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Companhia Vale do Rio Doce (Vale) (NYSE:RIO)

Q1 2009 Earnings Call

May 07, 2009 10:00 AM ET

Executives

Fabio Barbosa - Chief Financial Officer

Tito Botelho Martins - Director of Corporate Affairs and Non-Ferrous Minerals and Energy

Eduardo de Salles Bartolomeo - Executive Director of Logistics, Project Management and Sustainability

José Carlos Martins - Executive Director of Ferrous Minerals

Roger Agnelli - President and Chief Executive Officer

Analysts

Marcos Assumpção - Itaú

Carlos de Alba - Morgan Stanley

Jim Young - West Family Investments

Leonardo Correa - Credit Suisse

Tony Rizzuto - Dahlman Rose

Operator

Good morning, ladies and gentlemen. Thank you for standing by and welcome to the Vale's conference call to discuss First Quarter 2009 results. If you do not have a copy of the relevant press release, it is available on the company's website at www.vale.com, at the investors' link. At this time, all participants are in a listen-only mode and later we will conduct question-and-answer session and instructions will be given at that time. (Operator Instructions)

As a reminder, this conference is being recorded. The replay will be available until May 13, 2009. To access the replay, please dial 5511-4688-6312 access code 454. The file will also be available on the company's website at www.vale.com, at the 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 in Rio de Janeiro are Mr. Roger Agnelli, Chief Executive Officer; Mr. Fabio Barbosa, Chief Financial Officer; Mr. Jose Carlos Martins Executive Officer for Ferrous Minerals; Mr. Tito Martins, Executive Officer for Non-Ferrous Minerals and Mr. Eduardo Bartolomeo, Executive Officer for Logistics, Project Management and Sustainability.

It is now my pleasure to turn the call over to Vales Executives. Gentlemen you may now begin.

Fabio Barbosa

Good morning to you all. It's a pleasure to be here with you. This is Fabio Barbosa speaking. I will start and then after the presentation Mr. Roger Agnelli, will make some comments as well. Our agenda today involves two major items; first, how we are dealing with the current environment and second, how we see the future.

On the first topic, I believe... we believe that the performance of Vale in the first quarter was very solid one given the environment that we are facing. We posted adjusted EBIT margin of 31.6% as considered our EBITDA reached 2.3 billion, net earnings 1.4. We invested 2.6 billion including the acquisition that we paid for in the first quarter and we managed to keep a very strong balance sheet with our liquid assets position at $12.2 billion at the end of the quarter.

As you can see in the next page, Vale was really affected by the shift we observed in the seaborne market. Vale was the most global, is the most global company in terms of annual market exposure. So we have a very strong presence in every single market in the world. And what we see here in page six was a major change in the geography of the seaborne demand and of course affecting Vale saves. We used to have 55% of our sales in the Western Hemisphere and in the first quarter of '09 this percentage went down to 19%.

At the same time this is has a direct co-relation with the seaborne demand performance that in the first quarter of '08; 79% of the seaborne was in the Eastern Hemisphere and in the first quarter of '09 this number jumped to 93%. So, we were affected more affected than other players in this case due to the specifics of the geography that operate. But we faced this environment; we properly react to the circumstances by adjusting our cost. You can see there in the next page that we made a major effort in cost reduction, almost $1 billion, if we also add the... more than $1 billion, if we also add the R&D effort that we did in the first quarter of '09 compared to the fourth quarter of '08. Of course the decline EBITDA responded was a direct result of and sales volume and also price changes that we observed.

But as we mentioned before, we are not quite waiting for the Valentine. We're working very hard to less our cost structure is order to provide the company with the financial strength it deserves and to our shareholders with the returns they aspire. So there is a major campaign underway combining short-term reduction with enhancement of the foundation of our long-term competitive as we put there. And we believe that those savings will be much more visible over the next to six to twelve months.

In the first quarter of '09 what we can already indicate is that in terms of discretion and spending, we reduced in 89 regions several items like infrastructure and support, consultancy services, outsourced services, travel, advertisement et cetera. So very important items there, discretionary items that we less by almost two thirds in the first quarter of '09 compared to the fourth quarter of '08.

Also the working capital requirement was sharply reduced by almost $900 million and the result of this, it could be visualized in the chart ten. As it's also spread in our operations. As we see the unit cost for iron ore nickel, declined visibly in the first quarter of '09 compared to the first quarter of '08 but also on a year-by-year basis.

On a quarter-over-quarter basis, the decreases were 35% and 23% respectively despite the reduction in volumes that were observed. We achieved that through several measures. We are trying of course to work with leaner corporate center. We are in-sourcing some activities, we're re-sourcing, renegotiating contracts with suppliers. We are cutting cost of project development. We are optimizing planned labor utilization, optimizing the flow of materials, streamline line of the products and shutting down higher cost operating units.

