Apr 27, 2021
Operator
Good morning ladies and gentlemen. Welcome to Vale's conference call to discuss First Quarter 2021 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 chain 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 statement 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, Executive Vice President, Finance and Investor Relations; Mr.
Marcello Spinelli, Executive Vice President, Iron Ore: Mr. Mark Travers, Executive Vice President, Base Metals; Mr.
Carlos Medeiros, Executive Vice President, Safety and Operational Excellence; and Mr. Alexandre D'Ambrosio, Executive Vice President, Legal and Tax.
First, Mr. Eduardo Bartolomeo will proceed to the presentation on Vale's First Quarter 2021 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
Thank you, good morning everyone. First of all, I hope you are all fine.
The first quarter of 2021, we kept our guards up in our operations as the COVID pandemic accelerated in Brazil. We have kept all safety measures and revision procedures in optimum operations.
And I want to reinforce that only essential professionals are allowed in our sites. In April, we completed 13 months since the start of restrictive measures against the pandemic and over 25% of our workforce is still working remote.
Safety, people and reparation, these three words have been our priority since 2019 and they continue to make more sense now in this very critical moment for all of us. Well, a crisis of this dimension requires the urgency to do what's in within our reach in the best way and as effective as possible.
We have been collaborating with governments and communities since the beginning and we continue to focus our efforts on the most critical items in this fight. For this reason, Vale and other companies have forced us to buy and donate 3.4 million medicines for intubation.
In contribution to the national immunization plan, Vale allocated resources for the expansion of the vaccine production of the Butantan Institute with an estimated production capacity of up to 100 million doses per year and for the donation of 50 million syringes to the Ministry of Health of Brazil. We are attentive so that our support is accurate and effective and that our help directly reach the people in need.
This is part of our new practice society. As I have been saying at each of our meetings, Vale is determined to fully repair the damage caused by the promoting strategy.
A major step in that direction was the signing of the global settlement in February. The decision, they ratified the agreement became final at the end of March bringing another layer of legal certainty for the reparation.
One of the fronts that progress is consistently is that of water security. We are working on the commissioning of the construction works for a new water pipeline to supply the metropolitan region of Belo Horizonte with around 6 million people.
At the same time, the reparation of individual damage is progressing. Since 2019, more than 10,000 people have been part of civil or labor indemnity agreements with Vale, which sum up to almost 2.5 billion reais.
We remain committed to a fair and prompt preparation for Brumadinho and effective breach. Talking about then safety, after works to improve stability, we have already removed the emergency level of four structures this year.
We hope to reduce or remove the emergence level of another four structures still in 2021. With stabilization works and actions and respecting the safety of the process by the end of 2025, we hope to achieve satisfactory conditions for all 29 structures, which are the emergency level to-date as can be seen in the graph.
We remain firm and progressing in the culture transformation towards a safer life. Last April 15, we launched our integrated report with the main information on Vale's economic, environmental and social impacts.
This is another delivery from Vale as a result of listening to our stakeholders. This document, in addition to presenting our ESG performance in detail, helps to demonstrate how strongly our ESG strategy is connected to our business.
Another bottom point is that it provides detailed information about our risk management including our assessment of emerging long term risks. With that, we closed one more ESG gap plan for 2021, totaling 39 gaps since 2019.
As can be seen, our ambition is to transform Vale into a reference in ESG practice. Well, now talking about operational results.
We started 2021 with a performance as expected with a good improvement compared to the first quarter of last year; our adjusted EBITDA was $8.5 billion, the highest in our history for our first quarter, which is seasonally weaker in volumes. In iron ore, we made progress in stabilizing production resuming the rest of the capacity halted at the Timbopeba site and at the Vargem Grande pelletzing plant.
Our beginning of the year was stronger than 2020. We produce in this first quarter, which is seasonally weaker, the same as we produced in the second quarter of 2020.
This gives us a lot of confidence in reaching our production guidance for this year. Spinelli will give more details on that later.
In nickel, we also performed as planned with a stable operation in Onça Puma and in the North Atlantic Refineries with long harbor reaching hyper production levels in the first quarter. In copper however, we underperformed with a drop of 20% to 30% in volumes of Salobo in Brazil.
This is because we are reviewing Salobo’s processes aiming to improve the safety of our operation at that site therefore impacting mine movement. You should say, we had a longer maintenance due to the difficulty of mobilizing contractors because of COVID-19.
On another front, in terms of addressing our cash drains, the sale of ENC operations was an important step in the commitment to transform our business. This commitment was made to our shareholders in the end of 2019 and delivered in a very responsible way with the creation of a local solution that meets the demand of all stakeholders.
