Vale S.A.'s CEO Discusses Q2 2013 Results - Earnings Call Transcript

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 |  About: Vale S.A. (VALE)
by: SA Transcripts

Operator

Good morning, ladies and gentlemen. Thank you for waiting. Welcome to Vale's conference call to discuss second quarter 2013 results. If you do not have a copy of the relevant press release, it is available at the company's website at www.vale.com at the Investors link. (Operator Instructions) As a reminder, this conference is being recorded. To access the replay, please dial 55 (114) 688-6312, access code 6358517#. The file will also be available at 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 at 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 and Strategy; Mr. Roger Downey, Executive Officer of Fertilizers and Coal Operations and Marketing; Ms. Vânia Somavilla, Executive Officer of Human Resources, Health & Safety, Sustainability and Energy; Mr. Galib Chaim, Executive Officer of Capital Projects Implementation; Mr. Humberto Freitas, Executive Officer of Logistics and Mineral Research; and Mr. Peter Poppinga, Executive Officer of Base Metals and Information Technology.

First, Mr. Murilo Ferreira will proceed with the presentation and after that, we will open for questions and answers. It is now my pleasure to turn the call over to Mr. Murilo Ferreira. Sir, you may now begin.

Murilo Ferreira

Good morning, good afternoon everybody. Thank you for having opportunity to share some views with you. As you know Vale had a good performance in the second quarter 2013. Regardless of performance of the economy in the whole world and declining minerals and metal prices. We have continued to deliver on our promise. (Inaudible) other way of producing good improvements. Maintaining total cost and expenses and we can see that about the numbers that we got in terms of decreasing costs, decreasing SG&A, R&D. And these support our cost cutting efforts, present us a very interesting EBITDA number, which remains almost the same in comparison with one year ago. In the range of $10 billion for the first half of the year. We got us also $2.1 billion in revenues. It was mainly regarding the price.

We must say that the cost performance of the second quarter '13 was reached with an average Brazilian real/U.S. dollar exchange rate of 2.07. That again highlights that we have potential opportunities for the [States]. In terms of the debt, our total debt came in to $29.9 billion from $30.2 billion, again it's almost the same number comparing with that of the first quarter 2013. Despite giving $2.25 billion in dividends and investing $3.6 billion in the second quarter of 2013. We would like to highlights some events like the permit for the implementation of S11D.

The improvement of the operational performance of base metals. We are very happy mainly with the ramp up Salobo. And we can stress that in the next coming months we will be able to bring good deals in terms of the coal, in terms of fertilizer. As you know fertilizer is especially strong in the second half of the year compared with the first half of 2013. We note some math, mainly in terms of the press regarding the hedging account in order to minimize the volatility of accounting earnings and to allow our financial statements to better reflect the economic performance of our company. We’re considering using for future periods the implementation of the hedging accounting programs which allow us to our readiness to serve, to be used as a hedging for accounting purpose. We know that we needed to work with some key elements in this process and we intend to consider for the future. Regardless of this, we did a presentation about what could be the numbers in case of heading using these parts since the beginning of the year.

Again, it’s mandatory to see that Vale is strongly committed to disciplined capital allocation to bring return to our shareholders with good project execution. It’s very important for us (inaudible) to bring mature design engineering and to focus the construction and contract management in order not having deviation as you had in the past. R&D expenditure should decrease comparing with 2012, 2011 as a result of a decision to focus on a smaller and more selective pipeline of projects, which in the end will bring us a high rate of return in our portfolio and with world class projects. It is very important. And as an example of this capital discipline, the (inaudible) engineering for the whole project S11D is almost completed and we are with contracts and equipment services packets almost 70% hired with firm proposals. And then can bring us the level of confidence about the future in order to complete this project on time and on budget, very important for us.

Really appreciate your time and I would like to share with my executive director for questions and answers and I will be back in the end of the session. Thank you very much.

Question-and-Answer Session

Operator

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

Rodolfo R. De Angele – JPMorgan Chase & Co.

