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Vale S.A. (NYSE:VALE)

Q4 2012 Earnings Call

February 28, 2013 10:00 am ET

Executives

Murilo Ferreira – Chief Executive Officer

Luciano Siani – Executive Officer of Finance and Investor Relations

José Carlos Martins – Executive Officer of Ferrous & Strategy

Roger Downey – Executive Officer of Fertilizer and Coal Operations and Marketing

Vania Somavilla – Executive Officer of Human Resources, Health and Safety, Sustainability and Energy

Analysts

Felipe Hirai – Bank of America Merrill Lynch

Carlos de Alba – Morgan Stanley

Chelsea Konsko – TIAA-CREF

Terence S. Ortslan – TSO & Associates

Gary Lampard – Canaccord Capital

Jonathan Brandt – HSBC

Daniel Rohr – Morningstar

Rodolfo De Angele – JP Morgan Chase

Paul Massoud – Stifel Nicolaus

Ivano Westin – Credit Suisse

Marcelo Aguiar – Goldman Sachs

Operator

Good morning, ladies and gentlemen. Thank you for standing by and welcome to Vale’s conference call to discuss Fourth Quarter 2012 Results. If you do not have a copy of the relevant press release, it’s available at the Company’s website at www.vale.com at the Investors link.

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. To access the replay, please dial 5511-4688-6312; access code 4353110 pound key. 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 to 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 are; Mr. Murilo Ferreira, Chief Executive Officer; Mr. Luciano Siani, Executive Officer of Finance and Investor Relations; Mr. José Carlos Martins, Executive Officer of Ferrous & Strategy; Mr. Roger Downey, Executive Officer of Fertilizers and Coal Operations and Marketing; Ms. Vania Somavilla, Executive Officer of Human Resources, Health and Safety, Sustainability and Energy; Mr. Galib Chairman, Executive Officer of Capital Project Implementation; Mr. Humberto Freitas, Executive Officer of Logistic and Mineral Research; and Mr. Peter Poppinga, Executive Officer of Base Metals and Information Technology.

First, Mr. Murilo Ferreira will proceed to the presentation and after that, we will open for question-and-answers.

It’s now my pleasure to turn the call over to Mr. Murilo Ferreira. Sir, you may now begin.

Murilo Ferreira

Good morning. I will start my speech today by addressing one of the most important areas, respect people. This means that health and safety first, environmentally responsible and supporting the communities, where we operate.

As you know, 2012 was a challenging year for the global economy and particularly for the mining industry. This low growth and uncertainty just fall on minerals and metal prices. Iron ore prices became much more volatile than before and showed a downstream in our first quarter of the year.

Against this backdrop, our financial performance was impacted, and the main indicators show a larger drop against ’12, ’11, when Vale attained the best financial performance since its incorporation in 1942. Underlying earnings which exclude the non-cash non-recurring items was $11.2 billion and adjusted EBITDA reached $19.1 billion, the third highest in our history. We distributed $6.0 billion in dividends, the highest figure in 2012, among the biggest mining companies and for 2013, we announced last month a proposal to the Board of Directors to pay a minimum dividend of US$4 billion.

Investment reached $18.7 billion, almost a $4 billion below, there is no budget already reflecting the great forecasts on discipline in capital allocation. Moreover, capital expenditures and dividends mostly in line with the expected cash flow with a minimum use of the balance sheet giving our firm commitment to preserve our credit ratings.

The ramp up of Oman, Moatize and Bayóvar projects allows us for production record of pellets, coal, and phosphate. The performance of the iron ore operation in the last quarter of the year was very good. In addition, our marketing policy in iron ore is capturing more value in iron ore sales through higher prices.

Our goal is to maximize shareholder returns through the cycles and there are so many ways to achieve it. Discipline in capital allocation is highly mandatory and will be primarily the focus on world class assets. As a consequence, you see a smaller portfolio of projects that without late potential to produce high returns on invested capital.

There is a lot of value to be on locket from existing operation and project ramp up. A gold stream transaction is a good example of that. Currently, we have – there are several projects in Lubambe, Salobo, New Caledonia, Lubambe and as long as these process advances, variable cost will tend to decrease. Fixed cost are diluted, thus there will be a large swing, the cash flow of this project from negative to strongly positive. So far, New Caledonia is operating as expected proving to be visible. We expect to confirm its economic viability in about one month.

The March operations are going very well. In 2012, we produced 3.8 million tons and its main product is Chipanga hard coking coal has been received very well by our clients. However, the (inaudible) will remain constrained by the capacity of the existing logistic infrastructure Linha do Sena railway in Beira Port until the construction of Nacala corridor is concluded, which is expected to take place in the second half 2013. This year there are 40 projects coming on stream, Additional 40 million CLN, Conceição Itabiritos, and Long Harbour. We have a large potential to create value over the next few years being new platforms of shareholder returns.