We also signed the agreement for the acquisition of Mitsui stake in the coal and logistics operations in Mozambique, an important step towards our divestment in that business. Another commitment made to our shareholders.
In the sense, another relevant step was the conclusion of the revamp of the Muatis processing plants which will allow us to achieve a production rate of 50 million tons per year in the second half of 2021. In summary, we continue to take the necessary actions to stabilize our production, ensure growth options and allocate capital in the disciplined way.
And speaking of discipline in capital allocation, we presented more and more evidence of our commitment to returning value to our shareholders with the announcement of the share buyback program this month. We are confident of our ability to deliver already risking and maximize value creation for our shareholders in the long term.
We believe the buyback is one of the best investments for the company and one that does not compromise the continuity of dividends higher than the minimum set bar policy. With that to conclude, summarizing for you, we are making progress with the reparation of Brumadinho quickly and fairly.
We continue on the path to build a culture of safety at Vale. We are working hard to make our operations more stable and predictable.
Our ESG commitments and strategy are increasingly linked with our business and finally our capital discipline remains unchanged. Most importantly, I assure you that we are doing everything we can to ensure the safety of the people in our operations, in our communities.
I would like to thank our 70,000 employees, our contractors, suppliers and customers for their resilience and high guard during this critical moment through the COVID-19 pandemic. Now I pass the floor to Spinelli who will give more details on the performance of iron ore, Thank you very much.
Marcello Spinelli
Thank you, Eduardo. Good afternoon all.
Well we've been updating above the resumption plan to reach 400 million tons next year. I'm going to use the same slide to facilitate our explanation and start in my left hand side.
So you see the bar today remember that the concept that evolved from now that's the capacity we have for a year. We came from a number, the 320 the last quarter, now we have the 327.
We had an additional capacity in Timbopeba of 7 million tons. Remember that we were running with three lines.
We had with this setup of other three lines. So we have a full capacity to Timbopeba now, but should be 325.
So we have a minus 2 that we already update the forecast of Itabira. Itabira in the last call we said that would reach a minus 9, we still have this minus 7 as above for Itabira.
Itabira, we have a temporary problem there with the lack of capacity for the disposal of the [Indiscernible] as we evolve during the year, we can update this minus 7, but we already put here the minus 2. So that's the number of capacity today.
I want to highlight also in the right hand side at the bottom, the information that Vargem Grande. Now we now have the startup of the tailing filtration plant.
We're not adding yet a capacity here. It will be important to the second half, when we have the whole feature of Vargem Grande growing.
But it's important milestone. That's the first plan of a sequence of plans coming from Brucutu and Itabira and it's an important milestone to highlight.
I want to emphasize that we are really committed to deliver the production guidance for this year. Our range from between 315 to 335 million tons.
What support this formation? Well, firstly, we started this year in a very much better way compared to Q1 last year.
As Eduardo said, we added 8 million tons this year compared to last year. Seasonally, the second quarter is better than the first quarter, you know very well that due to the end of the rainy season in the south and the southeast of Brazil even in the north, we still have the rainy season there.
But June is usually drier than other months and the rainy season. So we're counting on that to improve our production and you can affirm that we have our guidance in perspective.
As Eduardo said it's a lot of information. The last Q2, Q2 last year was the same one last year.
So that's another information that we are growing to achieve the guidance. And also we have many actions that I'll follow up with you in the next slide.
Our roadmap to achieve the 400 million tons. First information in the southeastern Vargem Grande next week, we are advancing our tests with a conveyor belt.
This test is a vibration test. We must check the impact in our upstream in that site.
Fabrica is already testing the wet processing. We expect to have the final permit from A&M, the national agents in mining to keep the operations, we expect to do this in the end of this quarter.
And still in the southern system, in Vargem Grande we are bringing online Maravilhas III dam. This is a very important as for second half.
We have some civil works there to finish and the important information we already have, all the permits to start up this asset. Only missing the declaration of instability that's only in the end of the construction we can get.
I also want to drag attention to the southeastern system and its important information. Good news here in Itabira, we are anticipating a partial operation of the filtration plant.
This will allow us to offset that buffer, the risk capacity that we have in Itabira is minus 7 that I mentioned the first, we are keeping here, but we are trying to anticipate it now, we already have in our plan the anticipation to bring, to use the filtration and try stack the tailings. And I want to update you also about Brucutu site.
An important asset that are also coming online that is Torto dam. We are during the middle of the construction, we expect to finalize this construction during this year.
But differently from Maravilhas III, we don't have final permit still have to apply in the process of one month or two months. But both processes, construction and permit, we intend to have all completed this year.