Congrats for the good numbers. We discussed a lot cost and recovering volumes in the previous call, but I wanted to follow up with two things. First, wanted to hear more details in your comments on a potential effect of weaker Real on the CapEx budget in the release you mentioned details of the S11D, how 90% of it is in Europe. Could you comment a little bit more on the other projects. Is there upside if we consider FX stay at around 230 for the CapEx budget for this year and into next year. And my second question, I just wanted to hear from management if there’s anything new or what’s the status of the tax discussions with [Brazilian] authorities? Thanks.

Luciano Siani

Okay. Sorry for that everyone, we had an audio problem. So now addressing Rodolfo's question on capital expenditures. We highlighted the share of Brazilian real expenditures for (inaudible) as a lead, because it's really a large one, 90%. It's a similar share for similar projects here in Brazil. However, if you think about the entire portfolio of projects, a lot of the share is naturally lower. It's more close to 50% rather than the 90%. So it's not difficult to do the calculation if you -- and that includes sustaining investment as well. That share that I just gave you. So it's not so difficult from this share to have an estimate of the impact of any real depreciation over any period of time. On the tax dispute. No, we have not had yet any meaningful development that should be conveyed to you.

Operator

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

Carlos de Alba - Morgan Stanley

I have got questions. The first one is on the non-iron ore business. Clearly the company has been on a very strong effort to reduce costs and expenses and we have seen the results of it. But nonetheless, the nickel, the copper, and the potash business continued lose money at the EBIT level. I assume part of this obviously has to do, particularly in nickel, we have pre-operating and the service costs. But I was wondering if you can give us a sense of when do you expect this business to be profitable, assuming nickel and prices are around these levels. Can they be profitable and if not, would you consider selling them or at least some of them. And then the second question is on the working capital reduction in what's very amazing, very strong results. Is this new level sustainable? Were there some one-offs that affected the development? What can we expect going forward? Thank you.

Luciano Siani

Okay. Carlos, thank you for the question. This is Luciano. If you look at the segment reporting footnote for the financial statements, it's footnote 25. So there we can see very clearly for each business segment and even within the segments, the revenues, cost and expenses and R&D into operating and idle capacity numbers for each of the segments. If you look at this, I think we only have base narrows on aggregate as a whole. But if you look at the footnote, you have nickel and copper separated. And remember that nickel in this case includes all the byproducts and copper is just the Sossego and Salobo and Lubambe operations in Brazil. So if you look at performance of this quarter for nickel, you have a little under $1.4 billion in revenues and $860 million in costs. So it’s $500 million margin on absolute terms and that is basically coming from the assets in Canada and in Indonesia. So even at those depressed prices where we have a reference to the prices, an average price of $15,100 for nickel in the second quarter.

The nickel business so to speak and its byproducts was able to generate $500 million in cash. So this gives us confidence that once we lay in the pre-operating and idle capacity expenditures and once there is a medium term recovery of nickel prices, that this business can be profitable on any account. If you look at copper, we had just our first monthly EBITDA for Salobo was very small, around $5 million. But Salobo will be a very low cost producer. So the Salobo operation, depending on the prices that you assume for copper and for gold, can generate significantly high profits and this should be reflecting on the copper line of the segment reporting. So Salobo can generate anywhere between $700 million and $1 billion of EBITDA depending on the prices that you assume.

So going forward we expect the performance of the base metals business as a whole to improve significantly. Remember that also New Caledonia is not contributing to results much on the country. We are still going to lose money this year from New Caledonia, much like the last year and we intend to break even next year. Actually we intend New Caledonia to be cash flow positive next year. So the prospects for the base metals business are of significant improvement over the next quarters. And we have no intention or not want to do any divestment on this business. On working capital, yes we believe the levels are sustainable. And as I mentioned before, we still have opportunities on the supplier financing side on the inventory side. Perhaps on the accounts receivable, the improvements are going to be more marginal from now on.

Carlos de Alba – Morgan Stanley

Any comment on potash in general?

Luciano Siani

I’ll hand it over to Roger Downey.

