Duncan Niederauer - Chief Executive Officer, NYSE Euronext
Thanks everybody. Good morning. Welcome to the New York Stock Exchange. My name is Duncan Niederauer and welcome to the 11th Vale Day here at the New York Stock Exchange. It’s great to have Murilo and the team back in the building. Again, this has become a nice tradition for us. And I think it’s a great illustration of how we aspire to collaborate with the great companies that are listed here. You know I think how we feel about Brazil, it’s a very important region for us here at the NYSE, we have about 30 companies from Brazil listed at the NYSE with a combined market cap in excess of 700 billion and Vale is certainly one of the most valued partners in the region and we have enjoyed a love affair with Vale since their listing here in 2000. And if you look at it today in the 13 or 14 years, Vale has been listed here, it is consistently one of the most actively traded stocks everyday. So Murilo, on behalf of the New York Stock Exchange, it’s a pleasure to have you and the team back. Thank you. And Luciano and Roberto, a special thank you to you for always using our venue to hold your Investor Day. I wish you the best today. Our house is your house. I am going to turn it over to you. Thank you very much. Thanks. Cheers.
Murilo Ferreira - Chief Executive Officer
Good morning. Thank you for coming. It’s really a pleasure to have an opportunity to share some views about Vale and let’s start with a film and then later on we will go ahead with the presentation. Thank you.
Conrado is with us. For the first time, our Chairman is here. I would like to ask you for introduction.
Dan Antonio Marinho Conrado - Chairman
Thanks Murilo. Ladies and gentlemen, good morning. I am very pleased to have meet you here to start the discussion of our strategy and investment plans. The strategic guidelines approved by the Board of Directors of Vale are very simple, straightforward and consistent with its mission, vision and values. The focus on discipline and capital allocation is of absolute importance to get the maximum return for each dollar invested. As a consequence, the Board approves funding only for projects that prove to generate world-class assets.
Another key component of our strategy is the focus on our car business, which is iron ore, nickel, copper, coal and fertilizers, which implies the divestment of non-core assets. Adverse program is underway since last year and we have significant results already achieved, the preservation of our leadership in a very competitive global marketplace demands low cost on permanent basis. Cost control was something that must be practiced everyday and as of now Vale’s efforts to cut costs have yielded substantial savings so far. Vale’s dividend policy is strictly linked to its cash flow and I am very positive about the financial capacity to distribute sizable dividends simultaneously to the funding of its investment plans and maintenance of our health balance sheets.
For next year, the financial budgets approved by the Board of Directors for this at least maintaining the minimum dividend of 2013. Moreover, the company policy is to return excess cash to shareholders. The $12 billion returned to shareholders in 2011 including $9 billion dividend paid exceeding $5 billion the amount announced in January that year. It’s a very clear example of the execution of this policy. If there will be excess cash in 2014, Vale will return to shareholders. Over the medium and long-term, we expect that the combination of capital discipline, low costs, growing volumes and cash flows will enable Vale to enter a path of increasing dividends.
Now, I will hand over to Chief Executive Officer, Murilo Ferreira, whom I like to congratulate for the good results achieved so far, who will commence the presentations that will be made by the executive directors. Thank you very much.
Murilo Ferreira - Chief Executive Officer
I am very glad to be here for our Vale Day at the New York Stock Exchange. As usual, we will discuss our strategy and its execution. Our priorities remain the same as the last couple of years. They are incurred on the two critical principles, austerity and simplicity, which guide our decision-making process. We are very flexible in contemplating different scenarios and options, but we are also very rigid when it comes to the austerity and simplicity. The ultimate goal is to produce a structural transformation towards a low cost, high efficient company able to create big shareholder value on a sustainable base. The mining industry is highly capital intensive business, which highlights the need to minimize the cost of capital. Thus the preservation of a strong balance sheet as a consequence our A credit rating remains also an important priority.
Our asset portfolio continues to be adjusted to improve capital allocation. You see this morning that our CapEx is following a downward trend as you are very strongly committed to deploying capital only in world class assets which large reserves, low costs, high quality and opportunities for low cost brownfield expansions. The divestiture on non-core assets has so far reached $6.4 billion with $1.5 billion in 2012 and $4.5 billion this year, not including some transactions that are still being concluded. Among these, the largest is the sale of additional stake in VLI, which is near completion and will reduce our share in VLI to less than 40%. The relevance of these transactions begins not only by free funds to finance the development of our core assets, but also from unlocking of hidden value and the simplification of the portfolio allow us to concentrate our efforts on the assets, which really matter to the value creation process.
A further step on the execution of our strategy is to explore opportunities for partnerships, which can be leveraged in the return on capital invested. As a consequence of the requirement of the Government of Mozambique, the Nacala corridor will be dedicated to the transportation of other cargos such as grains as well as coal. Consistently, with our strategy guidelines of less in the exposure to the general cargo business, we have decided to reduce our stake in the Nacala corridor to almost half of the current 70%. This movement will promote a big reduction of our capital commitment to our $4.5 billion project, while maintaining the access to an efficient logistic infrastructure which is a key to leveraging our world class assets much easy.
Our gold mining assets in Australia and Mozambique will be joined under a global gold entity with the intention of selling minority stakes to investors. In the fertilizer business, we are analyzing opportunities for having partners in project such as Canalete, Brazil and Kronau in Canada and/or in a global entity comprising all of our assets. The case of Bayovar in Peru is typically a successful case of partnership in our fertilizer business as it has contributed to maximize our return on capital invested in the project.
Finally, I would like to comment on the several milestones achieved in the last 18 months on eliminated uncertainty which have been down our share prices. Several tax disputes were solved with no major pressure on our cash flow. We successfully negotiated the ICMS dispute with Brazilian State of Minas Gerais as well as with some Brazilian states on the imposed new tax on mining managing to reduce the rate. The National Confederation of Industry filed a lawsuit against these states claiming the unconstitutionality of such tax. It wins the case we may recover the payments made to these states. The tax liability climate by the Swiss authorities was settled by Vale. The (indiscernible) obligation as we are seeing the agreement between Vale and Swiss federal government in 2005 was emended to and in December 2015 thus shortening is duration and giving more flexibility.