If you have any delay it's important to say that we have a backup position with the startup of the filtration in Brucutu, remember that we have filtration camp in Vargem Grande and Itabira and is expected to start up in the first quarter of next year. I'll be here for further questions in the Q&A session.
I will pass to Luciano.
Luciano Siani Pires
Good morning, good afternoon. Some highlights on the financial results.
Starting by cash flows as you saw they were very strong in a quarter. Working capital had a positive contribution of 550 million.
You may have been surprised, but actually the very strong sales of the fourth quarter of last year were collected this quarter more than 1.4 billion in reduction in accounts receivable and remember that prices spiked at the end of December remained strong in January. So that was the reason why working capital evolved positively despite also the first quarter being very heavy on other payments like payment to suppliers, inventory billed, profit shared with employees, but still working capital moved positive.
Still on working capital, you may have noticed that the price realization didn't actually move in parallel with the plats price. And why was that?
If you look at the fourth quarter, the average iron ore price 62% for the quarter was 134 whereas the provisional price at the end of the quarter was 158 because of the increase in December. So there was a very strong recording of EBITDA in the fourth quarter on the back of the provisional sales whereas in the first quarter what happened was the opposite.
The average price for the quarter was 167 and the provisional price at the end of the quarter was still 158, 159 actually. So the opposite, like the provisional prices dragged down the average price realization for the quarter even more so compared to the fourth quarter in which they pulled up.
And so something to notice is that those sales that were recorded and 159 this quarter, they will be re-priced at today's prices once ships arrive at ports. So therefore, you could expect a carryover of EBITDA of maybe about 300 million U.S.
from sales from the first quarter towards the second quarter cash and EBITDA. Talking about costs.
C one costs before third party purchases, we need to look before third party purchasing because the prices have been going up sequentially. They were in line $14.8 per ton compared to $15 per ton in the same quarter of last year.
However, despite the depreciated Brazilian Riyal and we now can see that for the year 2021, the costs are going to stay, like I said in the last call, slightly higher about $1 higher than last year on average. And why is that?
We have about 70 cents of impact from diesel prices which increased substantially in dollar terms from last year. There is another 30 cents that will come from a shift in the mix because of the very high prices that we are experiencing, we're doing some opportunistic production in sales especially from the mid Western system which is very high cost, has costs around $40, $50 per ton.
We're increasing sales from there and although by a small proportion it does impact about 30 cents, the mix as a whole and C one before third party practices. Also in our competitiveness some words on freight.
You saw the recent spike in freight rates towards, spot freight rates toward $28 per ton under this backdrop actually the freight rates within Vale, they did not increase much from just to $15.7 per ton. But if things stay this way and as we use more spot freight in the second half because of our higher production, we should expect about $1.5 increase on average freight for Vale in the second half because of that spike in spot freight rates.
Finally, a word on New Caledonia in base metals. Just a reminder from now on you will not record under the base metals EBITDA, the losses of New Caledonia, which were running at around $50 million, $60 million per quarter.
And remember also about a year ago you didn't have Onca Puma also operating. So today as compared to one year ago, we have on Onca Puma generating around $50 million per quarter and New Caledonia out saving another $50 million per quarter, so a net $100 million per quarter improvement in results at the same conditions of price as compared to last year.
So these things start to make a difference as time builds up. Finally on capital location.
This is no doubt the big questioning. What are you going to do with the money with these higher prices?
I want to call your attention, we have had a lot of consistency and things are evolving quite quickly. Just a year ago we were with the dividend policy suspended, we were in the middle of the first wave of COVID-19, a lot of uncertainty, markets diving and the reparation of Brumadinho not consolidated.
And then in the second half of last year, once the first wave ended and reparation advanced, we resumed the dividend policy and we paid over $3 billion. Then in November prices started to, actually early December prices started to increase from the level of $120 towards higher prices, still but Brumadinho agreement was still in discussion.
So we didn't know what to expect. But finally in February, once we reached the agreement in prices kind of situated at a higher level than $120, we decided to pay another $4 billion in dividend despite the burden from the Brumadinho agreement.
But prices then were still fluctuating, peaked up 170 then down to 145, but after they're stabilized at 160 in April then we announced earlier this month the $5 billion buyback and now here we are again running after prices which are now at over $190 and naturally it will create more options for cash flow allocation. So as you can see the recent story has been of progress within Vale and upward surprises in the market.
So what will be our response? There is nothing new in our response as we have been doing, we will make decisions and we will announce those decisions that will prioritize return to shareholders.
The story remains the same. We're going to be consistent.
It can be an acceleration of the buyback. We can finish the buyback earlier.
It could be another increase in dividends above the minimum. It could be both of them.