Roger Downey

Hi Carlos. Yeah, our potash operation today is a small operation. It is at the end of its life of mine .it’s something that’s been – the mine has been going on for (inaudible) of 20 years. It is a significant operation in the sense that Brazil is so potash dependent. So it really keeps a foot in the door in terms of the market that we want to secure. The operations today are impacted by I guess non-recurring things that we are doing today at the mine. It is not a mine that we will sustain at an EBIT loss of course. But it’s something that we want to – it’s a market that we want to invest in. it is very promising. I consider Brazil being the China of iron ore in terms of potash. There’s a lot of potential there. And as you guys know, we have been looking at prospects for this business and looking at new opportunities. But answering your question more directly is, it’s just a means to a greater end. We will maintain the operation at Taquari-Vassouras but not at any cost.

Operator

Our next question comes from (inaudible) from UBS.

Unidentified Analyst

Just a single question from me. Can you give a little bit more clarity on your cost savings? Obviously, it's being something much talked about both in Q1 and Q2. I am sort of curious, can you break it down for us a bit and just also highlight any currency depreciation savings in that number of, what was it, $730 million something. Thank you very much.

Luciano Siani

I believe on the press release on each of the segments that when we come at the costs that we have separated the exchange rate in fact, so we tried to convey some color on the changes in the nature of those net-off depreciation charges in the exchange rate effect. What I can tell you is that the exchange rate effect was very modest up until June. So June was the month where it started to kick in. So most of the positive exchange rate effect that you can read over the press release are related basically to the month of June. And as Murilo mentioned, on average for the quarter it was 2.07 exchange rate. So going forward there should be meaningful improvement. Every 10 cents of depreciation of the Brazilian real means an annual savings of around $700 million.

On the nature of the cost savings, there has been a lot to do so far with the simplification of the company. So a more focused company spends less money on distractions so you can have leaner support structures. You have less expenditures in R&D. So net SG&A and R&D, it's a question of focus. When you go to the operations it's the more comprehensive review of contract services, internal benchmarking, productivity improvements. We also have an ongoing cost cutting program in place with several hundred of initiatives as well. So we are tracking. We believe some have already kicked in, some will take longer time.

We mentioned six months ago that we were doing a review of the procurement function. So everything within Vale may be 12-24 months ago was geared towards -- speed was paramount in the old days. Now we are looking for quality, for doing the right thing regardless of timing. So we are taking the time to plan better and this has a number of implications across the company. From let's say current investments where you can package different work into a bigger contract and then do a tender, take your time to do a tender, call more suppliers, negotiate more. Lower the practice to better plan your maintenance stoppages, to revisit the scope of those maintenance stoppages in order to spend less than what is necessary. So everything when you do it more carefully and with more planning, planning more ahead, you get more quality, you get lower cost.

Unidentified Analyst

Yeah. I guess where I am coming from, maybe ask my second question then is that, if we sort of disregard the currency impact on your cost savings, I am sort of curious as to how much longer you can keep on cutting cost. I mean presumably over the past five years in this somewhat macro-economy, you have been cutting costs. So I just wonder how much meat there is left on that bone without basically jeopardizing the future of Vale's revenues and earnings. From what you were saying, you can still go on for a while longer. Is that correct? Is that the right interpretation?

Luciano Siani

Yes. All cost cutting measures that we are adopting are sustainable. We are not jeopardizing the future of the company for a mistake of the short term. So you shouldn’t worry about the sustainability of the current level of cost reduction. It is here to stay and there is no impact on the future earnings of building up the company of any of the cost reductions much to the country.

Operator

Our next question comes from Mr. Thiago Lofiego with Merrill Lynch.

Thiago Lofiego – Bank of America Merrill Lynch

I had two questions. The first question is on the regulatory framework definition in Brazil. What’s your take on the recent development? Do you think the final document will be significantly different from the original proposal? And also what’s the timing for the new rules to be effective in your view? And the second question, just a follow up from the Portuguese call regarding the CLN 150 logistics project. What’s the additional rate of capacity expected for 2014 and what capacity is actually tied to the S11D project? And also what’s the potential iron ore tonnage in terms of sales for next year, for 2014? Thank you.