Our Board of Directors approved our participation in the tax settlement REFIS for payment in income tax and social contribution on earnings on our non-Brazilian companies from 2003-2012, which involves a 20% upfront payment, 15-year refinance and 8% discounts on penalties and 50% on interest according with the terms established by law. These has caused a substantial reduction in our tax exposure to BRL22.3 billion from BRL45 billion. The net present value of the payment option chosen by Vale after tax benefits is BRL14.54 billion, which when compared to the full upfront payment option minimized liquidity pressure at the present value of payments.
The tax exposure for 2002 and 2013 was not included in the REFIS for 2002 was declared unconstitutional by the Supreme Court and for 2013, which was not benefited from REFIS. If there is a decision of the Supreme Court on some merits on the litigation and such court decision is applicable to all the tax payers Vale may have the right to stop paying the REFIS and request the return of whatever payments Vale has made based in the same REFIS.
On the environment permit front all of our major projects have already obtained the permits required for the execution. However, we will still face uncertainties related to the regulation of caves which poses challenges to iron ore mine in Carajás giving the technical work we have been performing at positive about the probability at least solving part of these issues in short-term. We will now hand over to Vania Somavilla who is our Executive Director, In-Charge of Sustainability, HR, Health and Safety and Energy to further clarify the issues and to show you the efforts that we are making to mitigate these constraints. Thank you very much.
Vania Somavilla - Executive Director, HR, Health & Safety, Sustainability and Energy
Good morning everybody. Thank you for coming here to hear from us. We are going to talk a bit about sustainability in Vale. Because we cannot choose where mines are since the very beginning we had to be used to different realties. The co-existence of mining, environmental and societies has pushed us towards either technological or social solutions. In Vale, we understood that sustainability is always seen as related to global trends and problems, but the solutions always are at local levels. So we decided to include sustainability in our strategic planning in order to make it more tangible to all our leaders and our stakeholders.
In 2013 the sustainability agenda played a central role in our strategic planning. Then we decided to define eight priority areas based on the materiality analysis that was conducted together with the internal and external stakeholders of the company. For each of these eight priority areas we developed strategic projects. Today we are going to develop a bit more with you two of these areas. Health and safety that is the main and the top priority of Vale and land use and diversity that we are going to give an example of how we are conducting the case, natural case study and development inside Vale.
At Vale life matters most. In the last – in the past two years we have put a much stronger focus on health and safety led by this – the genuine passion that was shown by our CEO related to this issue. In Vale really life matters most. We have achieved a lot of success but we are not satisfied and we will not be satisfied until we reach zero fatality as on our way towards zero harm. This is our main goal in the company. To achieve this, we have developed a lot of actions and we have our leadership personally involved in all these conducting a lot of health and safety forums with their teams.
We had started in 2012 the implementation of a global health and safety management system. And each of our business units today they developed golden rules that must be followed for everybody in order to avoid tragic or accidents. We are having enhanced training and we have developed also a lot of technological alternatives in order to avoid to expose our employment and contractors. This is only Vale that can assure that we do include the contractors in our health and safety projects. And we had tried to develop this – we have for instance safety nets for working on heights. The very S11D project was completely conceived using health and safety criteria in order to save our men, our employees from risks. But you understand that it’s not only a technological issue, we need to develop a culture of genuine care and we understand that we have genuine care. If we are best in the industry in health and safety we also did the best in operational excellence also. This is quite important for us. To-night we are going to sign an agreement with Global Fund for preventing malaria in our operations mainly in Africa. We are very proud to announce this also.
Now it’s another issue the Northern Range caves, how we are dealing with this. For Brazil legislation, natural caves are any on the ground cave, there can be accessible by human being and they are protected by the federal constitution. So it was very difficult for the industrial sector in Brazil to understand how to deal with this. Actually, it took 24 years for the rule to became clear in order that we could conciliate preservation of the caves that which are needed to be preserved that are what they call in Brazil the maximum relevance caves and conciliate these with the exploration of mining and other activities nearby. Since we are only in 2012, the rules were clear for us. And these 30s, that are expected by this legislation in Brazil. They take one year to be complete, because we have to consider the dry and the rain season. So only in 2013, we got these studies completed and we have sent it to the environmental agents. There were a lot of discussions for the understanding of this. That’s why we are expecting by December or January, this approval of our studies in order that we can compensate the caves for the operation that we call LO 267, that is the operation where we are today. It’s in this map, you can see there, is what we call N4.
For the, what we call, area global that is the area below we expect these by the middle of next year together with the license. And to show you that it’s difficult, but it’s feasible we have a successful example of how we treated this. For the S11D, the project was already conceived using these mandatory issues, mandatory criteria by the legislation. So we got to do a project already considering the existence of the caves and we build the project related to this and we could preserve the caves, we could compensate. And for S11D, we got the environmental permission together with the cave to allow us for us to compensate the relevance, the important relevance, vertical height relevance caves. So we got to preserve and we got to have our mining exploration plan. So we are expecting the same for the operation of the place of northern range, where we operate today by next maximum two months. Thank you.
Luciano Siani - Chief Financial Officer
So let us start by recapping the trajectory of capital expenditures that we just have approved. So this shows you that we are entering the third consecutive year of CapEx reduction. We are already giving you the forecast for this year, which will be $15.5, so not the $16.3 that we have approved and for next year $14.8.
A few things to call your attention. The first one is we are giving you the numbers for 2015 and 2016 for the approved projects. And as we have committed to only approve world class projects, it’s in the hands of this management to put Vale into this trajectory of CapEx reduction. So we believe after 2016 that we will have a much more balanced profile between cash generation, CapEx and dividend distribution. The other message here is if you look at the sustaining investments, we have budgeted for 2013 5.1 billion, we are going to end the year with 4.8 billion and for next year 4.5 billion. So there were in the past, recent past some doubts about the ability of Vale to contain the sustaining investments into a reasonable path. So this is again, this is the fourth year of stability of sustaining investments although we have been growing our asset base. So I would say, you can be pretty comfortable with that going forward. This is also an expenditure that is under control.
