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Executives

Fabio Barbosa - CFO

Roger Agnelli - CEO

Analysts

Rodolfo De Angele - JPMorgan

Marcelo Aguiar - Goldman Sachs

Jorge Beristain - Deutsche Bank

Marcello Brisac - Itaú Securities

Felipe Hirai - Merrill Lynch

Terry Ortslan - TSO & Associates

Sanil Daptardar - Sentinel Asset Management

Carlos de Alba - Morgan Stanley

Ben Falk - Marble Bar

Companhia Vale do Rio Doce (RIO) Q3 2008 Earnings Call October 24, 2008 10:00 AM ET

Operator

Good morning, ladies and gentlemen. Thank you for standing by and welcome to the Vale's conference call to discuss third quarter 2008 earnings results. If you do not have a copy of the relevant press release, it is available at the company's website, at www.vale.com, at Investors link. (Operator Instructions).

As a reminder, this conference is being recorded. The replay will be available until October 30, 2008. To access the replay, please dial 55-11-4688-6312, access code 345. The file will also be available at the company's website, at www.vale.com, at Investors section.

This conference call and the slide presentation are being transmitted via Internet as well. You can access the webcast by logging on the company's website, www.vale.com, Investors section, or at www.prnewswire.com.br.

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 in Rio de Janeiro is Mr. Fabio Barbosa, Vale's Chief Financial Officer; and Mr. Roberto Castello Branco, Vale's Investor Relations Officer.

First, Mr. Fabio Barbosa will proceed to the presentation, and after that we will open up for questions-and-answers.

It is now my pleasure to turn the conference over to Mr. Fabio Barbosa. Sir, you may now begin.

Fabio Barbosa

Thank you very much. I'll just like to inform you all that our CEO, Mr. Roger Agnelli is here with us and he will participate at the whole conference call. Thank you very much, Jose, for your presence here with us.

Roger Agnelli

My pleasure.

Fabio Barbosa

So let's start with the first picture of our results in the third quarter of '09 versus '08. It was a very good performance, operational performance. We have record in the output production of iron ore, pellets, nickel, bauxite, alumina, aluminum, cobalt and thermal coal. Our shipments also were in a record high for iron ore, pellets, copper, alumina, cobalt and thermal coal.

Revenues reached $12.1 billion, our EBIT $5.5 billion, EBITDA $6.4 billion, so a tremendous operational performance. That was also associated with the recognition awarded by the (inaudible) this very week of being considered the most admired company in Brazil. That's very good and show how responsible socially speaking we are in the environment that we operate.

Page four, risk management policy, first of all, the basic concept is that our trading desk is not a profit centre. Our policy is very conservative. We have our policy focus on mitigating cash flow volatility. So this is what drives our policy, our risk management policy.

We have no leverage in our operations. And as of September, the overall position of our derivatives, mark-to-market basis, was $32.6 million. It was a positive $32.6 million or less than 0.1% of our last 12 months revenues. So this is an important message considering what was observed unfortunately in the last several weeks of Vale.

If you look at our release, you'll see a very detailed explanation about our risk management policy and the use of derivatives. And also, a note on our financial statement by request of our CVM or SEC in which we produced very detailed explanation about our derivatives and policies. So this request was made by CVM last Friday and Vale was able to comply fully.

Yesterday we released the results already with this addition requested by CVM, so very important news there. Given that now we face a new global scenario, so the picture of the world that we know until September '09 changed in October as a brave new world out there. In this last quarter, what we saw till September it's something that is the end of [fears] now, we have to face the reality of a new world. And for that Vale is very well poised to explore growth options in this much more illiquid world.

We have a very powerful cash flow, very large cash holdings that were derived from our capital increase that we promoted our offering in July. Most of the cash that we have today is derived from this operation, $12 billion, and now we have $15.3 billion.

As you may recall, we setup long-term credit facilities with institutions like BNDES in Brazil, JBIC and NEXI in Japan. And finally, we have $2 billion in committed facilities for our short-term liquidity needs.

So on the top of that, we have a very well structured debt profile. Our total debt EBITDA reached a new low with one time EBITDA in the third quarter of '08. And we are talking here gross debt, I would like to mention that, gross debt EBITDA reached one time EBITDA very low level, considering what we have today.