So you should expect that we will continue to follow this track record of returning consistently money to shareholders. The next question on the balance sheet, is it inefficient that a lot of people start to ask this.
First, a note here with low interest rates so about 3% on a ten-year bond for Vale, the value of the tax shield if you increase leverage is relatively small. So for example, if you add $10 billion on debt at 3% rates, you're going to save approximately $90 million per year in tax payments for 10 billion additional debt.
So if you want a meaningful reposition on the balance sheet in order to really take advantage of tax shields, you should add $30 billion, $40 billion in debt to the balance sheet, which obviously in a cyclical industry you wouldn't do that. So these tax savings they should be weighed against the opportunities that the financial flexibility that today we have that may bring in the future and that's the calculation we're making.
However, I also note that these 10 billion expanded net debt target, we established that 2-3 years ago when prices were around about $80 per ton and with the expectation of stronger for longer prices, we obviously could increase leverage and we are evaluating that and most importantly, if we have the opportunity to deploy the additional capital in a smart way. So that's how we're thinking now about the balance sheet and now let's hand over to Q&A.
Operator
Thank you. Ladies and gentlemen, we will now begin the question and answer session.
[Operator Instructions] Our first question comes from Alex Hacking from Citi.
Alex Hacking
Yes. Good morning everyone and thanks for the time.
I guess, I wanted to ask about the potential for a base metal spin-off that's creating some headlines this morning. If you could just give us some color on where you are in your thought process there?
What kind of transaction you would, potential transaction you would be considering? What kind of assets you would be considering putting in it?
And then what would be the sort of logic behind any potential transaction? Thank you very much.
Eduardo De Salles Bartolomeo
Thanks Alex. Well, let me be clear here with obviously, we are always analyzing this opportunities okay.
That's a main, how can I say driver behind us. What is really pushing us to that situation I think it's twofold.
One is that we are in the midst of the foundation of recovering the business and we believe we are on the right track. And secondly, we are undervalued both on the Vale as a whole and on this metal story.
So it's a clear way to unlock value just in the basis of the multiples. So what we said and I would be clear now to give you where our minds are, it's in the exactly the conceptual phase of analyzing what does that mean.
First of all, let's put it this way, we have assets as you know in Karajas there are intertwined with the iron ore assets. We need to find out a way to how we deal with that that's one issue that we are, that we have to deal with, how we organize ourselves inside.
So there are several aspects within, how can I say the pre-condition to do the business that we are studying that said analyzing. What is important and then I might because now we're in the English fully, I can ask Mike, Mark to help me on that.
We have first of all, as I mentioned before to work on the foundations and on the narrative. The foundations are very clear since the beginning.
We need to get the North Atlantic operations productive and operating adequately. We need to replace capacity so voice is base [Indiscernible] copper cliff mine and the sales of VNC.
One of the things that triggers us as well as you ask about our mines where they are, is the sales of VNC. It unleashes us to think differently about the business.
But I'll ask Mark because he's head in the business and I was heading beforehand as well, what is the narrative, I think Vale has a unique narrative here that we might be able to exploit. But not to be overly repetitive, we are on a phase of studying it, analyzing the possibility.
Could you help me on that Mark?
Mark Travers
Sure Eduardo and Alex, I think Eduardo said out very well like the path really is to make sure that we get the optimal value for base metals and he spoke about the need to build the foundation. Maybe the narrative or maybe the strategic direction to optimize value I can spend a minute or two on it.
So I think more and more we're focusing in on copper, nickel in our business as a key for our participation in the decarbonization of the economy. We clearly have lots of opportunities, which we've described in previous calls and on Vale day around copper where we have a current pipeline of projects that should bring us to about 500,000 tons of copper per year in the next few years with Salobo III, Cristalino, Alemão.
We also have a number of projects around the Carajás area, which can optimize through synergies with the iron ore business and the current infrastructure in the area plus some other options for example, Victoria project in Canada and project [Indiscernible] that can get us up to 900,000 tons. So clearly, even within the internal pipeline we have significant opportunities for growth.
On the nickel side, we spent a lot of time recently talking about the dynamic of electric vehicles and what is bringing to the industry and clearly we are going down that path of the electric vehicle penetration in the auto industry and the inclusion of nickel in the batteries for those vehicles, our approach is that we have the products. We have the products that have diversity and quality and form to go into the electric vehicle battery and we have the ESG credentials and we continue to try and build those and those credentials relate to the low carbon intensity of our product coming from well regulated respected regimes such as Canada.
So really, what we're going to really focus in on is, seeing that narrative or opportunity to build in this area currently just to give a little bit of an update we have buyers who are very interested in the products that we produce right now in the electric vehicle space. We recently signed a significant multi-year contract with an OEM.