Briefly on the composition of the capital expenditures, key message here is that the portfolio is very, very focused. So the set of projects is very concentrated, very easy to understand what Vale is doing. We are expanding production in the north, revamping our production base in the south, enhancing our distribution network to be competitive in Asia. We are doing our world class project, coal project in Africa and Mozambique and finishing up Salobo. It’s a very, very clear and simple agenda. And when you think about sustaining investments again, the iron ore business, which includes here as well the logistics networks, is where most of the sustaining investments go. And we believe another reason why we believe we can still maintain a good trajectory for sustaining investments, it’s because we are still working with some backlog of sustaining investments in the fertilizer business and we are still spending money on the implementation of the ERP system. So these are one-off events that once removed could lead to also to lower sustaining investments going forward.
And finally, when you look at R&D, the 2013 number that you see is the last 12 months ended in September. So it shows you again a diminishing trajectory. What you can see here is that as you simplify the project portfolio the amount you spend with feasibility studies also decreases and also we are now being more and more focused on the mineral exploration strategy. So basically the 384 that you see in there, it’s mostly comprised of brownfield near mine exploration on our existing reserves. And in terms of greenfield we are mostly focused on copper because that’s the commodity that I believe everyone likes and that where Vale doesn’t have the asset base that we will like to have.
This is a key framework that we have spent a few days preparing it for you to understand. We got lots of questions about how is cost-cutting progressing within Vale. So you have heard Murilo, our CEO talking a lot about the culture of austerity and simplicity, which is a major transformation within the company, but also we have a few stages that we are going through in this cost-cutting program. So we have done whatever you see in the column of 2013, which was much talked about. In 2014, we still, we believe we are going to reap more longer term initiatives that were started in 2013, but will start to bear fruit in 2014. But I would like to call your attention for the major structural changes that can come on 25 onwards. We have also highlighted a few of the achievements and targets that we have. So on the first column you have the achievements in 2013, on the second column, you have a commitment that we have to further reduce SG&A expenditures by 10% this year and our major goal in respect to the cost and expense lines for these years is a reduction of 50% in preoperational and stoppage expenditures, which have been running at above $1.5 billion and because of our confidence in the ramp-ups of the projects we believe we will be able to achieve those.
And finally on the structural changes, just to call your attention because Vale still has lot of opportunities to reduce cost going forward in the medium term. The opening of new iron ore pits as Vania explained, so we are getting the license to open new pits in Carajás. The dilution of fixed cost Vale already has all the fixed cost in place to produce much more iron ore than it is producing today, because we have the processing facilities in place, we have the railway capacity, we have the port capacity. So the people are already there. So as you expand production, fixed cost will dilute. The new projects, the extended enterprise once and if we worked in China, we will be able to streamline our shipping cost as well by a significant amount and the surface plans optimization mainly in the fertilizer and base metals business and the much talked about, for instance, the synergies with Glencore in the Sudbury basin. So there are lots of structural opportunities to come.
And finally, on the growth trilemma how we are balancing our cash flows for next year. So we are putting here an exercise. If you look on the left side, if you take the average that the research analysts predict for 2014 for EBITDA for Vale, we believe we can squeeze an additional $1 billion at least from the working capital and to raise that money from our balance sheet. We still have $800 million to go on the sale of Brookfield that will only be materialized in the beginning of 2014. So if you sum that up you get $22.3 billion, not considering potential windfalls from additional divestitures and partnerships in coal and in fertilizers that Murilo mentioned. By the way, the CapEx that we have shown considers 100% of the investments in the Nacala corridor and in the mine made by Vale. So our partnership will be a huge upside on that.
If you look at to the right side, we have the CapEx for 2014 and estimates for interest payments, taxes and the minimum dividend according to the 2013 figure. So this is not guidance for just making an exercise based on what you saw in 2013 and you get the exact same value of cash generation. So you have a balance between cash inflows and cash outflows for the next year even with the minimum dividend as was announced by our Chairman of $4 billion and we still have an opportunity to generate more than that. So in conclusion we believe Vale is well positioned to continue distributing good dividends, financing its growth program and then lots of upsides to come in the near future. Thank you.
Galib Chaim - Executive Officer, Capital Projects
Good morning. I’m going to present to you some information and results in 2013 related to project capital. Let me start talking about the discipline, the discipline in project management from the development to completion phase. We have some few factors, key factors that assure our good governance. The pre-feasibility study, the feasibility study is a very – there are important issues that we have to assure that they will be very well approved before going to the next phase. We have to avoid errors being carried over the next phase.
The second one, increasing the design quality, we had some problems in the past I believe that is our duty now to avoid these problems. The effective procurement and management plan for all suppliers and contractors is something very important. We are being more selective now to avoid problems in replacing companies, replacing contractors during the construction. I remember that we had some problems that cause a lot of issues. We now – we have a very good market with the lower pressure on the market that means we are getting lower price in our proposals that means the budget is not so much - we don’t have much pressure on our budget. Our robust and efficient construction and completion management system it’s we are taking care over the project capital and other KPIs, a new health and safety guidance according to what Vania said before.
Let me start talking about the projects delivered in 2013, Additional 40 and the CLN 150 Conceição Itabiritos, the Malaysia distribution center, Long Harbour and Totten. Peter Poppinga will talk something about Long Harbour and Totten. Additional 40, Additional 40 you can see in this picture, you can see that - it’s in operation of course. You can see that the tertiary crushing built conveyor going through stockpiles as everything is going well without any problem from the operation. The operation have been producing the – have produced up to now 3 million tons almost 3 million tons up to now. And as you know, it’s a dry process, 100% of massive recovery producing sinter feeds and the final CapEx was $3.5 billion.
The next one is the CLN 150 railway and port, the area in operation now. We had for the railway capacity, the total rate capacity is 128 million tons a year after five segments being delivered and the port capacity, the total port capacity is 151 million tons a year. We of course included a new terminal and you can see here the new railway alongside the old one and here you can see a Valemax being berth - berthing. We have shipped up to now 6 million tons and 25 vessels that means using five Valemax that means the operation is going very, very well, no issues or no problems up to now.