We will continue to deploy capital to our highest return business in the iron ore project delivered between 2013 and 2016, we will add substantial value. The progress attribute in environmental in 2012 is a step change forward in our iron ore operation allowing for lower cost, high quality and production growth.

Unfortunately, we have posted this low construction of Rio Colorado project, a world-class asset using that its economics were not in line with our of principles of discipline in capital allocation. However, we hope to find a solution to allow us to resume its discretion.

The tax disputes have been gradually solved and we expected that conclusion to take place during this year. This will eliminate certain about our cash flow and you free time into concentrate on managing the business. Although in initial stage, you are starting to deliver on the commitments we have made. This investment program is fully underway in major adapted to improve efficiency in working capital management are already giving fruits.

R&D expenditures as mentioned main expenses have dropped, we have clear signs of reduction cost of goods sold and will take disciplined actions and patience to produce a meaningful quantitative change in our performance. But we are on track to deliver helped by the hard work, high skills and motivation power there are some now. The global scenario for minerals and metals is gradually improving and I haven’t lost the faith in the future of their markets. And overall, I remain confident of our ability to produce maximum value for our shareholders and we strongly believe that much better days are still ahead.

Now, I will hand over to Luciano, who will discuss our results in more detail and we will be happy to take your question later on. Luciano?

Luciano Siani

Good afternoon. I am going to give some color on the performance of the company mainly in costs and expenses and talk a little bit about our balance sheet and then we’ll hand over to Mr. Martins to talk a little bit about our price realization. So in terms of cost of goods sold, I would like to highlight to you the trend in the fourth quarter of reduction in our bulk services and materials, you can refer to the table four of cost of goods sold and expenses in the press release.

With a structural components of our costs and they have started to show a downward trend, although still early for the administration of our management to give you some guidance as to whether our objective in here. However, these are encouraging signs.

I would like to clarify also something that I didn’t do in the previous conference, which is on acquisition of products. As you can see there is an increase also from the third quarter to the fourth quarter and it’s mainly concentrating acquisition of auto products from $32 million in the third quarter to $148 million. This is not a structural increase in costs, this relates to the sale of our excess energy, Vale has excess energy. Vale has surplus of energy in 2013, 2014, its sales of the excess energy in the sport market. So this is the result of the depressed practice in the beginning of the fourth quarter. But with the increasing spot practice of energy, the sale of excess energy moving Vale should give better results and this upward trend should be reversed.

In terms of SG&A, R&D and other expenses, there has been for the first time in many years a decrease also in the full year numbers from 2011 to 2012. A small decrease, however, I would like to point out for the relative performance between the fourth quarter of 2012 and the fourth quarter of 2011. As some of you know, account seasonality in terms of expenses and capital expenditures to stay investments within this comfortable were working and try to eliminate that, but however, some factors still exists for instance in sales, general and administrative expenses. Usually the salaries when they are usually increase at the end of the year and they have impacts on many accounts, mainly provisions for the 13th salary in Brazil and for vocations and so on, so this all reflects at once in the fourth quarter.

In addition to that, there are some severance expenses that will be incurring with the restructuring. But despite that the personal accounts has posted a decrease compared to the fourth quarter of 2011. We also posted strong reduction in services and other items of sales, general and administrative expenses. As an example, travel expenses for instance we are running at a rate which is 50% below that you are running in the first semester of this year. These are – I mentioned in the number of $65 million of travel expenses for this year of which we have $40 million in the first semester. And so, at a much stronger pace and now we are running at only $11 million for the third quarter. So this is just some color on the efforts that we are making and we are strongly confident that we are going to reduce SG&A by at least 20% this year.

In terms of another big chunk of expense is pre-operating start-up expenses, we have single out this line. There has been an increase from 2011 to 2012. The increase has much to do with the ramp up of Salobo, so the cost, which in 2011 were accounted of its CapEx and now started to appear as pre-operation expenses. There are high costs in terms of the profits of the (inaudible) and what accounts for the most part of this is Vale New Caledonia. And as we will set with the ramp up of the project, we are confident that we will reduce the mix of the pre-operational and idling expenses. So I would say that reducing it of several hundred million dollars is an achievable goal for 2013.

Beyond those pre-operational expense this to have other expenses are large chunk and these were most impacted this year by the extraordinary effects of the payments was settling the disputes over the royalties and also the value added tax in the state of Minas Gerais, which these two account for approximately $700 million, so this will repeat in 2013 as well. Although, the TFRM, the new tax that was introduced by the States of Pará and Minas Gerais, it really increases the level of these expenses under its current basis. There are no recurring effects from the settling of the previous disputes.