At this stage I would like to invite Tito Martins to enroll need to operations to make some comments of what we have been doing and our need to business to shutdown costs.

Tito Botelho Martins

Thank you, Fabio. I think it's important to stress on I will not be long in my speech but its important to stress that despite the difficulties we faced in the second semester of last year due to the drop in the pricing market, we try to first to as was mentioned before, streamline the production and at the same time, work on to some overhead costs we had in our operations worldwide.

We are right now working on a better definition of some functions not only in Canada but in the operations in Indonesia and New Caledonia. We do have an extra effort relate to the cost reduction when we're talking about the line of products. And in some specific items of consumption, it could stress energy and fuel consumption. That's why we decide to shutdown some part of operations in Indonesia by the end of the year. And that's why we decide to have a shutdown in the next in the following weeks in St. Barry (ph). We decide to do that as a response to the market condition and at the same time to go for a maintenance process in our furnaces in St. Barry.

Fabio Barbosa

Okay. We also, we have been promoted a structural shift in our iron ore output towards Carajás as we put there in slide 12. And of course you all know Carajás is the low cost high volume operation and we just now released our 20th report, and there we filed our 28th report in which we indicate that we are turning our approval and proving reserves. And now total volume reserves reach on average 14.2 billion tons And Carajás alone we have 7.2 billion tons of iron ore and 67% Fe content. It's a major reserve in the lies of reserve all the highest volume material as available in the ore.

And so we are supplying this high quality ore and in relatively high proportion so that we are trying to maximize of the higher Vale use of our iron and today, 42% of our iron ore production is coming from Carajás against outbound source in the last five years. At the same time, we continue we saw initiative in terms of strengthen our competitiveness and through changes in our logistics and also in our iron ore marketing policy.

In logistics I would like to invite Eduardo Bartolomeo to comment on what we have been doing on the application of ships in contracts of the freights.

Eduardo de Salles Bartolomeo

As a nation we keep on our strategy to increase our control over the maritime freight towards mainly Asia. We have now under our control 20 ships either ownership or the old ship we used to have, the three old once. We bought five ships and we have around the 12 coles (ph) and we are looking to the markets we see a lot of opportunities on that sense conversion of tankers so we are will be able to secure I would say right sized upgrade as this changes happen in the market.

Fabio Barbosa

Well, so we have ordered already 12 delux (ph) and we have options for four more. And we are looking for more ships in the market in order to speed up our nickel jump up sales into Asia. So we're trying at the same time to increase our customer base by developing new markets, new client base. We are of course with the any of the distribution centers in the Middle East and Asia in order to optimize our product mix and we are adopting a more flexible stance towards more price and likely by Martins to comment, make us on comment on that as well.

José Carlos Martins

And as you ask that, as we have already announced that to the market, we are flexibilizing our price policy in order to cope with customers' requirement and also with the competitors' moves.

Cost wise, we have a condition to sale I don't know at lower price it was needed but we are always managing the price volume situation. We if we increase to match our sales probably, we are going to drive price a lot and in another hand we can pressure freights situation. So, we are operating under this three points, which is the price that was needed to sell our production in market, where we really have this elasticity because it's already in Europe and Japan and the U.S. and one of the market. Price is not the issue if we will not buy because we have a lower price.

They only elastic market today is China because you have local production which has higher cost.

So our flexibility today is mainly related to the Chinese market because of the situation and we also needed to cope with our competitors more than it. So that's from own way that's the way we are operating.

Fabio Barbosa

Yes, so flexibility will be the name of the game.

José Carlos Martins

That's it.

Fabio Barbosa

Policy.

José Carlos Martins

That's it.

Fabio Barbosa

Okay. Let's move to the second session of our presentation today where we have some comments about how we see the future. First point we'd like to make is of course the performance of the PMI. It is in the negative spectrum of there index but it's in our view is issuing clear signs of stabilization of industrial production which is good news as industrial production is the most related with mineral (inaudible) demand. On the other chart we see that there is positive combination as well of declining inventories and increasing and driving new orders indicating that we may actually have reached the bottom of the current crisis.

This is a possibility to respect this is the case of course nobody would be absolutely sure but very strong indications in this direction. Chinese PMI is also in the 50 plus region. It's also a very important indicator considering the rate of China, Chinese demand in both of consumption of our industry and in slide 18, we see that fixed asset investment responded very quickly to the incentive package, the stimulus package implemented by the Chinese government. So, the growth of fixed asset investments which, although 28% in the first quarter in the last month of March.

So global steel production of course reacted to the negative environment and but now it's showing signs of recovery particularly in China, that's already showing a growth in two months average seasonally adjusted basis. 40% growth compared to the previous level at the end of year of 50% decline and this is driving back the global steel production. Is still the negatively deployed but less negative than it was the last part of '08.