The next one is Conceição Itabiritos is in operation since the last month. It’s a very important project producing pellet feed with high quality and the 12 million tons of capacity and it’s very important for us because we could deliver this project below the budget and on time that means a very important milestone showing what we are doing now - the way that we are managing our project now. The operational permit was also issued hence everything is going well and I believe that next year we can have good production, good surprise from Conceição Itabiritos.
The next one is a beautiful picture. You can see the distribution center in Malaysia. You can see in your left is the import facility with the new three ship unloaders you can observe here the three ship unloaders already placed. And the first Valemax will be unloaded in the coming weeks, that means it will be a very important milestone that means we are starting up the importation facility and the next year we are starting the exportation facility that means 30 million tons of throughput. So Teluk Rubiah in Malaysia is also progressing under the budget and according to the scale.
The next one it’s showing just giving more information about the stockyard. In Malaysia they have a static capacity of 3.2 million tons and with 5 handling equipments like the stackers and reclaimers and it’s also is going very, very well with no problems up to now. So let me talk about something about the main project under construction S11D, Moatize, Nacala corridor and Salobo Copper. S11D I believe that’s one of the most important project we have now.
We – you can see here the earthworks in the mine site is we have already started and I believe that it’s we don’t have any problem even with the raining season we are progressing very well and very important we have reached 15,000 up to now, 13,000 workers up to now, 64% of the total package – is our total package for this – for the procurement we had been contracted or are in the final stages of contracting. You can see here the modules, the modules, we have modules, we have 109 modules, we have up to now two deep one modules already done. So it’s a very good news and is progressing very well.
And the transportation of the first module from this area to this other area, another area we took – took something around the 48 kilometers and was very good, that means a very important part for the S11D. Under the transmission line, the main substation has been concluded and is rigid. We – I believe that S11D is going with no problems up to now. On the next slide, you can see the earthworks going on the railway and the port, the north part of the – north berth of the port of St. Louis, the Ponta Da Madeira port. The severe works have started that the peer 4. On the railways port, the railways port means from the Canaã dos Carajás to Parauapebas and we have also started the duplication of eight segments of the Carajás railway out of total of 48. That means we are going to increase the capacity of the railway from the next year.
The next one, the Moatize, the Moatize is we have also 48% of physical progress. The project will be delivered in the second half of 2015. And you can see here the foundation for the new CPP and the background – the existing or the current CPP, the core process plant in operation and we have also concluded the city works for the crushing station and conveyors 100% done. And we have some around 15,000 workers working onsite, including the Nacala corridor. Talking about Nacala corridor that is the railway and port, the greenfield part of the railway is going very well. That is the most important part of it. We have to finish the greenfield part to make sure that we are transporting coal to Nacala port at the second half of next year. And the progress, the physical progress for the greenfield part of the Nacala corridor is 66%. That means it’s very well diverse and you can see here also the construction of the port with the piling on the bridges is going very well and we don’t see any problem to start shipping coal in the first month of 2015 from the Nacala port.
And the last one is the duplication of Salobo, you can see here how important is the Salobo expansion, it’s a progress, it’s 89% almost done, we hope to deliver this project, the second half of – the first half of next year, it’s the CapEx is also under the budget and we think that we are delivering a better process plant, because all the improvements made in the existing Salobo was incorporated to Salobo expansion and I believe that means that the ramp up will be done much better condition. Thank you very much.
José Carlos Martins - Executive Officer, Ferrous Minerals and Strategy
Good morning everybody. It’s a pleasure to be with you today to speak a little bit about Vale and iron ore. So we believe the market of iron ore will continue to grow in an average of 3.6% per year and steel at 2.7% roughly. Why seaborne iron ore demand will grow more than the steel is because of big part of the increase will happen in Asia, which is much more seaborne market intensive than Western worlds. Western world, we have a little bit more strap and a little bit more captive mines and local ore what you don’t have in Asia.
I would like to address also the issue of scrap, I have been noticing by our reports that many of the analyst reports that scrap will be issue. We don’t believe it will be issue until the end of this decade and we believe that scrap will be some kind of an issue after 2023, 2025 utmost. I would like to remember you that some years ago everybody was concerned at about vertical integration. And as we see by the start, the vertical integration really decreased in the last 10 years. And when you look scrap and iron ore units, fresh iron ore units that comes from iron ore, we see that scrap is really decreasing its share in the steel production, should take into account blast furnace production plus the RI production we see that iron ore is really increasing its market share in the steel production. And we believe in the next 10 years, there will not be any big chance on it and only be an issue after to 2023, 2024, but not in the extent people are forecasting in their reports. Another issue is the threat of oversupply, which is in our view exaggerated. We believe that bigger part of the additional capacity will be used to cover depletion. And as the price of iron ore became more stable, depletion will increase, because many mines will not be economically exploited at the lower iron ore price. So we don’t see any big issue of oversupply in the iron ore market.
Another point is that the main markets for iron ore, which is China. We believe there is a long way to go until peaking. If you see this comparison based on the steel intensity of GDP and we see that clouds there different countries and different areas, you will see that iron ore consumption in China as percentage of GDP is following much more Korean pattern than western world pattern. I would say that China consumption is even steeper when you look at this chart. So we don’t believe that in the short-term that situation will change and China will continue to grow its steel industry and also its iron ore consumption.
Another point is about price, we see the price of iron ore stable going forward and we look that this kind of volatility is really decreasing. And the reason it’s decreasing is because first your supply is catching up with demand. So the peak price are becoming lower. On the other hand, cost of producing iron ore is growing mainly in China, so you have resistance in the price to go down so and we see by this chart that the average price of iron ore in this period is around $130, last year was $130, this year is $135 and the last two years bigger part of the analysts forecasted a lower iron ore price, we don’t, we didn’t. So our strategy in iron ore is very simple. First, we have confidence in Asia and China as the main driver of iron ore consumption in the world. Second, we believe that to be well-positioned in the cost curve of the industry is a must and also to increase quality. As times goes by, quality will be more and more a big issue in the iron ore business.