It represents about 5% of our class one nickel and we see further opportunities to grow the sale of our class one nickel into this space. We have some other opportunities there in terms of moving our products around.
We have some opportunities with maybe some relatively smaller investments to repurpose some of our production lines to get a little bit more out and then we have other opportunities for growth, which we look at and we have a lot of government interests talking to us to try and tease some of this out. So in the end we're looking to build up to about 30% to 40% of our class one nickel going into the EV space.
So Eduardo, I think that's probably the narrative that I would give in terms of how we increase value within the base metals business.
Eduardo De Salles Bartolomeo
And Alex, just conclude it's a process that as you asked there are several questions that have to be answered. We are in the initial phase of going back with that view that we had in 2014, but in a much different way.
Now we think we have a better foundation. We have still work to do in the foundation.
We have a better narrative now and of course there are several questions that has to be answered as you ask, how would be the potential transaction. We didn't get to that yet.
We're just in the beginning phase of analyzing the possibility to unlock them. I hope I have answered your question.
Operator
[Operator Instructions] Our next question comes from Timna Tanners with Bank of America.
Timna Tanners
Yes. Good afternoon and thanks for the color.
I wanted to get your perspective on the situation in China. It's been interesting to watch iron ore prices rise even as China talks about cutting production and yet very little production actually cut as you point out in your release in the first quarter.
So just want a little bit more of your perspective on what's happening there and what you see happening as the year progresses? And then if I could, a second question it's just on any impact that we should think about or prepare for with regard to the Samarco bankruptcy filing?
Thanks guys.
Eduardo De Salles Bartolomeo
Go ahead Mr. China Spinelli.
Marcello Spinelli
Timna, thank you for the question. Well, China as you said, we have two points, two main questions actually.
We have a solid demand based on the stimulus and based on all trade war problem that started some time ago. China is going really well.
All the indicators we can see coming from properties 7.8 growth rate considering New Year's manufacturing and infrastructure a lot of starts, new starts last year, they are under construction this year. So we have the scenario of a fantastic demand coming.
The question that we have open here for how long we're going to have this stimulus. In our perspective, we don't see a huge process to stop this.
We see as a smooth process coming on the second half. We don't see this in this half.
We're going to face a stronger demand the next quarter, but for the rest of the year we can see something going on in this way. On the other hand, this two suppliers you said, China just after the two sessions with the party meeting, they came to the world as a country that definitely are going after the capitalization.
They are really, being really strong about this. We [Indiscernible] as you see, the second question is how will be the rollout of this?
We see our market intelligence, we can see that they are coming really seriously at this time. We can see Cesar try to control this process with their three actions that they see, the two or three -- they say that if you want to get the guys that didn't do their homework, the swap production or didn't follow the permit to get something in two years, three years ago or they are not compliant to the ultra emissions, low emissions that they should comply on.
And although they say that if you are complied to the ultra emission part of the production are going really well in this area. The EU should allow.
So again, what we can see, the interest is declining, burst furnace in a very high utilization. So this scenario Timna for instance is to have high prices.
You can decline in the second half and mostly high premiums. We can see a support for the premium for the whole year.
If you consider that the digitization of burst furnace will be high price, price substitute will be high, margins high. So this scenario for our forecast is to have the premiums in this level for the whole year.
I will pass to Luciana for Samarco.
A – Luciano Siani Pires
Timna, Vale is going to be a BHB as well, we're going to be spectators in the this Samarco JR bankruptcy filing. So the company has started to operate.
The creditors have got some sentences in their favor, left the company no alternative, but to file for JR. The process will take at least 240 days by law, likely more.
The company is generating operational cash flows. Those cash flows will be available for distribution to the creditors.
This is going to be done through an organized process in court. And we don't have any expectation to have residual equity value from Samarco and also there is no expectation whatsoever of any additional capital injections to support operations at Samarco given that the debt is no recourse to Vale and BHB.
So we're going to be at the stands watching what's going on.
Operator
[Operator Instructions] Our next question comes from Mr. David Gagliano with BMO.
David Gagliano
Hi, thanks for taking my questions. I just wanted to drill down a little bit more on the capital allocation questions and issues.
First of all, has Vale bought back any of the 270 million shares associated with the buyback that was announced in April?
Luciano Siani Pires
David, yes we have. You're going to see the monthly reports.
We will require required to file with the securities regulator in Brazil. So it's going to be available for everyone.
However, just notice that we had blackout period because of these results issued yesterday. And therefore, in the 15 days prior to the issue of the results, we were not able to buyback any shares by regulation.