And the average maturity of debt stays in a very comfortable 9.3 years level, so it's a very comfortable position. year. Next year we have $380 million in amortizations, so this is a very, very comfortable debt profile. At the same time, the cost, the average debt cost is around 5.8%, which at current levels in this prevailing markets, it's a very comfortable position as well.

Well, this new world, we are talking about, it's a new world where that shows through this PMI that we are put there in page seven. There is a sharp deceleration for industrial production, and this is a part of this new reality, and the PMI as a lead indicator is anticipating what is yet to come, so we should be aware that this will be a very difficult environment over the next several months.

Indications that we have is that we should expect weakening in the demand for minerals and metals over the next several months. The world economy has changed, as we put there, there is less liquidity. We observed wealth losses around the world, trillions of dollars of wealth simply disappeared and we should expect a lower growth path the world economy. Although, with a divergence that we mentioned now, release between emerging market economies and develop their cost, that should continue and should widen actually.

So high cost producers will face very difficult environment, and the lack of fund and liquidity will most likely hamper the future growth of supply and in a way would contribute to market rebalancing sooner rather than later.

The Chinese demand is weaker right now, much weaker. There are some cuts in steel productions in October. And we do expect production in general in China to rebound in the first half of '09. In fact the Chinese demand for iron ore has been slowing due, to as we put their combination of several factors.

First, we have there a snow storm and then soon after that we had the earthquake that in fact provokes a major disruption in the logistics and the feeding of the several regions of the country in terms of raw materials, so this caused a major disruption out there.

And then we had the Olympic Games and Paralympic restrictions, where in areas around Beijing we had a sharp reduction in industrial activity. And there is of course a fact that there is low external demand for Chinese steel that also affected the dynamics of the amount for iron ore there.

And finally, the negative effects of the domestic credit tightness in China is affecting, particularly the properties sector, as you can see in slide 10, in chart 10. This credit tightening promoted by the Chinese government had effect of slowing sharply the loans to construction, it almost didn't grow in August, and the total loans also are growing at much lower pace.

So this is the result of credit tightening, it is the most dynamic sector of the industry, and the Chinese economy. And it had a major impact on the steel consumption. As you can see in page 11, where the construction itself represents the property, represents about 24% of the total fixed asset investment, second only to manufacturing.

And then we have a construction that is a major consumer of steel, affected, and measures related to deal with the excess of activity that was observed by the Chinese government in the economy in the late 2007s, early 2008. Inflation is down now, but the result of this tightness in credit was a major deceleration in the construction, with obvious effects on the steel consumption.

However, we believe that the long term fundamentals are strong. We believe that there will be some sort of deflation in housing and the affordability of buying new homes should increase over the medium to long-term. Urbanization and rise in income are key drivers and those are structural elements that will not change, they will continue to be there.

We are in a pause that could that could take several months, but the growth process, the development process of Chinese economy will be certainly resumed. And now we have to wait until the effects of the measures taken by the Chinese government have an impact on the short-term indicators.

In fact, we will continue to have a very positive view about the long-term, but in the short-term, things are much harder, although the Chinese government implemented a very comprehensive package for stabilization of the demand, by trying to avoid an excessive appreciation of the RMB, there was someone monetary policy easing, there was softening of credit controls, and tax incentives, again, in place.

So they are trying to deal with a short term hardships in this way, of course one cannot ignore the difficulties represented by this crisis in the world economy, but the long-term fundamentals are there.

In our case, we have been working to enhance our growth options in the long-term. We are better positioned now to weather the downcycle. We have been preparing the company along these years to work in a less favorable environment and the fact is that that today we enjoy a financial strength that is second to no company in our segment, I would say, world class assets and a long and attractive projects pipeline.

We implemented, as you could appreciate in our last few quarters' releases, the cost-cutting measures that should have an effect. We established strategic alliance with suppliers of parts, equipments and engineering services. Of course, in this new world, we all have – should have a stronger U.S. dollar, and this would affect in '08 positively our long-term cost. We will certainly – we have to look at our production plans and make some adjustments as Roger will comment. And unlike previous years as we put there, we have no large iron ore project coming on stream in 2009 and 2010. And finally, the nickel projects Goro and Onça Puma, we always have the option to extend the duration of the ramp up in order to deal with market circumstances.