The second point which you call T is the time-to-market and the tailor-to-market. Time-to-market as we believe that the consumption will continue to grow in Asia. We have to position ourselves to support Asia growth and as Brazil it’s far away from Asia, 45 days. We are just developing our strategy to be able to supply Asia timely in a cost effective basis. So it’s easier to supply timely but you also have a lot of cost involved. So our strategy is designed to really do it at the lower cost.
Another point is tailor-to-market, I think as time goes by we needed to supply customers with different kind of mix or iron ore and we are developing our strategy just to blend or and to bring more stable quality for our customers and to support them which kind of iron ore they need because they have different mix in their burden and they have different supplies, so Vale is really looking to be the balance of supply for all customers. We want to bring the exact iron ore our customers need without having the burden of cost of doing with.
And safety, health and sustainability, today, no company in the world that can have its strategy without addressing this point and I really believe that those points is a very important source of competitive advantage. The one that can do it best you have a much more efficiency. As Vania presented to us, the big issue of caves is a point of sustainability. So the company to be profitable, the company to growth, the company to deliver its project on time needed to do its best on sustainability, it needs to do the best in safety and health, it’s I think is right, but on the other hand the companies that are able to do it better will have a much better future.
Our strategy addresses the challenges of delivering shareholders’ value through first keeping our market leadership, second keeping FOB cost parity with our main competitors, third, increasing quality of our products, reducing logistic cost, and improving customer services. I think it’s a very challenging target for us but we believe that we are on track to reach it. This we see the cost curve in the industry where we intend to be in the first quartile of industry and we see that the 30% high cost producers, their costs are really increasing more. So then this curve is not becoming flat as everybody believes, it’s the opposite.
I think the high cost producers are - having their cost going even higher because the high cost producers are mainly in Asia, mainly in China. Their currency is becoming stronger; labor is becoming more expensive, environmental controls as far as pollution is increasing, so the cost of the high cost producers going up. On the other hand we needed to consider that countries like Australia and Brazil they are becoming a little bit more competitive first because we have big projects, large scale projects and our currency is becoming weaker.
So this curve is moving a little bit in a different way that everybody is really forecasting as long as I see the reports I receive from the analysts. So the shift to Asia will continue and this is a big challenge for Vale. Until the year 2000, Vale was delivering big part of its production in the Western worlds, near 70% of our iron ore was delivered in the Western worlds. Today, we have near 60% the other way around, near 70% the other way around. So it’s a big change for us that we are far from the markets. We are addressing it through our logistic strategy based in big ships and in distribution centers.
Our Valemax’s strategy is developing it mostly. We already export 44 million tons through those vessels and we have 30 ships in operation and five more to be delivered. So until now we delivered a big part of our Valemax or through Ponta da Madeira. And we see that 52% was directly delivered to the final port, final destination, which brings the cost down sharply and 48% through our FTS, our transfer station and this number will decrease and the direct shipping will increase. We continue to believe that as time goes by we are going to deliver our Valemax ship directly to China. We really believe that these changes in China will help in this direction because China economy seems to be more the regulation in China and also less state intervention the economy and more market oriented.
And up to now more than 121 shipments were done through Valemax. So this chart is really very important because we are summarizing all the investments that support our strategy. We see big part of our investment based on increasing volume, part of it addressing the quality issue, and part of it addressing what we call this extended enterprise which means how we can move our (arc) close to our customers and how we can make it more effective and how we can make it as a competitive advantage for us.
So in total we are investing $37 billion in iron ore, $18 billion already done, and $19 billion to be done until 2018. For the time-being we don’t have a big impact in our volumes but I can tell you everything has been done and Vale is becoming more and more close to deliver a lot of production. Our infrastructure is improving. We have a new port facility. We are doubling the tracks in our railway and increasing capacity in the railway. In the mine site we already have all the processing facility in place and for sure that we have some bottlenecks mainly relating to the environmental issue related to the caves which Vania addressed to you in detail and we really believe that will be solved.
Another point that I would like to stress in this chart is the volume that we are investing to increase our quality and we have many projects devoted to that. So vale can and its strategy to address the issue of cost and address the issue of quality and also being more flexible. I think it’s a challenging proposition but we are putting the right quantity of money to get this done. This is our future. We believe in 2018 we are going to be with capacity at 450 million tons of iron ore and iron ore with much a better quality. As you can see we intend to increase our average iron ore content by 1% and decrease our silica content by 1.65. By the way iron ore units and silica is now priced in the Chinese market, this means roughly $5 per ton additional price.
And if you look 450 million tons this is almost $2.3 billion more on the bottom line. We also expect to recover part of our market share that we lost in the last 10 years from 23% to 29%. This is how our production as opposed to growth in this spirit, next year we expect 321 million tons, 2015, 340, 80, 376 in 2016 and to reach 453 in 2018. Summarizing our strategy is based on reducing cost and increasing quality. Keeping market leadership which we believe is important and also flexibility and customer services, respecting safety, sustainability and to be a more environmentally friendly country and we believe that by doing that we can deliver value to our shareholders. Thank you.
Peter Poppinga - Executive Officer, Base Metals
Good morning, ladies and gentlemen. Let’s have an update on the base metals. This first slide summarizes the turnaround strategy for base metals. We have basically based this on two pillars. The first one is more tactical one. It’s about cost reductions. It’s about delivering on the ramp-ups. And the second one is about optimizing our flow sheets and it’s more of strategical nature. So if you go through first one its delivering positive cash flow results. Internally we call this working on our own to fit and we started that with a gold transaction we recall in the first months of this year where we raised $1.9 billion and this was actually base metals financing itself for the – to finance all the simultaneous ramp-ups under a very stressed price scenario and without asking money for the shareholders. The second one is about cost reduction, we recall for – you recall that Vale cuts $2 billion in R&D, in SG&A and in operating expenses and out of which $800 million came from base metals. And of course the third one is finalized ramp-ups of new operations and we are going to talk about this in a little more detail in the next slides.
The second pillar is value over volume in feed generation. This actually means that we think the value is in the mines and the process plans on the surface is just the routes to market. So here we are idling some non-profitable mines in short-term and the mid-term. We are also optimizing our mine plans is Sudbury and surroundings. This is actually an example Totten mine is ramping up now, it’s a new plant, new mine, and it will replace some low value feed from other mines or from third parties with low margins. That’s one of the examples what I mean by going for higher value.