As a result of this economy, of course the Chinese demand for iron is showing a very strong performance and now 12 months or the last twelve months is the latter reached was $473 million. So, we believe that we are just locating some high class local producers and we have been able to share part of this growth that was sold by the Chinese import that is they are growing now at 18% average that is relatively closer to the pick ups and the need of last year 2008 at 23%.

Another element that gives us more hope about the future is that the loss of property sector is expanding very deeply as you can see in slide 21. So, we have talking about growth of around nine to 10%. That compares to the minus 2% of sales in the last quarter of '08. So the tightening of terms of credit of property sector was reverted and then we have now an expansion that are even higher than the ones observed in 2007.

And the floor space also is showing the same trend after the trial over minus 25%. In the end of last year, we are showing now a recovery and they are close to zero. It's not brilliant, but it is much better position than we had in the end of 2008.

And this is very important. As you can see on page 22, it is very important for our market, our iron ore in particular, given the rate of the construction sector and their demand and their steel consumption. So we can... we show that in page... in slide 22 that construction responds of 51% of the steel consumption in China. And out of it property... residential property is 37%, commercial property price is 40%, infrastructure spending 23%. So it's very good news. What is happening in this specific segment as it has a direct effect on the demand for steel and consequently iron ore.

And in this connection, I would like to point out an important point that I would like Martins to comment as well. How well Vale is poised today to capture the future upside in the iron ore market. Martins, if you could comment a bit?

Tito Botelho Martins

Yes. I think the worst of this first quarter result is the volume we lost because of this trend in geographic... the geography of the market, okay? We lost a bigger part of the slowdown in the seaborne market Vale took. So we lost around 100 million tons per year of volumes. But on the other hand, from now on, all our competitors are operating to capacity. So additional market that will come and for sure you'll come mainly in Europe. Vale is prepared to take advantage of it. So we are now the only producer that has spare capacity to supply the market. And we are prepared to do it as long as it's needed. So we have this upside potential; that is for sure will be captured in the next quarters.

Fabio Barbosa

Well, turning now to the nickel demand, it's also showing the same pattern. There is some early signs of recovery and the tentative protection is needed, the 5 billion tons level is far from the peak of 7.7 million the last two years ago. But it's moving up and this is good news. And also the austenitic ratio is also starting to recover as we can indicate there, reaching almost 75% in the first quarter of '09.

And the reality is that the price of high-nickel stainless steels have plunged. So the demand, the elasticity. There is of course some elasticity of the demand regarding prices as we could see in the last few years. So it operates to bring down demand and it should operate the other way around now when prices are very low compared to the peak level we reached in 2007 and the update to the levels of 3rd January, of early 2004.

So it's important to have the view that the combination of low inventories and low prices could bring the foundation of that respect, so the nickel business in the future.

A word of caution. Of course, we're positive about the future considering the environment that we're facing. But we see that there is still a long way to go before we can say that the crisis is over. Recessions caused by global financial crisis as we put there tend to be longer and this is precisely the case we have massive destruction of wealth worldwide. We have an erosion of the capital base of banks. This is still an issue today with the financial system. And of course credit is a key element in the recovery of economic activity on a sustainable basis.

Of course, we believe that we reached a situation that the downside risks are very limited and the government policies are having important effect and bringing back the economic growth to the positive territory. So this is good news.

And in this connection I'll like to stress again that Vale is very well prepared also to capture value in the recovery of the economy when it happens. And we of course prepared to as we put there to continue to generate value across the side.

Thank you very much for your attention. Now I'd like to turn the floor to Mr. Roger Agnelli to make his comments. Roger, please.

Roger Agnelli

Thank you, Fabio. Well good morning everybody. It's a pleasure again to be here with you. I think Fabio ended what I could say is almost everything about the results about the performance of the company in the first quarter.

I would like only to add some comments about that.

Late October, we start to face the crisis. Our first decision was to rethink our business model, our strategy, rethinking our investments, rethinking the cost structure et cetera et cetera. And we made some commitments to be achieved in the first quarter of 2009. We said well, until March, I think we needed to be... to go forward carefully, left with a little bit to see how the market will accommodate, how the market will be reacting different in the different areas that we are operating. And in March, we are going to take our decision how to go forward. I think this is the most important thing to mention to you.

So everything that is happening right now or everything that we are showing in our first quarter results I think we are happy. We are happy because we achieved almost everything that we were committed to achieve.

The first thing is the unit cost for nickel, for iron ore, logistics and phosphate in our operations is right now the same as it was before the crisis, even considering a much lower volume, a much lower level of preparation. I think this was a very good result for us.

Of course, we took some very tough decisions to shut down some mines here in just our system (ph) and bring volume to Carajás. I think that was correct. If you see the unit cost of iron ore or the cash cost of our iron ore business, it dropped 35% in the first quarter compared to what was last year.