So when we talk about our balance sheet, I would like you to please refer to the page 24 on the presentation, whereby we show on the left side that we have decreased our cash flow by $2.6 billion and increased our gross debt in the quarter alone. However, the reasons for that can be seen in the right hand side, so the acceleration of outstanding on the last quarter of the year, you know that we are not running up this $5 billion per quarter with them many more.

The strong dividend, which was distributed and as I mentioned you have the year $600 million or write-off cash outflows from the tax agreements, the settlements I just mentioned. With all of that, we have to increase our net debt by $3.9 billion. And but I am confident that we will revert back to the situation because of the strong cash inflows from the gold steam transaction of $1.9 billion. Higher price is then anticipated in the first quarter and also some proceeds of receipts that were accounted for in the fourth quarter. However, there only going to be a cash in the first month of this year that relates to our pricing mechanisms.

Now, I am going to hand over to Mr. Martins to briefly comment on the price realization. We have introduced the graph here in order to give you more color on the comparison between the Vale prices and the market prices, which is on page eight.

José Carlos Martins

Good morning everybody, good afternoon, sorry. The idea we put in this chart on page eight just to compare price realizations of Vale with the IODEX on the same basis. As you know, IODEX is CNS price China and also on a live basis, and our price realization normally strong as FOB price, our ports, and on our last page. So the idea was to show both price in the same basis, and also show the improvement that we are obtaining in our price realizations.

By end of 2011, beginning of 2012, I don’t know price and through a big change moving from the confident price system to most daily price or even a spot basis price. And that effect, our price realizations a lot at the beginning. Manufacturing influences, but we have been managing to improve our price realization, as we can see in this chart when we compare in the same base.

Actually, our sales in the last years are moving a lot from Western world to Eastern, or to Asia. Today, we sell 70% of our sales in Asia and 30% in the Western world. If you look back 10 years ago, the situation was exactly the opposite. Another issue is the pricing system. We moved from a benchmark pricing system, which was a FOB price and in our year-to-date and our negotiated price, we moved from benchmark to a more market price on a daily basis. Today, 55% of our sales has gone on a daily basis – priced innovative basis, and the remaining 45% has gone in a price that is not more than a quarterly basis. So it’s a big change in the price system.

Also, we’re moving from 100% FOB basis pricing to now almost 50% CNS price basis. So those big changes have a big impact on pricing and the way we see our prices and also in the price realizations. And despite of all the difficulties, we are managing to improve our price realizations as we can see this comparison on a same basis.

Looking forward, we see a space for improvement based on the mainly on the quality issues, okay. In the last year, we saw deterioration on quality price for Vale. Basically, you can see it in 1% iron ore content in the ore that came from a price of highest $10 per 1% to as low as $2.50 for 1%. So it was a big drop in the price of quality. And two reasons behind that, first, was the price of coal that went down sharply in this period and bigger part of the quality price for Vale ore is because our ore demand less coke for reduction. So we save some costs by using Vale ore, and as the price of coal went down, so that advantage was not that big. And now the advantage of Vale ore is productivity in the blast furnace.

As we add higher iron ore content, the productivity is higher, generate glad with lag in the production, so the customers are used to pay a premium for that. What's happened is that today we have fair capacity in blast furnace, and so high productivity is not a big need, so the premium for quality also went down.

So those factors affected our price realization, but we have been improving our situation as we can see by this comparison. And we look that going forward, we expect some improvements to come mainly, because we believe the price of coal will move up a little bit and also blast furnace utilization, we will increase. We are forecasting some around 3% to 4% grow in steel production this year and that probably will bring the higher utilization rates and also we require better arm to improve the productivity and that probably will reflect on the premium. So those of the points that I would like to raise to you.

And our idea is to keep comparing the price realizations with the market price as you see by the IODEX on a same basis. So in the next report that we are going to make in the future, we intended to keep showing this comparison for you in order to allow you and get a better pools in what we are doing as far as price realizations.

Question-and-Answer Session

Operator

Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Mr. Felipe Hirai with Merrill Lynch.

Felipe Hirai – Bank of America Merrill Lynch

Hi, good morning, good afternoon, everyone. So I have two questions; the first one is, regarding what you have been saying that cost might be more than expected, are you kind of sustaining the CapEx and some of the projects maybe (inaudible). I don’t know if I was surprised on the mere side, so you think that you might have higher than expected cash flow this year? So one you kind of reduced excess cash flow that you’re going to have, so can we expect to see a higher throughput or eventually the company to buyback again?

And then the second question is related to your tax liabilities. Did you expect to see any kind of alternate negotiation with the government or that could be hedging negotiation with Government or are just – are going to have some rate or they ruling from the Supreme Court? And have you heard anything or you negotiate anything with the tax assessments after 2009, so those make few prices? Thank you.