With that I will pass the floor to Roger to make his comments about the scenario and the prospective of our company. Roger please.

Roger Agnelli - Chief Executive Officer, President

Well, thanks very much, Fabio. Good afternoon everybody. It's a pleasure to be here with you. I don't have a lot of things to add to what Fabio mentioned. The point is the balance sheet is out there, no surprise. The company is still working to reduce costs. I think we managed very well the cost reduction for these nine months of '08. We are going to continue to work to reduce more our cost.

Of course, right now, we have in our favor the reais depreciation, which is very good for us because our expenditure of our cost is reais-denominated. If we had this year of '08 ending in September, I think, we should be very happy, because we visit all the records. The results are bigger than last year already.

We worked very hard to have all the finance for our projects and we have all the money that we needed to continue to finish our project. I think this is the major step that we are going to have next year is to finalize all the projects that we have already started. Of course, the ramp up of those projects will be according to the market conditions.

Second, to start new projects, of course, we have the ability to choose the best timing to do that and we work carefully to push more investments ahead. Of course, we are concerned about the oversupply of different materials in the market right now and we will be very careful to add more volumes in the market.

So, I don't have any additional comments to do. Just say that, no surprise. The results are good. The year of '08 is very, very solid for us. We are in a very good situation right now and we have all the options open for us. If we wanted to speed up the investments we can do, we have money. We have credit lines to do that if we wanted to (inaudible). We can do that. If we wanted to continue to analyze possible acquisitions, we have the ability to do that.

This is not our priority as I'm always saying this kind of thing. This is not our priority. But certainly, in the future we are going to see a lot of depreciative assets that we can analyze if it fits to our strategy or not. If it fits, if it adds value for our shareholders, we are ready to move.

The point is we are in a very good situation to face the challenge that we have within front of us.

For the future, what I can say, let's be quite for a while. We are not pressed or we are not forced to sell our product at any price. Of course, some of our competitors are selling at a very low price right now. This is the adjustment that the market is forcing those guys to do that. We are in a very good situation. We can hold a little bit. We can wait a little bit to clarify the situation, clarify how deep is going to be the recession.

There is no doubt that we are going to have, at least for the next six, seven, ten months a very deep recession. But we don't know how long this is going to take to rebound. That's it. I think we can don't have anything else to say, just to answer your question, if you may have.

Fabio Barbosa

Okay. Thank you, very much, Roger.

Question-and-Answer Session

Operator

(Operator Instructions). Our question comes from Mr. Rodolfo De Angele with JPMorgan

Rodolfo De Angele - JPMorgan

Hi. Good morning everyone. My question is about iron ore, could you just be a little bit more specific as to what you expect to see in terms of volumes over the quarters and beginning of our next? Are you already getting the sense that volumes are down by any percentage points any like that you could give us on what is the situation on the iron ore side of equation?

Roger Agnelli

Rodolfo, to make comment right now is dangerous. What we can say is that in September we shipped over production without any problem including China. October, I think we are on budget, maybe a little bit lower in terms of volume. For November, I feel that we are going to face really a crunch in the market, but it will not be a disaster. And of course, we have the ability to reduce production in some mines that we are not very competitive. For next year my feeling is that we are going to see at least more three months or four months, very, very complicated. After all, I think we are going to rebound.

What is causing that is because in the first half of '08, Chinese and some of other (inaudible), they bought a lot of stock. They bought a lot of material. And if you go to Chinese [real] mountains, mountains and mountains of iron ore that is a need. It has been consuming. I think it's going to take more two or three months to normalize or to have equilibrium in terms of demand and the supply.

But I can tell you it's really hard to see the next six months. At least I should say that we are prepared to face these next three months, very complicated. This is the situation right now in the market. There is a stocking process going on. We needed to wait a little bit to see where the real demand is. Some of our clients are cutting production right now. This is a world wide situation right now. Everybody is a little bit scared about the lack of demand, but it's not going to take so long to reverse.

Rodolfo De Angele - JPMorgan

Okay. Roger, thank you. I'll leave my follow-up questions for (inaudible). Thanks

Roger Agnelli

Thank you.

Operator

Our next question comes from Mr. Marcelo Aguiar with Goldman Sachs.