In the nickel business, the same thing. We rethink the material flow, we rethink the working capital we involve in the operation and we reduce the costs a lot. We adopt our corporate activities to a new level of activity. We were growing very fast and now we are... we can say that we are stable in terms of growth. Of course, we are keeping... investing in our projects, but we are not really in a hurry to increase our production or increase our opportunities or for M&As et cetera. So we are let's say calm, very, very calm and we are not in a hurry.

So from last September to late March, we reduced the number of employees involved in our operations or working in our site by 2000 person, 2000 employees, which is really very, very strong adjustment. And we made that until the end of last year, until December. So of course, we are keeping our talent, we are keeping our people and we just in-source some work that contractors used to do for us. So we reduced the workforce directly and indirectly involved in our operations by 2000 employees. So this is something that wasn't good, but was a imperative for the companies to do to achieve our goals.

The other point is we carefully drove our iron ore business. We said, what, we'll have the lowest cost operation in the world. We'll have the best iron ore in the world. We have our natural market, which is Europe, affected much strongly by the crisis than other areas in the globe. We are far from China. We, in the first moment, we reduced our shipment China. We were talking with our clients and we discussed a lot with our clients about the future of the iron ore business, our supply capacity. We discussed a lot about the benchmark system or spot market or index or wherever.

Now I should say that we are prepared for anything. We will be very happy if our clients decide to keep the benchmark system. We will be very, very happy because we truly believe that this is the best model for this tube chain. This is then important for everybody, brings a lot of stability, reduce the volatility of the market. And we can really predict the capital expenditures because we have long-term quarter.

But if our clients decide not to follow the benchmark system and they decided to follow the short-term view, we will be very happy to do that. We will be very happy to do that, no problem at all. Why that? Because we believe that the market, the iron ore market for the coming years will be very tight. It's going to be very tight.

And as Martins said, our contractors, they don't have room to maneuver, because they are working, they are already working at the full capacity. And we have the market in additional tons in the market. I think Vale is much more prepared to supply this additional market than the other competitors. So we're not in a hurry.

In nickel, we are in the same situation. We're finalizing two big, very big projects: Goro and Onça Puma. And the market just consumed all the stock that they used to have in the last year. So today, the market, the initial market is relatively tight and we have capacity to bring it to the market and to take advantage of any recovery in the economy in the falling market.

In corporate, we are okay. We are working at full capacity. We are not really a big producer in the market. So we are following the market.

In coal, we are full stream ahead investing to be a player or let's say a significant player in the market that we are not yet, but we will be a significant player in the market.

Logistics, we are investing to repair or to restore our efficiency. And I think today, we are working with a very good efficiency in the system and we are increasing the capacity for the coming years.

So we had a lot of homework to be done. We finished almost everything. Of course, we are keeping... renegotiating our contracts with our suppliers. We are reshaping the volumes or the necessity of goods or materials for the coming years. I think we got a lot of cost reduction from our supplier; they are our partners and we are working together. And I think we are accommodating everything.

So in the point of view of the company today, okay, the first quarter I think was the bottom in terms of all kinds of problems that could have happened in a crisis like we are facing right now. I should say that in Europe, we are in weather that is minus 30 degree centigrade. In China today, we're working at maybe 35-40 degree centigrade. So it's hot there and it's very cold here in Europe. As an average, I think we are okay in a very pleasant weather because from minus 40 to plus 40. So we are in very pleasant weather.

So I think we are... I believe that we are prepared to take advantage of any recovery in the market. I feel that we are right now in a situation that we can at least see what's going to happen in the next six or seven or ten months. That was completely impossible to see three, four, five months ago.

My feeling is that the whole market is not getting worse. It is not recovering yet, but is not getting worse. But at least nobody has stopped in the market even ourselves. We don't have to stop. We have a little bit in the nickel that is going to take care about that, but is a very, very, very low inventory there. But the point any recovery, I think we are prepared. We are open to face any challenge in the market.

Financially speaking, we are very sound, we are very strong. We don't have any, any constraints. We don't have any pressure to generate cash flows to pay debt or whatever. So we are very comfortable in this regard.

So, again, I can say that we are... I'm happy with the results or very happy with the current situation, because I am not, I think nobody is really happy. But at least I say that... I should say that compared to others, I think we are in a very good situation and we should be very, very happy.

Looking forward, I think we are much stronger than any other main competitor in the market. So we can increase production, we can increase shipments to China, we can increase shipments to Europe, we can sell more nickel, we can sell whatever is necessary to sell. The cost is... I think we have room to improve a little bit more, and you are going to see that in this second quarter of this year, because some measures that we took into past is maturing right now.

The level of goods in our warehouses are going down from April on because of course last year, we were working with a lack of everything and we increased our inventories, or our spot price (ph) the inventories et cetera. And right now this is accommodating, this is starting to reduce.