Luciano Siani

On the mining code, as you saw, there were several amendments to the code. So obviously without deep knowledge of the political process we cannot anticipate what the outcome is going to be. But we remain confident that the ideas that were espoused by the government in the original deal should at the end prevail. That’s our hope. Hopefully the government will be able to mobilize its allies in order to sustain those. But we have no forecast on how much it is -- it will take and what the process is going to be. In terms of the logistics capacity, I will hand over to Galib.

Galib Chaim

Considering the CLN 150 for 2014, we expect -- we have now already 14 million tons added to the logistic capacity just for the railway. And as I said, for the fork for the exploitation we have $60 million tons of extra capacity for the (inaudible) exploitation work. With this 14 million, the total capacity will be 100 (inaudible) for 2014, yes. The volume guidance that we gave at the Vale day for next year, for 2014 is kept. And if you remind what we said back in November, the production increase should be a combination of the Carajás projects in the south and southeastern (inaudible) and others that should start up and recover a little bit of the performance and a little bit from the north. So in due time in the Vale Day we’ll give you more details on that.

Operator

Our next question comes from Mr. Ivano Westin from Crédit Suisse.

Ivano Westin – Crédit Suisse

The first part is on tax litigations. You reported total tax dispute of 57 billion reais. I just wonder what the difference that is of the dispute, specifically recently you had a court decision which was favored to (inaudible) company. So can you expect any potential reduction at all in the short term and when do you expect to have a final outcome on this? This is the first question. The second one is on the supply demand equation. Martins mentioned on his part of the call that he’s not concerned about them and in China which will remain resilient. I’d just like to ask him to add to this discussion the supply side. What is the expectation of Vale in terms of the net growth of supply comes to support the market next year? And what is the average price for 2014 (inaudible). Thank you very much.

Luciano Siani

On the tax dispute, as I mentioned, there has been no significant recent development on the side of Vale. I’ll now handle over to our legal counsel Clovis Torres who is on the call to see if he want to add anything else. Okay. So he is not on the call. So I reassure my -- we are sorry for that -- so I reassure my last answer which is that there has been no recent developments. And we haven’t yet have a full assessment of the impact of the [VSN], sort of the illustrative win on our tax liabilities. So handing over to Martins to speak on the supply and demand equation.

José Carlos Martins

We continue to see the iron ore market fairly balanced. Sometimes we see some additional supplies that later can be absorbed by the markets growth, mainly in China, as we are used to seeing in the last three or four years. We believe next year Europe could perform better. There is some signs of recovery in Europe. United States is not a big market for iron ore, they have their iron ore. But we feel the economic policy in Japan improving also the situation to be able to solve. We see next year with more supply coming to the market. But on the other hand we see some positive signs coming Europe and Asian countries not including China. So we do not see too much difference from what we see today. I think the market will continue to perform the same it's performing this year with some ups and downs. Volatility continues to be there, like we see all over this year. I don’t think the volatility would change but on average I do not see big changes in the market situation as far as supply and demand is concerned. Supply will grow but demand will also grow.

Operator

Our next question comes from Mr. Daniel Rohr from Morningstar.

Daniel Rohr - Morningstar

Just wondering about unit cash costs in the iron ore business, the $24 a ton figure you gave for the second quarter. Other then depreciation in seaborne freight, what else is excluded from that figure. It looks you had about $245 million in expenses that aren’t included. So I am curious what's in that bucket.

Luciano Siani

Okay. The way to reach the $24 is simple. You take the -- again, you start from the segment footnotes. The 25 --

Daniel Rohr - Morningstar

I don’t want to interrupt you but I am clear how you get there, you had a helpful explanation of that. But the $245 million in expenses that are excluded from the numerator in that equation. What's in the $245 million, I guess.

Luciano Siani

What is in the $245 million, okay. The iron ore business absorbs -- most of the SG&A is absorbed on our costing segment reporting process to the iron ore business. So for example, we are right now at the headquarters here within Vale, so all the expenditure, the air-conditioning right now is being absorbed by the iron-ore business. So this has a lot of expenditures that relate to the corporate and headquarter activities. So I guess this is it. So you just take from the cost the freight and divide by the sales of the quarter then you get the $24.

Daniel Rohr - Morningstar

Yeah. And then for 2012, in that filing you didn’t breakout costs versus expenses. So can you let us know what the equivalent unit cost would be for full year 2012?

