a look at our nickel coming from our Canadian flow sheet, for example, it has an average carbon intensity significantly below comparable products.
And we have an opportunity to decrease it dramatically. For example, taking removing diesel production, or diesel fuel out of our Voisey's Bay operations will dramatically reduce our carbon intensity in our product coming from long harbor.
So we absolutely do see that opportunity. And we do see and we are positioning our nickel in that way.
And certainly the supply suppliers are looking for that.
Eduardo De Salles Bartolomeo
Spinelli over to you.
Marcello Spinelli
Yes. Thank you, Alex.
Well, yes, we have our plan is to reach the 230 million tons next year to capacity in the end of the year. What I just checked with you, we have three systems there.
We have the North Ranch, the East Ranch and the South Ranch, that's S11D is only one of this. The first information that that was a good news from last year, it was the East Ranch, and we can add 6 million tons.
We stopped this operation two years ago. Now we're back.
So we are adding in this in this number of 230 millions. The North Ranch is the challenge is to bring the new pits online.
So we always need to bring pits and have the construction and the license. So the good news is the entry operation that I mentioned my initial speech.
And S11 that is the South range is going really well. This year, we need to have some adapt some crushers, it's in our plan this year, it came with the with the use of the of the S11.
So, we are improving the operation there. But we will be ready in the end of the year beginning of next year to have full operation there.
So we have the plan should be 232 till the end of next year.
Operator
Thank you. Our next question comes from Christian Georges, Société Générale
Christian Georges
Thank you very much and good morning. I’ve got two questions for you.
The first one on your pellets production, and how should we look at the production target? Should we should we anticipate a gradual return to 50 or 67 tons per annum in coming years and associated to that, what should we anticipate for you and for your cost of operation, so in releasing and prioritizing going forward?
That was the first question. And the second is on stoppage expenses that from Brumadinho those costs which are not covered by the settlement around something like $100 million per quarter, how should we expect those to evolve over the next two years.
And on the side, you seem to be very confident on your ability to deliver production this year, should we do already at being more likely at the upper and upper end of your 15 million ton to 35 million ton target? Thank you.
Marcello Spinelli
Thank you, Christian. This is Spinelli here.
Pellet production we expect to improve slightly this year compared to last year. Our main restriction is the production of pellet feed.
We have all the all the evolutions to face in this south eastern system with all the dams that I mentioned, so to the end of the year, we still have the breach of this production using the remaining capacity in the dams. In the next year, we gradually will go back to the level of the production used to have so we'll be around you know the ramp up to 50 to 60 of capacity obviously depends on the demand.
Again, the margin of volumes is part of the strategy but in terms of you can consider this year a slight recover and the next year after the production of pellet feed, we can improve more. In terms of costs, the dilution of course will come that we are operating part of our capacity in with idle capacity show, definitely the dilusion of will be important to reach the best of our of our operations next year.
Stoppage expenses should declining in the same proportion that the operations come back into production. So, with the exception of Vargem Grande, they should come to zero at the other sites by the end of 2022.
Operator
Thank you. Our next question comes from Amos Fletcher, Barclays.
Amos Fletcher
Yes, morning, gentlemen. Had a couple of questions.
First one on capital allocation, can you clarify that once the expanded net debt gets below $10 billion, can we expect all surplus cash flow to be returned to shareholders? And then the second question is just on your base metals business once upon a time, you look quite seriously at separating off the base metals business.
And we look at the huge valuation differential between the pure play nickel and copper miners compared to iron ore mining companies. Do you think there's a rationale to consider a separate listing of the base metal business again, to highlight the value there?
Thanks.
Eduardo De Salles Bartolomeo
Thanks, Amos. Yes, but look that the understanding of the trajectory of the expand depth is even more important.
So obviously, if we are below 10x at all excess cash is going to be returned to shareholders in forms of dividends or else. And secondly, about base metals obviously, we understand that you have a strong point we see the same, but we see that in iron ore today with the valuation that we are undergoing.
So we need to correct both valuations and build the business. And then of course, optionality like that are always in the in the table to look at.
But we still have to do big homework at base metals business, grow the copper, as we mentioned before, strengthen the nickel. But truly, it's something that we always going to be looking at.
But it's not the time. For sure, it's not the time and capital location just to be clear of everything, except it's going to be returned to shareholders.
But always on a trajectory because we paid a strong dividend this semester, and we had $1.3 billion extended that.
Operator
This concludes today's question-and-answer session. Mr.
Eduardo Bartolomeo at this time, you may proceed with your closing statements, please.
Eduardo De Salles Bartolomeo
Okay, thank you. Thank you a lot for your, for your questions, your interest.
I think we, as you saw we had a very, very good, I would say, even excellent fourth quarter. But as I've been saying to you, this is not a sprint, it's a marathon marathon that goes through the risking the company, reshaping the company in rewriting the company.
We are truly committed with the risk. We are we did strides very importantly through my [Indiscernible] as with the global agreement, in safety, we're improving.
We're bringing ouput with safety consistently, capital discipline, we are extremely conservative and we're going to return what we have to do with our shareholders on a disciplined way. We are reshaping the company to see automation several initiatives to clean up from bio diesel palm oil to the VNC problem to two other assets that are draining cash.
But we're going to reiterate when we are truly a safe, a sustainable and reliable company. So thanks a lot for your attention.
And I'll 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.