So those are the comments that I should give to you. And I think Vale is a very good position. I'm very confident that we are going to deliver very good results even in this very tough situation that we are facing in the market. Regarding to iron ore, everybody is betting if the benchmark will die or if the benchmark will survive or the spot market will be the market for everybody. What I see or I'd like to say that listen; if it is benchmark, great. If it's spot, it's great also. It's great also. Our clients are going to decide. They have to decide. And now is the time to decide what they want. If they want the benchmark, okay they should pay for the guarantee of supply. They should pay for the qualities. They should pay for the global agility that we are bringing to the chain.

If they decide to go for spot, I'll be very happy because we are going to have upsides. We don't ... I don't see that we are going to have downside because the price in the market is a little bit tight right now. That I can tell you, If they're ready to have to see the benchmark below the spot I am prepared to watch this spot. If they wanted to keep their guarantees, they wanted to keep their comfortable situation to have a very reliable supply with price that is they came from so they can't see how it's going to be the cost in future. How they will size their contracts with their clients. Okay, pay for that. If not, it's okay for us. It's okay for us.

We are now prepared to do whatever work our clients decide to do. If its benchmark, good. If it's spots, good. The only thing is; benchmark, guarantee, investments for long-term, credibility, et cetera. This is something that costs. And we are going to charge it. If it's a spot, okay, let's go and play in the spot. And I think it's... I like that also is not bad, is good also. That's it. Thank you very much.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Mr. Philippe Hi (ph) from Banc of America.

Unidentified Analyst

Hello. Good morning, everyone. My two questions are related to iron ore. So, in the last conference call you said that the first quarter you would ship about 50 million tons and it was pretty much of what you did in the first quarter. What kind of numbers are you looking for the second quarter of the year in terms of shipments and for the whole year in 2009?

And my second question on prices would be; could you give us an idea what's going on with the benchmark price negotiations if we should assume that this 20% provisional pricing should be the price for the remainder of the year or if you see any kind of risk that prices could be actually lower than these 20%? Thank you.

Unidentified Analyst

Actually the, there is talk about what's 50, as for the first question, we are not provide any guidance of volumes moving forward. So as the year evolves, we'll let you know what happened in our shipments. And that's the to Martins for the second question. Thank you.

Unidentified Analyst

I think as far as the price is concerned, looking to figures, we presented and the volume was sold and comparing our sales performance against the competitors' performance, it's clear that Vale was a very disciplined company during this period. We didn't reduce price to get the market. And the volumes as we locked, is a clear demonstration that we were not the first to drive the prices down like it happens. So now on, as we told before, we are applying a more flexible policy.

And also, we are considering other forms of selling. During the first quarter, we didn't sold at all in this quarter. All our sales are based in long-term contracts, with some flexibility, it's true but all our sales including China, was based on long tern contracts. We sold a near 50 million tons of yield, new sales in China for new customers at the benchmark price.

So, when I look forward from April 1, we start developing our price that a price of flexibility that is according to the market situation. And another issue is as we told before and that was stressed, considering all our competitors are operating full capacity. Our flexibility probably will bring us additional volumes. We face (ph) invest in volumes, a huge destocking process that in the first quarter above 10 million tons of iron ore that was consumed based on the stock inventories that the customer has.

We also have some impact of captive mines from some of our customers which amount to near five million tons in the first half. So we lost almost 50 million tons based on inventories and based on captivated production. But I think that these is the cap, they cannot go above it. And for now on even if they continue to consume the same quantities of iron ore, they consumed in the first quarter, they will need to buy more ore. So, besides that everybody knows what's going China with the present spot price in China huge grant to offer local ores be at this place and everyday we have more and more customers looking for import the ore.

And the only company that has capacity available to sales more is Vale. So we see a good prospective not only for volumes but also for quantities and for price. Why you seeing that? If you look into last three months China bought almost 50 million tons per month in the seaborne market.

This is almost 20% above their best figures in the last year. So even with these huge quantities spot price in China stopped going down and showing some signs of recovering. So we think that going forward, considering our flexibility to work in this market on not only quantity but also in price, we see good perspective for Vale.

Seaborne market as a whole, have a huge impact in the first quarter. According to our calculation, consumption was down 40 million tons but above that we have this destocking and also we have this captive mine production which together brought this seaborne market markdown near 55 million tons in this quarter. That could be around 220 in yearly basis. And a part of this 55 million tons was offset by the increase in seaborne imported from China in this quarter, which accounts for 25 million tons of additional ore being imported from China in this period.

So, in general seaborne market went down 30 million tons in this quarter. And by the figures you can see that we took almost all the ore. So, we don't see that situation can be worse than that. And from our on, we really believe that all the odds are for a good upside for Vale, not only based on volumes but also in price.

Unidentified Analyst

Thank you Martins. Thank you.