Luciano Siani

We can give you that afterwards. So we don’t have the information here.

Operator

Our next question comes from Mr. Paul Massoud from Stifel.

Paul Massoud - Stifel, Nicolaus

Last week, and this is just a follow-up on some of the commentary on potash, but last week some news that came out of Russia that a major Russian producer will be exiting it's marketing arm and increasing its production by 2.5 million tons. And the result of that is I think most expect pricing on the potash market over the next six to 12 months decline by something close to 25%. So I guess in the context of lower pricing, to me it almost seems that developing Greenfield potash projects in that pricing environment is becoming even more uneconomic. And so just going back I think previously stated strategies and I think you even said it today that potash is still a big focus in terms of growth and in terms of Brazilian demand. Has M&A become an even bigger part of the strategy in the growing in those businesses? And given where pricing is at today, does it make more sense now to buy established production rather than trying to build?

Roger Downey

This is Roger Downey here. I guess we always have to keep everything in mind. And I think we have to be anchored in the long term, back straight where our business has to look at always. There’s no doubt that the recent developments in the industry have put a lot of pressure on prices. We can’t look at our business from a very short term, quarterly or annual perspective. We really have to focus on what there is out there in terms of an opportunity for our shareholders to make money. We’re looking at the business from a perspective that we sit in a market that we think is probably one of the most promising markets for that commodity, the potash. Brazil can significantly increase its demand. We have a competitive advantage and a sustainable competitive advantage at that in terms of reaching our customers, especially in the northwest of Brazil with all the warehousing, logistics, our sales clientele and of course -- and especially our ports into Brazil.

So if we can find ourselves in a business that is in the lowest quartile of CFR costs into these markets and specific into Brazil, into the promising markets and specifically Brazil, I think you should certainly look at being in this industry. Brazil has a tremendous potential in terms of growth. If you just compare our productivity levels in terms of agriculture productivity, today we could be doing we’re talking about four or five times as much agricultural output. So and Brazil is totally dependent on potash and they can’t get enough. Our farmers can’t get enough. So it’s certainly – I think we have to be conscious of what’s happening in the short term, but focus on the long term. I think that that’s really what it comes down to. And of course we’ll balance our entry into that business if it really is something we want to get into as to what is the best door to get into it.

Paul Massoud - Stifel, Nicolaus

Maybe just as a follow up in trying to understand how you guys go about that process. Do you have a long term potash price that you think is reasonable? I certainly understand that current market dislocations may very well be temporary, but if you’re looking out say call it 24 months and beyond, what’s a reasonable price or maybe what’s the right price that you guys are looking at in terms of being a long term price? Delivered into Brazil?

Roger Downey

I’m not going to – we go much further in the next 24 months of course, especially given that our mines, even if we’re going to get into the potash business or not, we have to think about the property development or whatever, will take you more than 24 months. And then operating a mine is 20 years. So we have our long term prices we work with and which is our threshold. If we can be in a business that’s in the lowest quartile of the delivered price into the promising markets, we certainly should be in there. And if it makes a decent margin we should be there. So I think it’s a process, especially after the development we have in the development of our potassium project, potash project in Argentina. We are in a stage where we are reviewing the whole thing. But, look, as I said, it is with promising markets but we are taking a cautious [strain], a cautious approach to it. And again, we certainly think that these short-term issues may well result -- the short-term issues in supply may well result in higher prices in the long-term.

Operator

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

Marcelo Aguiar - Goldman Sachs

First question would be on restructuring development and just no CapEx. I mean you guys have been running a bit low you know your targets for the annual, both in the restructuring development and spending CapEx. Is this first half level for both expenses and CapEx are sustainable for the next, let's say next second half and the future? Or should we expect you guys to reach the budget that you outlined towards the end of last year. And that will be the first question.

Luciano Siani

On aggregate we should expect to reach the budget [to be inline] for last year if you consider R&D sustaining and CapEx.

Marcelo Aguiar - Goldman Sachs

Okay. And the other one would be a little bit more color on the VNC comment you made earlier, Luciano, about that you see the VNC already generating positive EBIT in 2014. I mean can you just walk us on, not what will happen, but what were the negative EBIT impact on VNC in 2012 so we can have an impression on the magnitude of that turnaround.