David Gagliano
And then just going forward obviously, you mentioned that obviously after regular dividends, total CapEx, payments are still a lot of cash here. And so, the question in terms of a little more detail in terms of how we should expect from a cadence from a timing perspective and in what form should we expect these incremental shareholder returns over and above the regular dividends?
Is this something we should be expecting before say for example, the next regular dividend payment?
Luciano Siani Pires
We haven't discussed that so as you said the regular payments occurred just in March and September. So the more obvious way to allocate return cash to shareholders in between is through an acceleration of the buyback but this could be discussed with the upcoming board which will be elected if we should or not do something interim.
Eduardo De Salles Bartolomeo
Luciano, just to add on that I think the keyword here David is consistency. We don't want to be stuck to the September, March dates, but of course we need always to gauge the market that we are in sometimes overly optimistic, sometimes wonder over pessimistic like last year in March.
So we did about the buyback in between because it was clear that we had to do it. But normally we would be willing to do consistently, but as Luciano mentioned, we have to talk to the board.
And you should expect of course dividends about minimum payments.
Operator
Our next question comes from Mr. Carlos De Alba with Morgan Stanley.
Carlos De Alba
Thank you very much. Good afternoon.
I guess on the same topic Eduardo, Luciano, are there any, I mean, clearly the company generates a lot of cash flows. It was surprisingly strong a quarter on that regard as you mentioned prices are higher.
Are there any caps or limits to the amount of dividends especially dividends that you would propose the company or the board for the company to pay? I guess the regular dividends are very clearly defined by a formula and we can probably look at the growth CapEx or potential growth projects on base metals.
But other than that is there any cap or limit to the amount of dividends that the company would consider paying back to shareholders? And my second question if I may, is on the Muati's divestiture process.
How can we, what are the expectations in terms of timing or next steps that we should expect from that process and also Luciano maybe if you can walk us through how the process of incorporation of [Indiscernible] into Vale's books would look like? I guess you will have to increase your debt and your interest payments in the coming quarters?
Thank you.
Eduardo De Salles Bartolomeo
Luciano, just let me get the first one. I think there is no cap.
There is always a balance of course, and again we need to assess market conditions, debt structure, capital structure and then again as I think you pointed out very correctly, our CapEx is pretty well behaved, is all around platforms or growth so you don't, you shouldn't expect extreme CapEx so there's nothing radar like that. And secondly, a question that a lot of people makes, so I will take the opportunity to make it clear there's no transformation in M&A in our radar as well.
So with that said and Luciano mentioned in the beginning, I'm just paraphrasing Luciano the return is going to go to the shareholders, right Luciano?
A – Luciano Siani Pires
Yes. On Muati’s, so we just finalized the revamp which started to ramp up.
We hope it will be quick. We hope by the beginning of the second half we'll be already producing at 50 million tons.
By the end of the year, we should receive equipment on site in order to upgrade the production to 18 million tons. If you consider today's thermal coal prices and mat coal prices a little higher than that maybe 130, 140.
The business can turn maybe that positive quite soon and be cash flow positive at the beginning of next year without the burden of the project finance and that goes to your following question. The burden of the project finance was always felt within Vale's financial results through the EBITDA of coal.
So coal EBITDA is penalized today because the mine pays a tariff for the corridor which is punitive because it needs to be, so in order to repay the project finance. So when you watch less 150 million for example, EBITDA for coal about 100 million negative is just a service of the project finance funded through the tariff.
Once you purchase Mitsui, what's going to happen is that everything is going to be consolidated and therefore the project finance will become Vale's debt and those 400 million a year or 300 million, 400 million they will be seen at the financial statements, part of it as interest and part of it as just that debt repayment. But on the other hand the coal EBITDA will immediately improve by the same amount and so that why I'm saying that you don't need much in order to turn coal EBITDA as a business positive.
You just need to produce and price is slightly better than what you're seeing today. So and that leads us to the next stage, which will be given that I do have a project finance which bears Mozambican risk and higher interest rates there's obviously the opportunity to refinance at much lower Vale corporate rates and save money with that.
That's what we're going to do. In terms of timing for the divestiture, we already have over 20 NDAs signed with interested parties.
Obviously there is a way to go between people wanting to look at the asset and offering a firm intention to bid. We hope that we're start going to have those intentions again by beginning of the second half.
Obviously, people are going to do a lot of diligence on that and if we succeed, hopefully the target would be to try to sign a deal before year end. Some variables put some risk on that.
Obviously there is this dispute between China and Australia which is waiting on met coal prices, now you have all the COVID-19 situation in India, which is a big importer of thermal coal and also good weight on international thermal coal prices. So let's see if we're a little lucky, I believe we can sign a deal still by the end of the year.