Luciano Siani

Felipe, this is Luciano. In terms of the cash flow, the first priority is to keep leverage in check. The trend has been upwards in the past quarters, and we need to revert that and keep it in check. Bear in mind that CapEx program is still significant, especially for 2014 as well because that’s when the S11D project will be peaking its expenditures. And also the volatility in the markets lead us to believe in a very conservative way in terms of managing cash. Obviously, if things surprise even more in the upside, we can always consider returning more money back to shareholders, but at this particular moment the priority is first and foremost to keep revenue check within iron ore in 2013, but also in 2014.

Murilo Ferreira

Regarding the tax issue, I think that we must consider two different levels. The first one is the Supreme Court; we have a discussion there not just Vale, but even the CNI and I believe that in the next few weeks you will see this subject being discussed between the Minister of the Supreme Court, this is one thing. The second one is that, we have a team with people from different companies in discussion with the government regarding our new law. And having this discussed during many month, I believe that we cannot see a decision or at least the first minute, the first graph until the end of March. Thank you, Philip.

Operator

Excuse me, our next question comes from Mr. Carlos de Alba with Morgan Stanley.

Carlos de Alba – Morgan Stanley

Yeah. Good afternoon, and good morning, everyone. Thank you for the opportunity. The first question is, just want to revisit the other operation on expenses Luciano that you had in the quarter, to me that was – that single, that was issue that single handedly explained the quarterly need, so I think is very important to focus on this. What can we expect in 2013? I mean, did you hear you correctly that all the pre-operational expenses in VNC and in Salobo will be gone in 2013 because that will be a drop of around probably 300 and change $1 million in that line which is going to be quite important.

And then the second question is regarding the increased EBITDA per ton of iron ore that you get when you sell on a CFR basis versus FOB basis, in other words how much lower your internal freight cost would be versus when you have to buy into the market or you have to net back the spot trade prices that we see? Thank you.

Luciano Siani Pires

Okay. So addressing the first question, first on the operating stoppage and start up expenses, we do have a trend towards significantly lower numbers, but it will all depend on the successful ramp cap especially of New Caledonia and on secondary basis of selling. If we are able to produce how much we have budgeted for this year, we can expect a drop on this line over – of around between $300 million and $400 million for New Caledonia alone. Additional improvements will come on the following yields as we progress on the ramp up. Salobo with the same start, so we have a $121 million of expenses with pre-operational expenses upside level if we can successful ramp up Salobo for issues that we should monitor, we can zero in those pre-operational expenses.

However, there will be pre-operational expenses in the portfolio and the cost of capitalized projects in iron ore. So I would say there is room for additional improvement during the privatizing companies as we said. So we expect more this year than we expect to spend next year, but if – be to give you some guidance, I think the total for the company would be to reduce this line between lets say to be conservative $300 million to $500 million if everything goes well.

On the other line, the other expenses, so as I mentioned we had about around $700 million of extraordinary expenses would supplement of tax disputes. But I would say that too early in addition to those $700 million that shouldn't repeat this year, too early to give you any guidance for reduction on the remaining amount.

I will hand it over to Martinis to talk about the comparison between the EBITDA for ton on our CFR for basis when you take into account our own performance on trade cost other than the market.

José Carlos Martins

As we already talked about it, our expectation is to – we’ll have the cost of [diverse] of $6 by selling CNS with our own big fleet of vessels. On top of it to sell CNS is not only about cost, but is also about the freight realization. When the sell FOB for instance, I have to sell 30 days before them, my competitors and that puts some pressure on price on us. So by selling ICMS is to sell at the same time as our competitors sell. And this is translating much more in price than in cost.

Operator

Excuse me. Our next question comes from Chelsea Konsko, TIAA-CREF

Chelsea Konsko – TIAA-CREF

Hi, I noticed that while, iron ore prices were going up quarter-over-quarter, pellet prices came down. Is the reason for that similar to the reason why the premium for our higher Fe content was also lower? And my second question would be you mentioned that you had poor results from your equity contributions from subsidiaries. And I was wondering if this is due to these lower pellet prices or other issues at subsidiary such as Samarco?

Unidentified Company Representative

For this, I don’t know prices concern it. The premium for the iron ore content has not to do from the price of that amount in itself. It’s completely independent. So we have iron ore price as high as 180 and higher premium iron ore content. At the same time we had a very low iron ore price and a little bit different pattern for the iron ore content. The iron ore content price what we call (inaudible) is based mainly as I said before on CapEx utilization the blast furnace and the price of coal. So there is no link between both. If you think that higher price means higher capacity utilization, yes, the price of iron ore content could move up for the (inaudible) could move up. But that cannot have a different pattern as always. We see different patterns and we see different factors behind iron ore pricing being the price of the iron ore and in itself are being the price of the additional iron ore content.