Now going a step further you realize that instead of working with two furnaces in Sudbury which are only half fold, it makes much more sense to work with one furnace on full capacity which is really maximizing our asset utilization. And on top of that, like you can see here we then save $1 billion also in sustaining CapEx which is mostly related to the SO2 compliance. That won’t mean that the refineries will have a shortfall because if there is a potential shortfall now of math we will feed PTVI, Indonesian math and from Thompson to take care of that. And the other one is the synergies we are analyzing in the Sudbury basin, it’s going well, progressing well, it’s about the mines we are way of access and ore availability, but also about surface facilities, but we are not touching the refineries there. We are making good progress and we are expecting some concrete results in the first half of next year.
This coming – coming to the cost curve we would like to share with you that you – you see that our – all our assets are in first and the second quartile of the cost curve. This considers all operation ramped up and of course considers after the byproduct credits. You can see that all our nickel assets are below $10,000 cash costs. And I just want to make a comment on PTVI. PTVI will shift further to the left once our coal conversion project fully kicks in and the benefits of the Karebbe hydropower are fully utilized. And you can see that Salobo our (indiscernible) in copper is – has a cost below $2000.
Speaking about Salobo, let’s go to the first ramp-ups and Salobo is really a success story and we – it’s on its way to become a cash machine of $1 billion free cash flow per year. And the Phase 1 is successfully ramped up, we are at around 80% of the capacity there and like Galib said we have Phase 2 doubled production and we expect to start in mid of ’14. And yes there is opportunity for further growth, but well there is space, there is enough reserves, there is good returns, but for the moment, we are focusing on the ramp-up and further expansion is not on our priority list.
If you look to the chart of the copper production, you see actually that it is more than 200,000. We are already now with all the improvements we did, we are already now forecasting that we can exceed nominal capacity of Salobo by 10%. And with the copper comes gold, gold production from Salobo will be 300,000, around 300,000 ounces a year and total gold from Vale will be 450,000 ounces a year.
Long Harbour, Long Harbour reached mechanical completion end of October. We are now in the way of commissioning, cold commissioning and then transitioning to hot commissioning and this will go into Q1 ‘14. And about the benefits, this is as you recall this is a must do investment to satisfy the Newfoundland government development agreement, but we turned – Vale turned this in an opportunity also and it optimized further the Canadian flow sheet. It’s – the first line is capital avoidance at other Vale operations. In Sudbury, the fact that you are not feeding is they feed anymore into Sudbury, but because it will go to Long Harbour. Actually then makes it possible that we can right size now the operations in Sudbury and go for – like I said from two furnaces to one furnace and by consequences also reduced a lot of sustaining CapEx. The same thing in Thompson where we are going to reduce sustaining CapEx since we are shutting down the old refinery and we estimated to sustain a CapEx need will be reduced by 50% by doing that.
Another advantage of Long Harbour there is zero SO2 emissions and it’s a seaborne facility, it’s close to the coast. We will have improved logistics and as you saw before the biggest advantage is that’s a low cost, low OpEx in the first quartile because it’s smelting and refining in one piece. Let’s go on to Sudbury and in Sudbury there is mainly two projects starting up, ramping up, and this will lead to further OpEx reductions in Sudbury than we had already. One is the top mine is ramping up and allowing us to optimize the mine plan. The other one is a core mill redesign which talks, it’s about substituting the magnetic separation and having in set flotation and more grinding and this will increase the global recovery of the Sudbury metals by 4%. So all this together will decrease the OpEx of Sudbury even further.
New Caledonia, in New Caledonia in 2013, it – we proved that integrated process works and that the new technology works and we had highlighted in Q3 where we run three autoclaves at the same time. The ramp-up yes turned out to be a little slower than expected and so now the focus is really on availability of the plant to get this up. We had an incident in November, a mechanical incident where sub-marine pipeline ruptured, but without any damage on the environment. And we are now busy working to reconnect the pipeline and to stabilize the pipeline and this will be done until the end of this year and we will restart until the end of the year. Production target remains 40,000 tons for next year. Onca Puma, a successful restart. We produced first metal in November. We are very happy with the new furnace. It’s getting very good preliminary results. And our guidance for the ‘14 production number is 15,000 tons.
Last but not least, I would like to show you some EBITDA trends for base metals. You can see that we are going from $1.9 billion this year to $2.5 billion next year and then $4 billion to $6 billion in the medium term. I would like to make two remarks on this chart. The first one is that if you compare the ‘13 numbers to the ‘14 numbers actually you should take out from ‘13 some extraordinary and non-recurring events like the gold transaction and VNC insurance. So actually the $1.9 billion becomes more $1.5 billion. Now you compare the $1.5 billion to the $2.5 billion and it shows you that we are going to increase EBITDA in base metals next year by $1 billion and the similar price assumptions, price environment from this year.
Now, the other comment I wanted to make is about the medium term. If we consider 2013 prices for the mid term, which we don’t believe in, but if you do that, you reach $4 billion. And if you consider slightly, prices slightly higher than $20,000 in nickel, which we believe in. Then you reached the $6 billion. That’s what I wanted to share with you. I think we have shown that with cost reduction and delivering on the ramp-ups and flow sheet optimization we can and will double and even triple the EBITDA of the base metals. Thank you very much.
Roger Downey - Executive Officer, Fertilizers and Coal
Good morning to you all. And now for something completely different, I will start off with my fertilizer, very exciting fertilizer business and I bet on a much better nourished world. The challenge to see the 10 billion people who will inhabit this planet within the next decades is well known to all of you. And as is Brazil’s role in achieving this task, Brazil will play a central role in this and we are already – the Brazilians are already the largest food exporters in the world. And given the vocation, the tradition and the competence that Brazil has already proven, we expect to be the biggest producer of food as well. However, that’s only going to happen if we can see fertilizer intensity grow.