Marcelo Aguiar - Goldman Sachs

Hi, gentleman. Congratulations on solid results, definitely a new world. Can I comment a little bit? I mean, according to our calculation here in the back of your results, I mean your iron ore cost had increased, if I'm not wrong, 17% quarter-on –quarter. Can you elaborate about this cost increase and what we could expect in terms of cash cost for iron ore in the following quarters?

Fabio Barbosa

Okay. Thank you, Marcelo. I think one of the major drivers was the energy cost. It increased this month, and also the moorage. We had a very tight shipment program in the September as part of this. So September was business as usual. So we faced some de-moorage cost.

And the effect of the exchange rate, the acceleration of the depreciation took place only in the last few weeks of September. If you look at the average exchange rate for the third quarter, it's almost the same as the second quarter, 166, 167 respectively. So there was no effect there.

So moving forward, if exchange rates remain as it is currently, we should expect all things remain the same, a reduction cost in cost associated with exchange rate.

Marcelo Aguiar - Goldman Sachs

Okay. Thank you. I'm going to get back to the queue.

Fabio Barbosa

Thank you.

Operator

Our next question comes from Mr. Jorge Beristain with Deutsche Bank.

Jorge Beristain - Deutsche Bank

Hi. Good morning, Fabio. I guess my question is could you give us more color as to what is happening on the ground in China? We're all aware than China has a massive amount of self-supply, and given we're a spot market, transactions are being recorded currently in the $65, $70 range.

Can you comment if your clients are now starting to feel the pinch of some of their suppliers essentially going out of business or ceasing to supply product at these price points?

Fabio Barbosa

Jorge, what's happening today is that, as you pointed out, spot prices are below the benchmark prices. Considering what Roger commented that there are a lot of inventories out there and inventory that were brought, let's say, were booked with a freight cost of $100 per ton in a different situation.

So these are difficult times here because not only prices came down, but liquidity is no longer there. And freight cost are now at $12 per ton or even $10 per ton. This is, of course, a result of a major deceleration to production. There has been cut in production of steel, in some cases up to 30% in steel production cost.

So demand for raw materials declined sharply considering this adjustment for the situation that's out there, a lot of inventories and a lot of downward pressures considering the credit crunch and a slowdown of the demand associated with all the elements that we commented.

So the scenario that we see in this fourth quarter, there is strong deceleration of the Chinese demand. And that should, of course, affect our shipments. As Roger also indicated, we are below budget. In November we have a difficult month, although again we have a very strong position, but we will have a very difficult November and maybe even December.

So this deceleration, of course, is concrete. And the Chinese government is also observing that and trying to figure out ways to foster more growth given that this deceleration is not in the intensity, maybe they would be expecting considering all the elements of the Chinese economic and social development.

Jorge Beristain - Deutsche Bank

Thank you. And my second question, if I may, is maybe more directed to Roger, but frankly, I was a little surprised that in the environment that we're in, Vale came out with an increase of about 30% on its planned CapEx budget to around $14 billion. And I would just like to understand what the real sensitivities are there to the actual slowdown that we're actually now leaving.

In other words, how concrete do you believe that $14 billion budget to be and at what point could we start to see signs that perhaps Vale may push back some of these projects or [reign] in that growth?

Roger Agnelli

Well, certainly the $14 billion investment for next year right now is concrete. Of course, we have the possibility to slow down a little bit and maybe start off the implementation of some of those projects. The point is we have been investing in a very strong bet and we needed to finalize some of the biggest investments that we are implementing right now, including Goro, including Onça Puma, includes some of iron ore projects and pelletizing plants like (inaudible). So we are going to finish everything.

In terms of ramp up of those new investments, those new production plants to our mine, of course, we are accommodated according to the market.

For the beginning of some projects, of course we are going to analyze it next year. I should say that, all the investments that we have right now in our pipeline are very efficient, are very good. Even if, we compare to the current market capitalization of some of our competitors, I think, those investments are in a better situation then old assets. So they are very good assets.

Just to give an idea, I feel that the project in Peru that we started three or four months ago, we are going to push this investment there. It is a phosphate mine and the market is still very good. We wanted to increase our presence in this market, in fertilizers or materials for fertilizers. So we are going to keep investing these in projects.