Unidentified Analyst

Thank you.

Operator

(Operator Instructions) Our next question comes from Mr. Marcos Assumpção from Itaú Bank.

Marcos Assumpção - Itaú

Hi, good morning everyone. First question is regarding iron ore as well. What percentage of total volumes are sold, also in the second quarter do you believe are going to be on the provisional discounts just like in the first quarter, 55% of total volumes were sold with the 20% discount, how much do you think in the second quarter will be?

Unidentified Analyst

As I told you before, we continue to work in this flexible price policy. And as far as the provisional price, from April 1, all our sales based on long term contracts has to be to the provision of price policy.

Marcos Assumpção - Itaú

All right. And the second question is regarding the, what level of premium do you think Vale can charge for on the spot prices for the higher quality, the guarantee of supply and the more stable quality of iron ore, when compared to other players?

Unidentified Analyst

Marcos, we are not going to provide any guidance about future price performance. We will disclose the results as we end the quarter and you'll see how much we managed to achieve adequate.

Marcos Assumpção - Itaú

Okay. So, if I can just, the last question here on CapEx, Fabio, we should call it on the maintenance CapEx was very low at $400 million in the first quarter. If we annualize that number will be like 1.6 billion for the year, your previous CapEx guidance for maintenance was 2.5 billion. Do you think that for an extraordinary year, you could see a lower CapEx even maintenance CapEx in 2009? It could be went reduction even on the maintenance CapEx that's my point?

Fabio Barbosa

As we indicated and the press release, we are in the process of reviewing our investment program as we comment on the last call. And, this process is not over yet. What I could say about the first quarter is definitely outstanding. It's that there is a seasonal pattern that usually execution of the budget in the first quarter is lower than the average of the year. So, it may not be a good sample to extra portfolio. Thank you.

Marcos Assumpção - Itaú

Okay. Thank you.

Operator

(Operator Instructions) Our next question comes from Mr. Carlos de Alba from Morgan Stanley.

Carlos de Alba - Morgan Stanley

Good morning, gentlemen. Thank you for taking the question. The first one is on China iron ore market. How much do you expect the total demand for iron ore in 2009 would be from China and at what price do you think the domestic Chinese production stops declining? At what price do you assume that the substitution from imports stops?

And the second question would be at what in the first quarter the production of Carajás was around 20 million tons. That's own about six million tons from the peak in the third quarter of last year. How much do you... can you produce from Carajás going forward as volumes picked up so that you continue to reduce your cost or maintain your very cost find in order you achieved in the first quarter. My feeling is that if volume picks up would you have to restart the selling system range and reflects your cost affect and that will go up a little bit? Those are my questions. Thank you very much.

Unidentified Analyst

So, as far as the Chinese market is concerned, in the first quarter China imported additional 25 million tons of ore which means from last year we can guess that they will buy at least 100 million tons more, which means these volume considering their production was almost the same as last year. This volume will come from local production.

I think to the price level that we have now in China, at least 100 million tons of iron ore will be displaced from local mines. So that's the situation we see in this moment.

As far as Carajás, I don't know if everybody is aware but we have one of the processed rainy season in March for Brazil and our production in the first quarter was below the production that we could have done in the normal situation, is in the north of Brazil this year is running 20% above the last half that was in the year of 2000. So this impact our production, but in the situation we have now we can produce up to 100 million tons in Carajás (inaudible) is around 80 million tons per month.

In the sodden (ph) system although we cut a lot of cost as we keep a lot of people in the company prepared to restart production in these mines production in this mine. Although we reduce production, we are prepared that any moment to recover production and its was need. So, we have a lot of flexibility that's production is concerned not only in Carajás which we can increase a little bit more but also in the sodden system where we have ever seeing place to restart production if it was needed. And that's the importance of the cost reduction we reached in this first quarter.

Because we have some redundancies in the company that we pay for it but only to be prepared to resume more production if the market is necessary according to the our market sales.

Carlos de Alba - Morgan Stanley

Thank you.

Operator

Excuse me, our next question comes from Mr. Alex Simlard (ph) from George Wise.

Unidentified Analyst

This is Alex. Yes, good morning. Quick questions in terms on a bench on the pricing I mean you said that you don't really... it doesn't really matter if its benchmark or spot prices you're fine with either one. But if it wont emerge to goes to spot prices don't you think its going to put a lot of pressure on spot prices because of the volume that it's going to be throwing to the spot market?

Unidentified Analyst

By the contrary. By the contrary. I think the market today is tight. Anything that can happen in Europe, recovery... if the market recovers in Europe, of course, our sales to China will decrease a little bit. And our competitors there are working at full capacity. So I think that any recovery in Europe means price increase.