We see today this iron ore content price has lowered to $2.07, and the main reason is based on coal price and capacity utilization. So they are in independent sector, so we cannot make this relation so directly as you said.

Murilo Ferreira

With regards to equity income, you’re right Samarco mix of the book of equity income. So in 2012, the fortunate came from Samarco is $639 million, out of the service. It’s about almost a 100% of the $640 million that resulted in 2012, which means that all the other affiliates of Vale, we had a mix of positive or negative results that netted out almost zero, but some market itself came down from $878 million in 2011 to $639 million. Overall, we had lower performance across the Board not only some markets, but also in the smaller palletizing companies where have a stake and our four coal joint venture is in China. (inaudible) which is also a significant affiliate posted flat performance, but there are rooms for improvement especially we had a swing in hydro and aluminum from $99 million positive in 2011 to a negative $35 million, so it was accounted for a significant part of the decrease.

I think there are some recurring items in this loss, so this should be – we shouldn’t go back to $99 million, but I am not forecasting hydro earnings, but I think the $35 million loss should be perhaps on the conservative side with forecast for the future. And also CSA, our stake in the equity income of CSA was responsible for our loss of $170 million in 2012, which was about the same as in 2011.

However, there are some signs that we can do better this year as well, because now the plant is operating at more closer to full capacity and it’s being able to dilute its fixed costs. So these are the explanations for the drop and there are some directional indications that there can be better results in 2013, although I don’t give the numbers.

Operator

Excuse me. Our next question comes from Terry Ortslan, TSO & Associates.

Terence S. Ortslan – TSO & Associates

Thank you. Good morning. Is there any other assets or infrastructure you can free up in terms of packaging in such a way that double tracking point since that Vale can get for your capital and have user fees instead and as a result you get some of your money back and as well as don't worry about the maintain number one. I'm trying to understand on the nickel front, the Long Harbour, the capital that you have $4.25 billion and with the output from there, how would that work out with respect to the nickel operations you have in Canada? How much (inaudible) (inaudible) will be done on versus Long Harbour being up and also the feed from the other operations in Manitoba? Thank you.

Luciano Siani

Well, thank you for your question. This is Luciano to address the freeing up of capital infrastructure. Currently, we have some leasing of loan stock and this is a model that we've been employing mostly in our general cargo operations, so this is already practicing within the company. There are no initiatives to, let's say, to stay a leaseback infrastructure for instance probably down minor warehouses and stock which is really small which is not material.

Murilo Ferreira

About the Base Metal, maybe I will ask Peter Poppinga, please question for you.

Peter Poppinga

Yes, thanks for your question. So we have $4.25 billion, that’s the CapEx for Long Harbour. And Buenos is on track with 80% to 85% of completion. But if I understand your question well, you are worried about what if this has an influence on the other operations? So there is not much influence because Long Harbour is being fed by the (inaudible) ore body. And then will be fed by other all parties around. So our capacity when we ramp up in 2014 may be mainly on Long Harbour which will produce 60% plating moderate nickel.

We will have, this will have more influence on whatever we are producing in our refineries in February, because there is no national connection in terms of feed. The feed which will build to probably from the railway mine is now going to be more and more used in Iowa. Regarding (inaudible), we have – that is the only all pending question we have. We have announced some time ago that the refinery and (inaudible) would shut down mainly because of the new asset tool regulations and from sustaining CapEx we have to invest there.

But we are revising that and the outcome could be that we continue one or two years more finally in and we are also looking for some major improvements in the mine, so that import of the nickel output from the basement business will, for sure not decrease, it’s likely that it will actually increase in terms of frac refinery output.

Operator

Excuse me. Our next question comes from Mr. Gary Lampard, Canaccord.

Gary Lampard – Canaccord Capital

My two questions; the first one is on iron ore cost and the second one is on nickel business costs. The iron ore question first, I’m trying to calculate a like-for-like Q4 iron ore cost comparison to the $36 of ton that you can calculate from Q3 financials. And this is obviously difficult. It’s not just the FOB to cost in freight accounting conversion. It’s also the new segmentation of R&D cost and then having the back Q4 out of the full year. And so, far I’m getting a Q4 cost of $48 a ton suggesting that on a like-for-like basis including R&D, iron ore unit costs have gone from $36 of ton in Q3 to $48 of ton in Q4. So my first question is, is that number, right?

Unidentified Company Representative

Well, the straight forward answer is no. However, I’m trying to back it up with some numbers here. Okay, here I guess.

Unidentified Company Representative

So what we have here is, if you adjust for the freight on the fourth quarter of 2011 and adjust the freight for the fourth quarter of 2012, you have a net increase – sorry regarding fourth quarter of 2011, I guess that – let me suggest one thing. Let me move on to the next question and then I’ll get to that. I found the numbers. No, we don’t have the numbers.