Mozambique's project, I think I feel that we need this to increase our presence in coal business. So, we are going to go ahead with these projects. If we analyze, Serra Sul Iron Ore Project, it is going to take like three or four years to finish the project, maybe we can finish the project in five years or in six years, but it's very important for us, even considering the quality of the ore and the cost of the mine that is going to be much below than the average cost that we have today.

So if we finish these investments, we will be in a much stronger position to compete in any scenario in the markets. The projects in railways, in logistics, we needed to open capacity or to increase our capacity of transportation for the future projects that once we wanted to implement in Carajás area, so of course in the logistic projects we have continued to invest

So I should say that the biggest part of the investment is concrete. Of course for 2010, we can reduce significantly the investment for the year 2010, but for 2009, I feel that we are going to continue to implement all those projects.

Jorge Beristain - Deutsche Bank

Thank you.

Operator

Our next question comes from Marcello Brisac from Itaú Securities.

Marcello Brisac - Itaú Securities

Hi. Good morning, gentlemen.

Fabio Barbosa

Good morning

Marcello Brisac - Itaú Securities

Just a quick comment here on taxes, your effective tax rate was extremely low this quarter, actually have no, effective productive cost (inaudible) factor, so I was just wondering what has happened, if there is a [mix effect] gain exactly. Why your tax rate was so low? Thank you.

Fabio Barbosa

It was a combination of elements, first in our Brazilian taxation, the effects of the monetized correction associated with exchange rate; they are not taxed, so it is a major element there. We have a lot of assets abroad and denominated in dollars, so there is no taxation because this simply a changing in the currency, but it affects the result. Also we have the contribution of the interest on shareholders equity that we announced. We are paying now this month of October, $1.6 billion, and we have deduction associated with that.

We also observed a reduction in the tax rate in Indonesia and then we reversed it provision for the income tax there and this accounted for about $164 million. And finally, the charges associated with a devaluation of the currency over the debt denominator, the US dollars, they are just fully deductible on the tax base. As there was a major depreciation of the reais there was an accrued expenditure associated with this.

The depreciation, that was dully deductible from our result. And this combination of elements caused our tax rate, this abnormal low tax rate, I would say, this is something that you should not expect to happen again, it was a combination of elements, that one should not extrapolate for the future, because our tax rate is about the same and should continue to be the same, the long term tax rate around 20%. So this was an absolutely exceptional one-off result.

Marcello Brisac - Itaú Securities

Perfect. So just to verify that the impact of the revaluation of the bad debt and expense that is tax-deductible?

Fabio Barbosa

Yes.

Marcello Brisac - Itaú Securities

On the other hand, the revaluation of [currency] is not an impact.

Fabio Barbosa

That is right

Marcello Brisac - Itaú Securities

Okay. Thank you very much.

Fabio Barbosa

Thank you.

Operator

Our next question comes from Mr. Felipe Hirai, Merrill Lynch.

Fabio Barbosa

Felipe are you there?

Felipe Hirai - Merrill Lynch

Hello. Can you hear me now?

Fabio Barbosa

Yes.

Felipe Hirai - Merrill Lynch

Hi. Good morning, everyone. Thanks for the presentation, it was very helpful, and I think one of the best than the last two quarters. My question is related to iron ore; I think that now it's what really matters for a while, I wonder if you could help us think on how we should be looking at the iron ore market for 2009 in terms of prices? What's going to happen with the index that the Australians were pushing? How we should think about freight prices? Now, it seems disciplined demand dynamics. They are in favor for the steel makers. So, just if you could help us understand how we should think about iron ore prices next year? Thank you.

Roger Agnelli

We continue to prefer the benchmark system. I think today there is no doubt that this is good for the industry because there is lot of volatility in the market. And in last quarter you are going to see that this is the best way to negotiate with our clients. Index brings a lot of volatility and a lot of distortions et cetera et cetera.

Clearly, I don't understand why the Australians they like the index or they like this kind of things. It's their problem. The point is we are continuing to deliver iron ore to China, to Japan, to Korea, to Europe at the long-term contract, at the benchmark system. So, I think we are in a much better situation right now compared to the spot market.

If they are selling in the spot market I don't know. But, of course, they haven't been hurting by the price right now. For next year, it's a completely new negotiation. We will be shifted to the benchmark system to have one price for iron ore. The Carajas quality is going be the benchmark again. And life is not going to be same. So, we don't see big change in the system. Even though, of course, we needed to adapt the benchmark system to a new reality, because the world is completely different right now.