Operator
Our next question comes from Mr. Alfonso Salazar with Scotiabank.
Alfonso Salazar
Thank you for the update and good morning everyone. I want to ask about the outlook of the pellet market and if you can provide some guidance regarding a production for the rest of the year and in the coming years and if you can give us some color on that?
Marcello Spinelli
It's Spinelli here. Thank you for your question.
Well pallet market, let's talk about the demand side. You split this in burst furnace pellet and direct reduction pallet.
The burst furnace pallet is quite the same as iron ore. We are not in China.
China is going really well. It's related to the problem of necessity to improve the use of the burst furnaces there but the same pattern you see in ex-China that's our market.
Very good prices, two prices margins and assisted to improve the production. So from this perspective, you can see a room for sales and premiums.
The supply side in the other hand is a limitation, there is a limitation today and Vale is the key, a producer and the key opportunity today. We expect the production this year slightly better than the year before.
The limitation is the pellet feed production. We have temporary restrictions to dispose of our tailings in the main sites.
So Brucutu, Itabira. So we don't expect to produce more than this year, but we are targeting to go back to the 60 million tons capacity for next year.
I'm not saying that 60 million tons, but we want to be ready to do that. It depends on the demand perspective, the market perspective to define that.
So as a conclusion, we see a market that the premiums, we doubled the premiums in the first quarter compared to the last quarter last year. This current quarter, we again have another risk in the premiums.
And we expect there is room for some another increase in the premiums as you have the demand is really tight, supply demand is tight. Just an update about the direct prediction market.
That's quite the same element that I mentioned for burst furnace. We have two more ingredients here.
USA coming really fast and their economy and all the stimulus that are coming, they produce, they use a lot of this scrap, but they need pellets to improve their production, direct reduction. And the Midwest is our main market because of the U.S., the increase of the use of scraps the price of scrapping in Turkey is really high that make our clients, they can charge higher price to have good margins now and definitely there is room again to improve the margins, improve the premiums in this market.
So the outlook for this year, the supply is limited and we can see good premiums because of the demand that is strong in place.
Operator
Our next question comes from Christian Georges with Société Générale.
Christian Georges
Thank you very much and well done with your medical assistants in Brazil, it is very good indeed. I had two questions for you.
One of them is, you just said no transformative M&A, even in a scenario of higher prices for longer and large cash flow. Does that exclude also some small M&A on copper because in your statement you seem to be very positive near term and long term on capital outlook?
So is this an area where you make some consider putting some cash in a large cash availability scenario? And on the side of that would you consider an investment in hydrogen in the context of your customers in steel sector?
I'm trying to move the greens to decarbonize. Can you be part of that or is that something which you're just looking at from a distance?
And the second question is on nickel. You're out of New Caledonia.
You're seriously in Indonesia. What was the situation with just to nickel out there, moving to being able to sulfate and serve the battery market?
Is it something you're still looking at down there or is it something you're looking at on the doing from Canada and Brazil? Thank you.
A – Eduardo De Salles Bartolomeo
Hey Christian first of all thank you for the announcement of the medical assistance. Thanks very much.
Yes, you're right there's no transformative M&A. We are always looking for copper.
It's very hard as you might understand but we could, we shouldn't stop. So obviously it's one area of interest.
Another area of interest is energy and we have a very bold goal to eliminate our clean energy, not eliminate substitute have all of our matrix for clean. So might happen to have some very small acquisition on that environment and hydrogen specifically it brings us to another subject that is very dear to our heart because we just announced, the scope three targets one of the few that did that by the way and we are following up some players that are doing that but necessary I think more on the watching how can I say that seat.
We are actually working very close to our customers. It's inadequate goal, but I think because of time constraints we wouldn't go there that far, but we're looking to help our clients with high quality iron ore and high quality metallics that will be needed if hydrogen and we believe hydrogen is the best to get with carbon capture, best alternatives for theses steel industry.
But we are watching closely what the hydrogen is happening but no investments on that okay. And I think for nickel I think it's better to Mark to answer.
He will be more short and more objective.
Mark Travers
Sure. Christian, in terms of class sorry the sulfate you're right.
The primary area of focus would be the Canadian nickel. But there are opportunities in Indonesia that the most prominent of which is the [Indiscernible] project that is being studied and being discussed with Sumatomo metals that would be a clear -- that product would clearly go into the sulfate market.
So that one's right in front of us. The other ones are I would say aspirational or early, there are opportunities but nothing really of significance at that point in time.
For example, there are call projects that are on the books by others in Indonesia and there are parties that are interested in our [Indiscernible] for example, but there's nothing significant at this point in time.