So if you can look at the chart, we can see Brazilian down on the bottom left hand corner there with biggest upside in terms of land. Obviously, we need land on which to plant and Brazil if you apply the growth potential in terms of land plus benchmark Brazilian fertilizer intensity, which is today very modest with North American standards. Brazil should grow its agricultural production 3.5 times. So it’s an interesting bet and we feel that we are a good player in this industry basically because of our expertise in mining, and our unrivaled reach into Brazilian agricultural markets. That’s what reassures our confidence in this and our focus on potash and phosphates. The other thing that fertilizers brings to Vale is this completely different cyclical patent to our other businesses, which makes it an interesting component in our portfolio.
We have retained decades of market intelligence and distribution networks, which mean that we can penetrate and use this capillarity to prove our position as the national champion in this industry. In order to achieve the growth that we are aspiring, we are basically putting in three building blocks and doing all the prep work to achieve that. There are several initiatives that we are putting in place, where cost cutting of course is one of our key initiatives. We have already accumulated about $115 million of sustainable cost savings since last year. But I think one of the most important initiatives today to readily establish this based on which to grow on is the optimizing and streamlining of our operation flow sheet. For instance, a very good example is how we have managed to fit in Bayovar, our Peruvian phosphate business bringing that into Brazil and we are already feeding 50% of our phosphate requirements and in coastal plants with Peruvian rock. We are already testing to go up to 100% of our needs on the coast. That is an optimization Bayovar rock is more competitive on the coast of Brazil than the phosphate rock that we bring in from central Brazil. So that’s again a structural saving that we find in the business.
As Galib mentioned earlier, another very important initiative in putting in these building blocks is the de-risking and the engineering of our projects for value and better returns. This is critical for the fertilizer business especially given so much of our growth depends on new greenfield projects. And to unlock all of the value that we have in our rich portfolio. We are bringing in partners both at the project level and/or the business itself into the fertilizer business itself. We are already quite advanced in our discussions to develop Kronau, a potash project in Canada. And we are already expecting to reach an MoU within the coming weeks.
We are also met with quite a lot of interest from global fertilizer players. So the idea is to bring in strategic players into this business and the fact that we are the national champions, the fact that most of the industry shares our view that Brazil will play a central role in the food challenge over the next few decades means it’s Vale is quite an attractive play on Brazil for most of the industry champions worldwide. So we have seen a lot of interest in our business. So going on from there with the MoU signed for Kronau, we will start basic engineering first quarter next year and of course by bringing in partners our capital requirements to achieve this growth will be much smaller and we will be able to catapult and accelerate our growth of the fertilizer business.
It’s pretty ugly out there, very tough markets, 30% of the industry is losing money. I think we would have seen more closures in the coal industry today if they hadn’t been for take-or-pay contracts, a lot of the mines are working just to pay for their take-or-pay contracts in Australia, the rail and port. That’s dampening appetite for capacity increases and it brings some uncertainty as to where we are going to be at the end of this decade, where we already see markets moving into a deficit. And every time a project is delayed, stalls or cancelled that brings this deficit for us considerably. And in addition to all of that, some of the sort of more macro context for coal, the challenge is that China is facing with pollution will mean that over the next few years we will see a trend towards richer iron ore products and richer coal, better quality coal because of emissions in the steel industry. So we are bringing in a low cost first quartile cost, high quality mine at Moatize and remember that Chipanga, our key product from Moatize has already been ranked and accepted by the market as a premium hot coking coal.
But the business starts with a turnaround and this business has seen very tough markets as we just said. And despite the fact that prices are so depressed, we have already seen our Australian operations move into cash positive territory as a result of all the initiatives of considerable sustainable cost reduction and productivity improvements. In Mozambique, we are testing new limits. I think that, that’s really we are still in what I probably say is still a sort of preoperational phase as we ramp up towards 22 million ton project and the business really comes into itself when the Nacala corridor is up and running in 2015. However, in the meantime, we have seen the rail, the Sena beta railway line achieve and sustain 4.2 million ton run rates over sustainable periods of time. So it’s we are seeing some improvements in the business there already. And in terms of marketing, despite the adverse markets that we are in today, we have been performing very well and I think that’s partially due to the way our business is organized and the support that we have from our JV partners and customers. In November, we have had just today I saw that we posted a new sales record, all-time record in us, coal business.
Moatize is really what our coal business is about. This is what gives Vale the chance to become a first tier producer in this industry. It’s unique. It will be probably be established a new reference in this industry. It’s scale the fact that it’s integrated mine, rail and port and the fact that we have high-quality products being produced at the lowest end of the cost curve means that this is a world-class project, the sort of thing that we like to have at Vale. Together with Eagle Downs, Moatize will really essentially construct this business and catapult Vale to become one of the top coal producers by the end of the decade as we progress in our ramp up towards 22 million tons at Moatize.
The Nacala corridor in Moatize in the Mozambique is as you know an open access railway line and we will operate it, but we will invite partners to be a part of this corridor. The idea is to bring – the concept is basically to bring owners of different corridors or parties that are interested in the theme of logistics in Mozambique, not only for coal remember that in the Northwest of Mozambique, there is lot of potential agricultural potential there and we expect some grain farming to take place over the next decade. So we have also met with a lot of interest from entities that would invest in agriculture, in the agriculture potential at Mozambique. So we have today, Vale has about 70% of the Nacala corridor. The idea is to sell down about half of that to these partners and users.
Another way of reducing our capital commitment in this project will also be non-recourse project finance, which we are already quite advanced in that process. The discussions with the joint venture partner for Nacala have started. We are moving towards an MoU as well. With that, we are also considering a minority sell down of the Vale Global Coal Vehicle, which comprises Australia and Mozambican assets. And for that of course, we will have just a minority stake, but that will give us the support as we have seen in the earlier slide from JV customers, joint venture partners and customers who will underpin the sales of an expressive amount of coal when we reach 22 million tons. So these initiatives by bringing these partners more than just alleviates the CapEx burden and mitigates some of the risks, it also strengthens our business. And together with what was just seen in terms of our fertilizer business, we are building stronger, more reliable and sustainable businesses for Vale. Thank you very much.