Felipe Hirai - Merrill Lynch

Okay. Thank you.

Operator

Our next question comes from [Ms. Carlos Cintella with Santander].

Unidentified Analyst

Good morning, gentlemen. My question is regarding the general philosophy of the company facing a global recession. What has changed versus the prices we saw in '98 and 2002 where companies were not that consolidated and the sacrifices were via price? What are you foreseeing that it's going to change this time, maybe more adjustments in volume in order to support prices? I wonder here how are you preparing for that. And if you can also give us, and following on these question, any updates on your negotiations of increasing prices in China at 12%?

Roger Agnelli

Well, in terms of market, I think the market today is completely different than it was in 2002. First of all, older mines have been facing a cost increase because this is the nature of the business. When you go deeper, when you increase your production, your cost goes up. So, I think it's impossible to compare 2002 with 2007, 2008.

For next year, a lot no efficient competitors came to the market. I think they will be the first to leave the market. A lot of dreams were sold in the markets that a lot of new material is going to reach the market that I don't believe that they will continue to push those investments ahead, because the cost of investment is very high. There is a credit crunch right now in the world and they are not prepared to realize all this investment.

So, I think, naturally the market is going to be adjusted supply and demand. We believe that in medium-term, long-term the trend is still positive. And don't forget that at the beginning of '08 the end of '07, what we had was a bit normal behavior in the market. The price went up sharply due to the exchange rate, the dollar depreciation due to the growth rate in the economy, mainly there in China because they were finalized the infrastructure for the Olympic games.

So right now, I think this is not normal. It is completely abnormal, the behavior in the market right now. Compared to us some companies are facing problems to price their products because the price today is affected by liquidity crunch. So, if they need money, they need to sell at any price. So, this is not sustainable either.

So, for next year, let's wait a little bit and let's be quite, let's be conservative, let's see what's going to happen. My perception is that, we will not have sustainable oversupplying in the market. This is for sure because the cost is very high. The current prices are below the average cost of the industry. So a lot of no efficient producers will be completely out of the marketing, I should say, in a few months, certainly in a few months.

Unidentified Analyst

Thank you.

Roger Agnelli

Sorry, there is another question.

Unidentified Analyst

The 12% that you guys were pursuing last month.

Roger Agnelli

Okay. The 12%, let's talk a little bit about that. First, I was in Japan, in Korea, in Taiwan, in China last April, May, and we mentioned that we stacked their price. We increased the price by 71% at that time, and we said that we could reach an agreement with the Australian with a price higher than our price. We would like to see something for us. They accepted to pay a premium for the Australians, the resale agreement there and then we asked for a quality price increase. Some companies or some clients, the major clients in Japan, in Korea, in Taiwan accepted the price. That was in July, August of '08.

Right after that, the market changed completely. And what's happening today is that the Chinese, they want to have the Australian price renegotiated. Today, they don't want to pay the premium that they agreed to pay a few months ago and they are refusing to accept our price right now. And of course, we are not in a hurry because a lot of trade, there is a lot of local mines, there is need to sell their product, so let's leave them first. Then next year we are renegotiate the price again with a completely different environment. I should say that we are not delivering. We are not shipping iron ore without the 12% percent price increase.

Unidentified Analyst

Thank you very much.

Operator

Our next question comes from Mr. Terry Ortslan with TSO & Associates.

Terry Ortslan - TSO & Associates

Thank you very much, Terry Ortslan. I share your reviews on China, just came back yesterday as a matter fact of fact. And you seem to have a timing horizon which is a bit more than couple of months or couple of quarters, but nevertheless let's assume that.

But my question to you is CVR (inaudible) a leader in many commodities, iron ore and nickel. Can we expect that you're going to show some discipline to the industry, whereby by cutbacks and managing the supply you can control the inventories a bit more and bring discipline to the industry, including nickel businesses as a matter of fact that you've implied in your presentation about Onça Puma and on the Goro? Thank you

Roger Agnelli

Yes. In nickel markets I think we are facing the major oversupply in the market for short-term or medium-term and we are cutting production. Indonesia, for example, we turned off all the power plants, the oil, the thermal power plant and we are running right now only hydropower plant where the cost is much lower. So we are cutting at least 20% production there in Indonesia.