Luciano Siani

Okay. I will hand over to Peter Poppinga, but just before he talks a little bit about the perspective, just to give you a few numbers. VNC lost $750 million in 2012 and we were expecting for this year a significant swing. Though we are [still] to have a loss, you can expect a swing of several hundred million dollars. So I am not going to give you a precise figure but the order of the magnitude will be still in the loss but several hundred million dollars less than last year. For next year we are going to, so we are looking forward to breaking-even as Peter Poppinga will explain. Please, Peter.

Peter Poppinga

Thank you, Marcelo, thanks for the question. Since in VNC as you know there is a major turnaround going on. Although it's taking its time because it's technology and it's very challenging. But it's going. We know now that the (inaudible) works and there is no fatal flaws anymore expected in terms of new technology. It's for sure. Ramp up is progressing right along, we had in the month of June. You don’t see that because you see already quarter's up, but I am very pleased to report that in the month of June we had a very successful month in terms of production in VNC because for the first time they continued to run with two [autoclave], we have three. But on average full capacity is meant to be the 2.5 on average because always one is at maintenance or something. That’s the design capacity. So we ran this two [autoclaves] continuously for a long time in June. So this worked very good. That means that we can be cash flow positive in 2014 because you need two autoclaves to be, under the current price environment you need two autoclaves to be cash flow positive in 2014. That’s what we are heading at.

And for the major milestone we achieved and so we are positive that in 2014 we are taking out this company to be positive.

Operator

Our next question comes from Mr. Tony Rizzuto, with Cowen and Co. LLC.

Anthony Rizzuto - Cowen and Company

I jumped on a bit late, there was a (inaudible) in other call, so I apologize if my questions have been asked. I guess I want to drill down a little bit firstly, in your assumptions on the global steel supply chain a little bit, if I may. You talked about a floor, strong floor at 110 per metric ton. I was wondering if you could tell us what you’re assuming for Chinese crude steel production and pig iron production and maybe your assumptions for Chinese ore grades, depletion rates in the west and how you view India.

José Carlos Martins

You make a very difficult question to answer because you put a lot of things that my crystal ball is not enough for it. But we believe that steel production in China will continue to grow around between 3% and 7% in the half of the year. This year we’ll grow near 10% (inaudible) is either about, near 700 and 8 million tons. Pig iron production continues to be the big part of steel production in China. We don’t believe scrap will have any influence in the near term. We believe scrap will only have some influence after 2025 or later. So steel production in China continues to be based on pig iron production. So I don’t see there’s impact on scrap. But you have to believe that urbanization China will continue to develop.

Now is 51%, something like that and we believe that until 2030 we don’t reach 70%, 72% which is the Chinese government target for 2030. So one year will be better. Another year will be worse, but on average China steel production will continue to grow based on pig iron. And so I don’t know. Internally, domestically regarding China, everybody knows that the quality is becoming worse. Depletion rate is increasing. Iron ore content is decreasing. So all of those effects and that’s the reason we believe that price sustainability -- price will be sustainable in the range of $100 to $110. So we do not see a big difference from what you see. And we see a positive scenario.

Luciano Siani

Martins, if you allow me to complement. In the presentation that is in our website on page 25 we make an estimation for global demand and supply on the seaborne market for 2020 that factors in several of the variables that Martins described. And we do see 160 million tons of high cost producers being displaced from the market of the starting level of over 350. And that includes also the opportunistic exporters to China such as U.S, Iran Kazakhstan. So, several non-traditional countries that supply too. So if you take the cost curve, even if you displace 150, 160 million tons of high cost production, if you consider the variables that he mentioned, cost increases both geological and internal because of the increasing labor costs in China, appreciation of the RMB, you get a very clear picture that 110 is on the safe side for our support.

Anthony Rizzuto - Cowen and Company

If I could follow up with another question, this time on capital spending and looking at a little bit longer term over the medium term, should we still think about your CapEx levels being in the ballpark of $15 billion U.S per year? And is there a potential there for some scope of reduction and of that amount, what would be the sustaining level that we should think about?