Unidentified Analyst

Well, you need to get back later on this conference to get the precise numbers here on the pile of materials. I'll get back to the question, but the answer is straightforward is no. I'll try to back up the numbers. And the nickel question…

Unidentified Company Representative

And the second question.

Unidentified Analyst

Is the line open? The second question on nickel cost.

Unidentified Company Representative

The nickel cost.

Unidentified Analyst

Okay, the second question on nickel cost.

Unidentified Company Representative

Okay, on nickel costs, they were stable. Actually they have fallen a little bit from the third quarter to the fourth quarter, for base metals. I'm sorry base metals which is the segment that we reported. The base metals total cost they have fallen some brilliant $569 million in the third quarter of 2012 to $1,538 billion on the fourth quarter. And that was not to be unexpected because there was a fall in the volume, actually in copper from the third to the fourth quarter. So part of the variation is actually explained by the fallen volumes in copper. Actually there were some items that increased the costs that offset this decrease which were the increase in depreciation which by the way, it affected across all the business segments that depreciation costs are increasing. But there were also some royalties in voice to me that impacted more in the first quarter than in the third quarter, but overall, base metal costs were flat and slightly 2% downwards from the third to the fourth quarter.

Murilo Ferreira

Honorable back it to the first estimates.

Operator

Excuse me. Our next question comes from Mr. Jon Brandt with HSBC.

Jonathan Brandt – HSBC

Hi, good morning and good afternoon, and thanks for taking my questions. I just wanted to go back and just talk about the debt levels and the debt ratios that we’ve seen rise. I think like you said there is good reasons, you expect them to fall. But could you give us some indication as to what the maximum debt levels you are comfortable with and please use whatever metric you feel is appropriate if it’s net debt or gross debt?

And then if you could sort of walk us through sort of the line of thinking if you are able to increase cash flow this year on whether it comes from more non-core asset sales or higher iron ore prices, is there a preference for returning capital to shareholders, is it via cash dividends or share buybacks is a preferred method.

And the second question is on Rio Colorado and I know you side there is a Board of Directors meeting in the next couple of weeks, is that your deadline for making a decision whether the project fully goes ahead or is it just something that you are going to discuss at the Board of Directors meetings? Thank you.

Murilo Ferreira

What I can tell you about our approach in Argentina is that, we will present at both level, regarding several alternatives that most of you considered, as you will know, today we have a gap in Argentina regarding the costs, the cost of material, the cost of human resources, and the exchange rate is one of the key issues. The second big issue is regarding some investments, some demand from the five provinces, we have in our railroads that will cross five province and they are demanding some help, some projects that is not related to our projects. We will present to the Board in order to serve the final reconciliation.

Unidentified Company Representative

Okay, as regard to that indicators, as you may know, we have a different rating perspectives from S&P, Moody’s. Moody’s being much more conservative, one of the reason is being because of the volatility of our business and our CapEx commitments. That is to say that in order to continue to have good ratings and access to the capital markets ratings, we need to consider those aspects like the CapEx commitments for the future and the point volatility of the market. That tends to put us in a position to be more conservative in terms of ratio. I would say the current ratio of that long-term EBITDA of 1.6, which is in the presentation, is something that we are still confident with, we would like to see it evolving further given the timing of those cycle of our investment produce.

Having said that, as I mentioned, the priority is to keep leverage in check and it’s still too early to talk about additional dividends and then returning back money to shareholders. We still need to go through a longer periods of higher iron ore prices, we still need to go through our divestment program in order to say something around that.

Just going back quickly to the question on of bulk materials, I pretty sure if you look at the personal material gas, energy acquisition accounts for bulk materials, and that includes iron ore and coal that the increase that you see is 100% expanded by higher volumes, which means that cost per ton on these lines should be stable or lower.

The only outsourced service is falling as we mentioned on absolute terms for bulk materials as well. Materials have falling on an absolute terms of bulk materials as well. The only line that has increased substantially was the freight one, and so we need to then offline do some calculations that you can do with our Investor Relations team to take out the effect of the freight from the third to the fourth quarter.

And not only the effect on the freight in terms of the accounting adjustment, but also the increase, the de facto increase in freights from the third to the fourth quarter, and which we have out in the press release. So while we can – it won’t be difficult to demonstrate and we can do it offline that cost per ton of bulk materials have been remained stable from the third to the fourth quarter.

Operator

Excuse me. Our next question comes from Mr. Daniel Rohr with Morningstar.

Daniel Rohr – Morningstar

Thanks for taking my question. I hope if you could talk a little bit about the sustainability of the SG&A decline we saw, especially with much of the decline from Q4 2011 to Q4 2012 concentrated in the others and services categories, it looks in those two categories alone costs were down $228 million?