In China, we are working right now with 35% off our capacity and we don't want to increase capacity because to sell at any prices is not reasonable. In Canada, we would like to keep the mines producing or operating at their maximum capacity because there we have the lowest cost in the nickel business.

So of course, we are going to follow this plan in the market and we will not sell at any price. If it's necessary, we are going to cut production, no doubt about. In terms of iron ore, we have at least $30 million that is completely out of our average cost in some mines that are not good in terms of quality, and we are reducing production right now in those mines, mainly here in the subsystem. But we are keeping production there in Carajás.

Of course, we are not buying iron ore from third parties right now. We cancelled the acquisition of those iron ore, and we are reorganizing the company to face the lowest cost productions possible. This is for the next three, four, five months. So we are not really pressed by debt or working capital, so we will be very disciplined.

Terry Ortslan - TSO & Associates

I am very pleased to hear that. Can you just elaborate on the Onça Puma and the Goro ramp-up the way you implied in your presentation in terms of the next scenario you have for the ramp-up schedule? Thank you very much.

Roger Agnelli

We are discussing right now the ramp-up of for Onça Puma and Goro. Let's talk a little bit about Onça Puma. Onça Puma was expected to produce 7,000 tons of nickel next year and the step up was expected to start in March or April. We are going to postpone a little bit from March to August or September or maybe October. And our expectation is to produce 4000 tons of nickel.

So we have turned on the furnaces and we will keep production at the minimum level. The same thing is to Goro, Goro we are going to turn on the furnace until the end of '08 maybe January of next year and we are going to work at the minimum production level.

Terry Ortslan - TSO & Associates

Okay. Thank you very much for your help.

Operator

Our next question comes from Mr. Sanil Daptardar with Sentinel Asset Management.

Sanil Daptardar - Sentinel Asset Management

Thanks. On the iron ore side, you talked about significant inventories in China. How long do you think that it may take for those inventories to get depleted? Basically, you have been saying in last many conference calls about your high quality iron ore, basically that's beneficial for Chinese blast furnaces, and you haven't talked anything on that today, in fact that you are going to push more high quality iron ore in Chinese mills, rather than the low quality, which they currently have probably on the inventories there, where you can get higher prices for iron ore in 2009, 2010 period. Is that still the philosophy or has that philosophy changed now on the downside? Can you just talk about that on the two factors?

Roger Agnelli

I think the first issue is, today that the scrap price is $200 right now, which is very, very low. And of course these two mills they prefer to melt the scrap than iron ore. So, if they are reducing production right now, what they need to do is to reduce the efficiency of their blast furnace. So, they will consume more low quality ore, but this is temporary. I feel that in three or four months their stock or their inventories that they have there in China will be consumed, but they need to have of course high quality iron ore to blend.

In Europe, they wanted to keep their big blast furnaces at maximum capacity because it is not easy to shutdown our big blast furnaces. So if it is working they need to keep it at maximum production, at the maximum efficiency. What we needed to do here is to see how big is going to be the adjustment in steel production. Then we will have all the options open to face a new reality in these two markets.

The point is, internationally the situation is not good. In Europe, some of our clients are cutting production, because there is a lack of working capital, there is a lack of finance right now. So they are obliged to shut off some blast furnaces. So let's wait a little bit to accommodate, to cease things, as in the normal situation of course. The level of production will be lower than it was in the first half of '08. No doubt about that. And we are going to adjust our production to this new reality.

Sanil Daptardar - Sentinel Asset Management

And the pricing in 2009, 2010 of course you cannot talk about that, but you were contemplating push high quality iron ore and do you think that in this scenario you may be able to get higher prices for the high quality iron ore or you don't think that it is not likely now?

Roger Agnelli

Since the clients are said to have a different price regarding to freight, I think, we deserve to have a premium for the high quality ore. No doubt about that. And we are going to be fixed to this policy because high quality iron ore is good for the environment, because the fuel emission is lower, because the consumption of energy is lower, the quality of this steel is better. So we needed and we would like to have that, why that? Because they accepted to differentiate the pricing in Australia and right now if we considered the freight price, I think there is no big difference between our (inaudible) and the Australian ore.