Fabio Barbosa

What I could add to the Roger statement is we are a price sensitive company. We manage... we are in a condition now more than before to manage volume and price. So we are going to do what is best for increasing our profitability. So we are not true in the market, the volumes that could drive the prices down for amount bigger than the profit we can take from this additional volume. So we are going to manage it. What is different now is as everybody is operating in full capacity, the only company that has the condition to manage the price volume game is Vale.

Unidentified Analyst

I see. One second question, if I may. So if my interpretation is correct, you're saying that, I mean because China at one point is going to have to start defending a little their local producers. You've been gaining market share throughout the first quarter. But don't you think at some point China would have to start defending a little bit the local producers and kind of step back a little bit in terms of importing iron ore and then you will be a lot more dependent on Europe?

Roger Agnelli

I think that this is a possibility, but let's wait and see. I think we cannot anticipate. We didn't anticipate what happened and we cannot anticipate what will happen from now on. One thing is for sure. Local customers that never used Vale's ore are now using. And I can tell you, they are like, so, I think now they proved the good stuff that you can offer. They are becoming more and more interested in buying. So I cannot talk about what the local miners will do or what will happen in China. But we have to follow and to serve the market and do what is best for our company and for our shareholders.

Fabio Barbosa

I think one point is very important. We shouldn't forget that the spot market price last year reached $200 per ton. At that time, a lot of low competitive, a lot of small miners were able to produce and to sell. And today, the market or the spot market varies $60, $65, $70 per ton. So they are not able to do that. So if the government decided to do something to increase the local production, I think that our clients in China will not be very happy with that, because they are going to lose competitiveness in the world market. So I think this is a possibility, but there is a tradeoff.

Unidentified Analyst

Thank you.

Operator

Excuse me, our next question comes from Mr. Jim Young from West Family Investments.

Jim Young - West Family Investments

Yes, hi. Could you talk a little bit more about your acquisition criteria and what you're looking for? I've recognized you made an acquisition of some potash assets in the quarter along with some thermal assets. What types of return on invested capital do you expect to generate given the prices paid? And it would seem that given your long-term nature and the strong balance sheet that you have that you would be a little bit more aggressive than you have been from an acquisition... on the acquisition front. Could you address those issues please?

Roger Agnelli

I think here we made some comments about the, our let's say, guidance for M&A. We said that we were looking for small assets that could really increase our strength, our position in some specific markets. And we are following this kind of strategy. We bought, as you know, Corumbaense from Rio Tinto. That is a very good asset to be a addition to our portfolio. We are very happy with that. We bought this Colorado... Rio Colorado potash project in Argentina that is right besides our other projects there in Yucan (ph) and this a huge deposit of potash and very good one. And we believe that the market is going to be very good for fertilizers or for potash and phosphates. We acquired some good assets in Africa also, a small amount of money, but with a very big potential in terms of copper. So we are very happy with that.

We are analyzing several different opportunities. But we are not considering to move ahead with big or huge acquisitions. And we feel that even at the current price, our projects are much more competitive. So we don't needed to acquire any other additional iron ore deposits because the deposits that we have in Carajás is much more competitive than any other possible acquisition.

In copper, we have several process being developed like Salobo in Carajás that we don't need to go for a major acquisition. And to be honest with you, major acquisitions or billions acquisitions today I think you can bring moral liabilities then assets. So I think it's better to develop a tool, keep our eyes on the clean, clean, very clean assets. And you do that when you buy a project or when you buy a small company because the big ones are, I should say, not really completely out of liability. And this is not the right time to bring liabilities to our balance sheet.

Operator

Excuse me, our next question comes from Mr. Leonardo Correa from Credit Suisse.

Leonardo Correa - Credit Suisse

Hi, good morning and thanks for taking my question. The question first is relating to Chinese domestic iron ore production. With the expectation that the ex-China market demand comes back in the second semester and stock price is recovering, do you see any risk that the Chinese domestic ore production that has been displaced during the first quarter come back to the market? Because in that case, basically, Chinese imports could be potentially driven down. So if you can please comment on that, please.

José Carlos Martins

Well, there is no free lunch, okay. So for sure, if the prices... the spot prices, the same mechanism that took these guys out of the market can bring them back if the price goes up. But that again really depends of how much ore can be sent to China. We didn't have to consider for instance that from now on a bigger quantity of Indian ore will be out of the Chinese market because of the monsoon. So I think there is space for some price increase and some additional exports from... for instance, additional sales from Vale to China, even this case. Because from now on, probably we see a big volume of Indian ore getting out of this market.

Roger Agnelli

And Martins, if I may, part of the consumption of the Chinese ore happened because there was no alternative. So the market was sold out down and they had to consume any ore they could find. And now, clearly, Vale represents an alternative moving forward.

José Carlos Martins

Yes. I think is the only available.

Roger Agnelli

Yes

José Carlos Martins

Thank you.