Luciano Siani

It is quite sustainable. Actually, we believe that this decrease you saw from the fourth quarter of 2012 to fourth quarter of 2011 will be maintained in the quarter-by-quarter the same period of the year comparison going forward. So that's why we’re so optimistic that we can reduce the full-year numbers by at least 20% in 2013 as compared to 2012.

Daniel Rohr – Morningstar

So could offer little bit more color on, so what of that $228 million that was being spent a year ago, but not spent now? What sort of stuff are we talking about now you’ve mentioned airfare, anything else?

Unidentified Company Representative

I would say consulting fees support services in a general way that do not relate directly to the operations are personal because we’re reducing, simplifying the overall corporate structure. So it's pretty much across-the-board.

Daniel Rohr – Morningstar

All right. Thanks a lot.

Operator

Excuse me. Our next question comes from Mr. Rodolfo De Angele with JP Morgan.

Rodolfo De Angele – JP Morgan Chase

Hi, my question is on iron ore. First of all, we saw Labrador seems to be a bit delayed. Could you share with us your thoughts on the outlook for growth especially trying to meet the under licensing for S11D, and I would also like to hear from Martins, his views on iron ore, which has been quite strong surprising most, I guess. So just wanted to hear your thoughts on the market overall? Thank you.

Murilo Ferreira

Rodolfo just briefly on the outlook for growth, there are still – we’re still betting on the iron ore curve that we made public to you on the Vale day. That’s still our best forecast of how the iron ore production will evolve?

Unidentified Company Representative

Well, I don’t know the price is concerned. What we are learning is that, we manage much better when the price is going after when the price is going down, okay. There is – because of the distance between Brazil and Asia, and we compete people that are nearby, so that translate being better price realization and the prices are moving up then the prices is going down.

As you will see that our price realization in the beginning of the year perhaps was going down. We had much more difficult in getting better price realization. By this year end, next year end – last year end sorry, at the end of 2012, the price was moving up, so we have a better position to get the price.

So I think that will activity affect us much more when the price is moving down and affect us positively when the price is most happened, that’s what I can tell you. Another point is that we are improving. We are a company used to sell on a yearly basis, okay, our staff in (inaudible) has to have a big change when we our people to seeing up more the development you would SKUs to work in this new product development and that takes time. So I think we were improving day after day.

Operator

Our next question comes from Paul Massoud with Stifel Nicolaus.

Paul Massoud – Stifel Nicolaus

Hi, thanks for taking my questions. My first question is on the Coal business and the second one is on Fertilizers. But on the Coal business, obviously you’ve highlighted some of the logistic constraints that have impacted costs in getting some of the more cheaper products to market. But when you look back over the history of the Coal business, I mean generally speaking, you’ve been running it at an operating loss. And so, if we’re looking ahead, given what prices have done, can we expect any kind of an operating profit before the Colorado expansion is complete or should we just expect – should we be expecting significantly higher cost until that’s gone?

On the Fertilizer side, so my second question, what I’m curious about is with Rio Colorado being guidelines or at least under review right now the Canadian assets in sidelines, with that in mind in the past fairly recently you’ve said that your goal is to grow in phosphate and potash fertilizers. So the main projects for potash are not being executed on them and should we be thinking about M&A as a more reasonable way for you to grow, or you going to be putting fertilizers on the sideline until you get some of the other restructuring done? Thanks.

Murilo Ferreira

Okay, starting with coal in Mozambique, obviously the – our hurdle – there has been the Sena-Beira railway and we’ve had a very bad start to the year this year. So we know the challenge is on. However, we have grown our outlook there considerably. If you look at our ramp up at Mozambique, the mine itself has been very well and we shipped everything we can that the railroads can carry. I think the relationship with the CFM, which is the railraod operator in Mozambique is good. This is a learning curve we’re on. And we are making progress, right. So it is not a case that we have to wait until that [color] to happen in order to have a viable and economically attractive business in Mozambique. We will make, I think and I’m sure actually. We will make a lot of progress during the course of this year. Then you have to remember that is a well where there hasn’t been really anything for 30 years. So there is a learning curve and there is a ramp up that has to take place.

In Australia, our coal assets are underplaying turnarounds and turnaround is well advanced. We have grown our volumes there by 20%. Obviously that filters down to the economics of the business. So we are seeing some improvements there. There’s a lot of work that is being done both on the operational side and on the cost side. We will see certain improvements as there’s certainly going to be improvement in 2013 on those businesses. So the message is very clear. The coal business has to stand on its own two feet. So we will have to make those hurdles.

Regarding our strategy for the fertilizer industry, for the fertilizer business we – and you’re absolutely right. We want to grow in both phosphate and potash. We have options we’re exploring. You mentioned Rio Colorado. Murilo had mentioned earlier in this call that by 11th of March, we will come back to the markets with more increase, but we have alternatives. Canada is one of them. We also have good alternatives in Brazil, up in the Northeast and that what we have do now is manage this portfolio of excellent options that we have.