Sanil Daptardar - Sentinel Asset Management

Okay. Great. Thank you.

Operator

Our next question comes from Mr. Carlos de Alba with Morgan Stanley.

Carlos de Alba - Morgan Stanley

Good morning, Roger. Good morning, Fabio. First one, have the strategic importance of copper, aluminum and coal changed with these down market or re those still the three most important avenues that Vale has to grow in coming year?

Roger Agnelli

Copper and coal is certainly a market that we would like to increase our presence in. We believe that long term is good. To implement new projects its going to take like four years to finish the investments and at that time, I believe that the market is going to be much better than it is currently. In aluminum, of course the problem is energy cost is very high. So, we needed to analyze carefully.

I think we have room to develop the business that is very intensive in capital. The return in terms of years is longer. So, this is not really our priority to develop aluminum smelters only if we find out places that we can count on a cheap or very low cost energy.

For alumina, I feel that we can go a little bit ahead. Of course, the timing or the speed is going to be reduced. But we are not going to reduce the speed in terms of copper, project and implementation like [Saluoko]. We will go at full stream ahead because it's going to take like four years to finish the project in [Co-Mozambique], very, very, very competitive mine and we are going to keep the same speed that we assume in the very beginning of the project.

Carlos de Alba - Morgan Stanley

Thank you. And just follow-up, is there any guidance, Fabio, in terms of the volume that we should expect for the year?

Fabio Barbosa

I think it's too early to comment on that Carlos. Things are evolving, developing. Markets are very volatile. We are not in a position to give any indication at this stage.

Carlos de Alba - Morgan Stanley

Thank you, gentlemen.

Operator

Our last question comes from Mr. Ben Falk with Marble Bar.

Ben Falk - Marble Bar

Hi, good afternoon. It's [Andy Mann] from Marble Bar Asset Management. Could you please give us some thoughts on the cash cost split up? I realize that prices are falling, but at the same time energy costs, fuel costs are also declining. Can you give us some idea as to after the reais adjustment what kind of cost declines we should be expecting in Q4 versus Q3? Thanks.

Fabio Barbosa

Well, I think the major element there, as you can appreciate, the markets have been extremely volatile. So, we have sharp reduction in oil prices that may or may not be translated in cost reductions here in Brazil, for instance and in our other places in which we have operation. This is the major question mark we have at least in Brazil where we have the bulk of our operation here.

Also, the exchange rate, and not only the reais, but also the Canadian dollar, the Australian dollar, the strengthening of the dollar should affect positively, all things remain the same, the cost structure of our several operations worldwide. So, again, today to guess what will be the average exchange rate for the fourth quarter is literally a several billion dollar question. But the trend, the appreciation of the U.S. dollar is there. And one should expect all things remain the same, a reduction in cost associated with that and the exposure, even the exposure that we have to several different currencies in our cost.

Roger Agnelli

And in my word, there is another thing that we can add to that. It's the fact that a lot of our suppliers, services suppliers or equipment suppliers, they are facing some cancels in terms of orders. A lot of [mining], a lot of other companies they put orders in the beginning of the year and they are canceling those orders.

So, a lot of our supplies are coming to us and say, hey, would you like to have the equipment right now? Or would you like to hire us to do something for you and we can give you a discount, because they are losing work right now. So, it's still premature to say or to put guidance of our cost reduction. But, of course, money right now is king and we have the money.

Operator

This concludes today's question-and-answer session. Mr. Fabio Barbosa, at this time you may proceed with your closing statements.

Fabio Barbosa

I'll leave that to Mr. Roger Agnelli, our CEO.

Roger Agnelli

Yes. What I would like to say is that we like to work hard. We love to work hard. And we are continuing to work hard to give or to bring the best return to our shareholders. I feel that we are going to have a lot of opportunities to cost reduction. I think we are going to have a lot of opportunities to support our clients that is going to be necessary to do that. And our view is always long-term. And I feel very comfortable to say that we are in a very strong and very good position right now to keep growing or to keep going on.

Thank you very much everybody for the ideas. Bye-bye.

Operator

That does concludes our Vale's third quarter 2008 earnings conference for today. Thank you very much for your participation and have a good day.

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Source: Companhia Vale do Rio Doce Q3 2008 Earnings Call Transcript
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