Luciano Siani

The ballpark that you mention should prevail over at least ’14 and ’15 in which we have the bulk of our expenditures in S11D. Sustaining investment we have an overall direction of not increasing it. So we believe that as a fraction of total assets it should be at stable or decline, but we don’t have precise figures to give you. After the expansion of -- after '14 and '15. So after the bulk of the expenditures on S11D and (inaudible) have been realized, one can expect a decrease in CapEx. But again, the details will be given you in Vale Day in November.

Operator

Our next question comes from [Terrence Orslin from CSO and Associates]

Unidentified Analyst

I have a round of questions if I could. There was the change of the -- or intended change of the policing strategy and the fiscal regime and all. Why isn’t -- I mean mining is such a big component of Brazil, why isn’t Vale and (inaudible) and all those companies far more involved in the process, even at this scale. Even if it's up to the politicians to decide, I know you [made] commissions and all, but why aren’t you driving this ship. Part because the process is [harder] than politicians driving it.

Luciano Siani

There is an industry body that represents the entire industry, which is called [IBRA], which is actively involved with the government in discussions. And Vale is one of the members of this body.

Operator

Our next question comes from Mr. [John Camaso with JP Independent Research]

Unidentified Analyst

You mentioned your long-term sustainable iron ore price expectation of $100 to $110 a ton. What are the nickel and copper prices you use for your balance sheet analysis?

Peter Poppinga

Luciano, you want me to answer that?

Luciano Siani

Yes, Peter.

Peter Poppinga

John, thanks for the question. So we are working very close to the industry average forecast. For copper we are working at a slightly lower price level than the current one that are on 7000, [type] lower. For nickel, we are distinctly about 20,000 because the export ban in Indonesia will work in the long term. And in terms of there is no supply wave coming....

Unidentified Analyst

So China doesn’t exist? The 30% increase in output in China last year and this year is not sustainable?

Peter Poppinga

Well, I don’t understand your comments.

Unidentified Analyst

The reason we are suffering in the nickel business is that China increased the output 30% last year and 30% so far this year or 70% cumulatively. And your planning as if they will not be able to import ore?

Luciano Siani

This is Luciano. We have views on the long time prices for commodities for sizing the opportunities. But in our capital allocation process we have very high hurdle rates and very high (inaudible) stress test. All the assumptions to make sure that the projects and the planning is robust under any scenario. So the long term prices, they are not so meaningful for us in terms of approval of projects. Which is more meaningful if the stress test and the hurdle rates -- the long-term practice have more of a sense of sizing the opportunity rather than an influence on the approval process.

Operator

Ladies and gentlemen, this concludes today's question-and-answer session. Mr. Murilo Ferreira, at this time you may proceed with your closing statement, sir.

Murilo Ferreira

Thank you very much for sharing your time with us. I would like to highlight again that we’re not so far guiding the future of the company regarding that program. What we are doing, we must live with the simplicity, austerity and very focused. We are not living the superstar cycle. We must provide good return to our shareholders and the simplicity and austerities both are key elements in our strategy. Regarding the mining law, I think that the Brazilian government is very conscious in order to maintain the competitiveness of the mining sector in Brazil. I think that this is very important and the Brazilian Mining Institute, IBRAM, is helping to the part of that in order to provide elements to the people and to see all the maintenance and to help the process. Regarding M&A, in fact we must say that we are very focused into big projects, mainly S11D and Mozambique.

In the next few years we will spend roughly US$26 billion in both projects. And we are not considering M&A at this point in time we can pursue with these two big projects high return and to bring return to our shareholders. We are not able to forecast about the level of the capital that we will spend right after 2016. But based in our institutional plan, we must consider just world class projects. We are not looking for to increase our volume anyway. We must have good projects, world class projects, low cost that we can expand in the future looking for brownfields with good technology in order to stay in our business, in our portfolio. Again thank you very much for your time and thank you very much for your support and we are very happy to see the results in the price of our stock. Thank you very much.

Operator

That does conclude Vale's second quarter 2013 results conference call for today. Thank you very much for your participation. You may now disconnect.

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