Operator

Excuse me. Our next question comes from Mr. (inaudible).

Unidentified Analyst

Good afternoon. Thank you for taking the follow-up. And the question goes on the S11D project. Just want to get an update of when you expect to get the installation license for this project? And also this is one in all the hurdle, so you can bring this to the Board’s appreciation. That’s my question. Thank you.

Vania Somavilla

We are very confident that we are going to have all this license by the end of April of S11D.

Operator

Our next question comes from Mr. Ivano Westin with Credit Suisse.

Ivano Westin – Credit Suisse

Good day, everyone, and thank you very much for the questions. My first one is first your main approved projects. You have consistent (inaudible) if you include depreciation ratio, what is the expected net growth you expect from those operations or especially from the (inaudible) in the next four years?

Then the second question first due to pellets. These decrease in price “by 10%” raised the question on pellets premium. I wonder what is your assumption for a premium, a long-term basis and whether this premium will remain above the cost of conversion? Thank you.

Murilo Ferreira

As far as the first question, we expect from this project to have an additional production of 20 tons for the year.

Unidentified Analyst

Yes.

Murilo Ferreira

And now the second question, we expect the premium for Paris to stay around $30 per ton, which is the hopefully the conversion costs. It will depend very much on the markets, okay, the price of pellets is very much relating to variable of Vale as far as market is concerned. But looking in the short-term, medium-term, we believe that $30 premium based on the conversion cost is a fair assumption.

Operator

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

Marcelo Aguiar – Goldman Sachs

Hi, thank you for taking my follow up. Some of my question was being answered, but I would like hear Martinis' views on the iron ore production growth in China. I mean there is a lot of iron ore run-off mine to come on line in the next 2, 3 years in China, I mean there are some numbers running around $450 million tons of run-off mine production. So I would like to hear what your Vale’s – I mean what’s Vale view on the iron ore production growth in China and in terms of Fe content and costs, this is the first question?

José Carlos Martins

As far as iron ore in China, we do not believe local production, we will have a huge impact on the market, because although they are increasing the run off mine of production, the content is decreasing. So at the end, we do not expect any big increase in their local production base in the iron ore content. So we see on the other hand that as time goes by, this is becoming – their course is becoming higher and higher and main of those mine is we will not support proper regulations based on the environment, okay. So we see China more and more concerned about the environment and those mine generate a lot of ways and they are a burden for the environment and looking forward we do not see their production increasing in terms of iron ore content. At most you would say in the same range as they are today.

Marcelo Aguiar – Goldman Sachs

They content exploration that Peter gave to the long harbor. Second, I repeat that and add a little bit on the core in terms of volumes to expect from Long Harbour this year and next year?

Murilo Ferreira

Peter?

Peter Poppinga

Yes, the volumes this year will be small. It will be a startup in the fourth quarter like I said. And next year, we are planning to ramp up and probably we will be around like we are following (inaudible) number two for those who don’t know that it means, it’s in the first year of ramp up that means then something around 40% of the nominal capacity. But I would like to propose you, just follow-up on what we talked about Base Metals and the nickel sales regarding to Long Harbour and affecting the other operations. I have this – we have mainly two strategic drivers here in Canada in the Base Metals and Nickel business in general; one is, the self-funding. So we are now standing on our own feet. You saw this through the gold transaction, and also we will have some smaller divestment of non-core operations, And of course, the ramp ups, which are now delivering.

And the other one is the value of volume. It doesn't mean that we want to reduce volume. It means that what goes into the furnaces we will have high value there. So we idled two mines; one is the fruit mine and simply the other one is (inaudible) mine is some care and maintenance. So what we will go into the furnaces, we’ll have high value, but that means that we're going to operate less furnaces in Canada, but there will be full and not half full like we are today and not to feed with no value in it.

This will significantly reduce our sustaining investment in the following two years to come, including this year. And you may ask that where is the feed for the refineries going to come from since Long Harbour is starting up? Well, the refineries will and since the furnaces are going to produce less material, the answer is that, this material for the refineries will come from Indonesia, where we are improving our production, you saw the fourth quarter this year was significantly higher since we constructed the new fronts and we will do another one next year. So this feed, intermediate feed of Indonesia will then fill our refineries here in Canada to the extent that there will be no shortage of feed, actually there will be an increase of nickel production. I hope this explains a little better the flows of the business.

Unidentified Company Representative

Thank you very much for you time. I think that we can trust as you continue with this discipline in capital allocation, looking permanently to reduce costs and working forecast in world-class assets.

Thank you very much.

Operator

That concludes Vale’s fourth quarter 2012 results conference call for today. Thank you very much for your participation. You may now disconnect.

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