Operator
Our next question comes from Mr. Andreas Bokkenheuser with UBS.
Andreas Bokkenheuser
Thank you very much for taking my question. I hope you're all safe and well.
Well two questions. A volume question and then a freight question.
The volume question is kind of two parts and you talked about it a little bit already. But Vale obviously has a number of licenses that are kind of required to reach your production goal of 400 million tons down the line.
Is there any kind of comfort or clarity that you can give us on these licenses? I mean are they merely a formality?
You obviously expect to get them but there is any kind of visibility you can get that are not going to be significantly delayed at this point in time either conversations with the state or federal government on this? That's the first part of the first question and within that you obviously have always had a focus on value over volume as has your Australian peers and one of the things I'm thinking about there is your additional capacity as it kind of materializes out of the northern system in particular, but Vale's consolidated capacity could be 450 million tons.
We're sitting at almost 200 ton on iron ore and if there was a time to kind of monetize that additional capacity I would think it would be now and basically add additional volumes beyond the 400 million tons with iron ore 200. So how do you think about that strategy value over volume given where prices are and given that you could have additional capacity throughout Vale's systems going forward?
So that's kind of the first, sorry slightly long volume question and then the second question is not freight. Luciano, you talked about a bit of freight inflation obviously and how it impacts your second half of the year.
How does that if we look beyond the second half of the year, if we look into 2022, 2023, Vale is obviously going to be putting more volume into the market that could keep trade rates high like if we're still sitting at $28 a ton by the end of next year is there additional freight inflation that kind of flows through your P&L or are you still well protected on your freight contract? So that's just a longer term view on the freight cost.
So those are my two questions. Sorry if they were a little bit long.
Marcello Spinelli
No problem, Andreas. Spinelli speaking.
Thank you for a question. Regarding the risk to achieve the volumes, obviously licensees or authorizations are always in our track and then we try to plan with some extra delay to keep our planning okay.
So what you see, if you split the challenges in three, the north we need to keep the license as a rolling process. We just got the license of Pete in [Indiscernible] so it's business as usual.
It's going well. We don't we don't see any delay.
In the southeastern system we are really close to bridge the gap of the lack of capacity, dam's capacity to install the filtration. So it's in our hands actually.
We have final licenses yes we have but we don't see any big deal and I explained about the Torto dam that we still have to do this but if you have delay we have a full back position for that. I'm emphasizing that we are trying to bring in our planning process buffers contingencies to be reliable in the end of the day.
Jumping to your second part of your question, Vale is a mantra. So we are ready to bring back the 400 million tons and we are building the extra 50 million tons.
This is 450 million tons. Why?
We want to be okay with -- we want to be reliable with our target of 400 million tons and we can use an extra 50 million if the market demands that. So that's our mantra.
We're going to decide these as we evolve in the market. So again, but definitely we need to be ready for an extra capacity and about the freight, finalize the freight side we again can see that we are less exposure this quarter, but this first half as Luciano said the second half its seasonally more exposure to the spot freight but don't, you must have in mind that we are bringing an additional 18 [Indiscernible] for this year that will match for the demand of 400 million tons and the next six New Castle maxes for our fleet.
We are talking about 170 vessels in our fleet today. So we are growing these natural hedge for the spot market freight and definitely we consider the inflation today and the last problem was really related to small vessels to Panamax is that just came the soybean seasons that make this happen and contaminated the vessels market.
So again we need to live this. We're not forecasting any big inflation for the spot market and we are working hard to have our own fleet to offset any problem in the market.
And an additional point is total fleet today we have installed all these scrubbers. That's another point that we are not being affected to the gap between the high and low -- so the shipping business for us is very important to be stable.
Andreas Bokkenheuser
Said it all.
Operator
This concludes today's question-and-answer session. Mr.
Eduardo at this time, you may proceed with your closing statements.
Eduardo De Salles Bartolomeo
Thank you. Thank you very much for your attention and questions.
I need the rest to talk to us. I think we've been repetitive in a play from day one.
It's a marathon that we're going through. I think in the Vale day we said the risking, reshaping and rewriting.
The risking is advancing pretty well. Still a lot of my goals to achieve.
Example, safety be more assertive on production. But we did strides very good, on the capital discipline is zero doubt that we are on that.
Reshaping tremendous good example of how to do it with respect with communities. Mozambique's going to be another one.
And we ratings going to watch is going to be our final mark. So we're going to be more reliable and more safe, and a more human organization that will be priced correctly.
So thanks a lot. Thanks a lot for your questions because that moves us to the right direction and hope to see you in the next call.
Operator
That does conclude Vale's conference call for today. Thank you very much for participation.
You may now disconnect your line.