Leonardo Correa - Credit Suisse

Yes, thank you very much. And the second question is relating to Vale's current market share to China. If you could provide please some more color on that, if these current rates are sustainable or we should expect them trending down going forward?

Roger Agnelli

What I see is we never in the past have iron ore available to test our market share in China, because they'll always prefer to supply Europe and the rest of the world. So, for the first time in many, many years, we have iron ore available to test what would be our market share. So, and we think that to reach 30%, it's something impossible, considering quality, considering all of the aspects involved.

Unidentified Analyst

Just to clarify that we are not forecasting that we are going to reach but it's possible.

Unidentified Analyst

Yeah, it depends on a lot of other factors, okay?

Unidentified Analyst

Yeah. Thank you.

Operator

Excuse me, our next question comes from Mr. Jim Richards from Natixis (ph) Capital.

Unidentified Analyst

Hi. In your release you said although the Q1 unit costs in the orders are very good in fact most of what you've done over the last few months hasn't actually had effect yet, and will affect Q2 through Q4. I mean, there is some quantification or some other color you can give us on that?

Unidentified Analyst

Well, we are not providing any guidance on the future performance of our cost. We indicated the measure that we adopted, we indicated we showed the results that we had during the first quarter and some of them have a permanent nature. So we'll release the results as the year evolves.

Unidentified Analyst

Okay. Thank you.

Operator

Excuse me, our next question comes from Mr. Tony Rizzuto from Dahlman Rose.

Tony Rizzuto - Dahlman Rose

Thank you very much for taking my questions. I've got two. First of all gentlemen, on the iron ore side, I wonder if you could talk a little bit about how you see ore grades playing out within China? And I realize a portion of that is going to be determined by the mix and the internal supply-demand dynamics, but if you could talk generally about iron ore grades there and then also what you think about the level of marginal capacity in China from an iron ore perspective?

Unidentified Analyst

If I understood your question, you want to know about the quality of iron ore being delivered in China, exactly what the point would you like to... our comments.

Tony Rizzuto - Dahlman Rose

Yes, really trying to get at what you see taking place with regard to ore grades over the medium term?

Unidentified Analyst

Well, I think as... when you'll have a very low capacity utilization, normally customers accept work with not so good ore, because they don't need too much productivity, okay? But as they are increasing their capacity utilization, more and more they demand good quality ore. And the good quality ore is not only important, because of productivity, but also because of carbon emissions. High quality ore normally demands less coal to produce iron and so you have a much lower carbon emission.

So, if you look going forward, as the markets becomes more I would say sophisticated and as the market becomes more and more environmental conscious, the need of high-grade ore increases. And so, that's we see a very strong acceptability of our Carajás ore in China.

Normally we didn't deliver too much Carajás ore in China because we're always delivering this ore in Europe and Japan, Korea so and so, and they always deliver more Southern system, or which is not so good quality as Carajás ore but from now always have the more Carajás available because those markets, those traditional markets are not demanding and so they acceptability of this high-quality ore is very good. And also considering that they are buying more low quality ore they need more high quality ore to blend it.

So, we have a many mills that are only using in the past, low-quality ore that now have the possibility to blend it with this Carajás or even southern system good quality ore. I see the prospects for our ore in China very positive as going forward, okay.

Tony Rizzuto - Dahlman Rose

Thank you. That's extremely helpful. And if I may I have one more question it's on nickel. And I was wondering if you could just update us on a labor negotiations at Sunbury (ph) it's a May 31 expire. I wonder if you could talk about some of the major issues that you see going into these negotiations?

Unidentified Analyst

There is not much to say for now. Basically, we started discussions last week. And so far we are still sharing views about the future with employees. Those negotiations usually be done in the way that both sides they provide their views about the future of the business. So, we are still in discussing mostly of the forecasts and the future of our business. We haven't really started any negotiations, not in the process of negotiation.

Usually it happens in the last two weeks of the proper time. Of course I cannot commit anything else about that. But I think it's going to be a very interesting negotiation. Both sides understand that we are going through a very problematic time. We have, the nickel business was very impacted by the drop in price last year. So, I understand that the unions, they know that and they understand that the future of our business depend on how they will react to what we will propose to them.

Unidentified Analyst

We need their support.

Unidentified Analyst

Yeah, absolutely. We'll need their support just too really to keep our operations in Canada competitive.

Tony Rizzuto - Dahlman Rose

Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes today's question-and-answer session. I would like to give the word back to Vale's executives for their closing remarks. Please go ahead.

Fabio Barbosa

I would like to thank you all for attending this conference call and of course as usual we will be available for any further questions you may have either myself or our team of the Investor Relations.

Thank you very much.

Operator

That does conclude our Vale's first quarter 2009 earnings conference call for today. Thank you very much for your participation and have a nice day.

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Source: Companhia Vale do Rio Doce (Vale) Q1 2009 Earnings Call Transcript
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