Murilo Ferreira - Chief Executive Officer
Ladies and gentlemen, before going to Luciano Siani, I am here to express our gratitude to Roberto Castello Branco, who is in charge for many years of the Investor Relations in Vale and his gorgeous tenure was in fact a revamp, a new era for Vale in the relationship with the investor. Thank you very much, Roberto. We really appreciate it. You left very good legacy in our history. Thank you very much. Luciano?
Luciano Siani - Chief Financial Officer
Well, this is the 11th edition of the Vale Day. Roberto started it all. So he has been to all of them. He has done also the five Vale Days in London. He was responsible for the listing of the Vale shares in the New York Stock Exchange for the listing of the Vale shares in Hong Kong Stock Exchange. Now, Vale has shareholders in all the 50 American states. Through his tenure as well, Vale got the investment grade rating with his contribution. Vale issued more than $30 billion in debt and equity in several markets led by him. I think Vale was very lucky to have himself working for us over the past few years. He, with his knowledge, former Central Bank Governor from Brazil, PhD from University of Chicago, please again help me thanking Roberto Castello Branco for everything that he has done for our company. Thank you.
Roberto Castello Branco - Investor Relations
Well, I would like first of all, I’d like to thank our CEO, Murilo Ferreira and Luciano Siani for being generous with me. I would say that all the achievements over these years was due to the support of those who worked with me, including the current team and the support I have always had from the senior management of Vale all this time. I am a believer that knowledge is very important, is a very powerful tool to prosperity. Our key channel of transmission of knowledge to prosperity is through the cross fertilization of ideas. I strongly believe that intelligent hardworking people attract other intelligent hardworking people. That’s because we like to challenge each other. We learn with the others, with the ideas of each other. So it creates a very powerful view to sickle. And one of – though I had my best experience over all these years was the privilege to interact with you. It was a really fantastic experience to learn from you to collect information and to be a richer man in terms of knowledge. Thank you so much for all the support. And last but not least, I would like to state that Vale is in very good hands. I have no doubt that under CEO, Murilo Ferreira, there is very important structural transformation that’s positioned Vale to create large value to shareholders on a sustainable base. Thank you.
Murilo Ferreira - Chief Executive Officer
Then we can start questions please.
Carlos de Alba - Morgan Stanley
Yes, good afternoon or good morning. It’s Carlos de Alba with Morgan Stanley. My first question is thanks for all the presentation and the very detailed information I think every year goes by Vale becomes more transpiring on that regard. My first question is regarding the linkage of the southern and southeastern system that was mentioning in today’s press release. Can you comment a little bit more as to what is the net impact of this in volumes we market, in cost reductions that it was – that we can infer from these, but it wasn’t detail in the report. And the second question is maybe Roger can give us a little bit more details on the Nacala potential joint venture or the sales of the stake in the Toro coal business, what percent does Vale believe that it can sell in Nacala, what is the stake in the Toro business, coal business, globally that you think Vale will sell any more information will be really appreciated? Thank you.
Well, as far as Pico-Fábrica, we are developing a lot of investments to reduce eliminate the bottlenecking, Pico-Fábrica will link southern system with southeast system and can free around 10 million tons per year of ore because we can move, we have some inventories in the south system that we can move to the southeast system because we have a port capacity in southeast system. This investment we will enter in operation in the middle of next year, so part of it is already considered in our forecasts.
Carlos de Alba - Morgan Stanley
I think that regarding the Nacala corridor as you know we have today roughly 70% in terms of shares. We have nine different joint ventures and in average we have 70% right Roger?
Yes, that’s correct. On average, we have 70% of the Nacala corridor and the idea is to sell down about half of that so that will be about 34%, 35%. We will retain the operator ship of the corridor and hence control we will have basically 50 plus one share, 50% plus one share of that. And the idea is really to unlock the value that we see in that – as a catalyst for the agricultural market there.
Marcelo Aguiar - Goldman Sachs
Thanks. Marcelo Aguiar from Goldman Sachs. First of all, thank you Roberto, it has been a pleasure to work with you, I mean long talks we had and success in the future for you as well, going to be a pleasure to work with the new IR as well. So first question I mean I think this is the first time we have Chairman of Vale here. So one of the overhangs we see market see for Vale is looking longer term what’s going to be the structure of the controlling with the company. We are seeing some in 2017 we are very close and still going to be midway ramping up, so to really know give this value to Vale I think investors want to understand what is the future of this controlling agreement, so if you can – this is the first question if you can help this?
Dan Antonio Marinho Conrado
Okay, although the shareholders of Vale did not make a formal decision, we see no reason about renewing the stakeholders, the shareholders agreement. And it will be done and we had time, we really had time, but I think we gave you some leads, one of them is that we approved $20 billion investments in S11D Carajás and the generation of cash flow will begin just in 2017 was in the same year the agreement expires. So we are very comfortable with our shareholders and I think in the future you will have the solution for that.
Marcelo Aguiar - Goldman Sachs
Okay, thank you. Second question will be more in CapEx, Luciano, I mean, can you elaborate a little bit the premises you use in terms of BRL, I mean you guys has also been saying to the market about some savings on Moatize and S11D, I mean are those savings included. What amount – what is the amount of contingences you have in this whole CapEx program just to have a sense and how much low it can be in the future?
Okay so the CapEx estimates for 2014 are based on an exchange rate of 2.25. The – we haven’t yet review the total budgets for the main projects that you mentioned because we are still in the early stages, but yes we ready reaping the savings on contracts and on the exchange rate, so that’s one of the reasons why we can have a lower CapEx in ‘14 and ’15 and going forward. The amount continues is around for next year alone I don’t have the total aggregate figures, but for next year the loan is around $500 million.
Thank you gentlemen for the interesting presentation and lady as well. I will probably start with the first with the lady, you mentioned Vania that Vale may get the environmental license within two months, I am just trying to get a caller for you on what would be the impact if you do achieve that what is your base case if that is achieved do we have enough room to see the production guidance of 2014 to be increased and what is the deadline for Vale to obtain this license and still maintain the same guidance? Thank you so much.
Thank you for your question. The main issue is that this license is a very complicated and they are obtained step-by-step for this already for the areas that we are already operating. For new projects, it’s a bit simple, simpler, but it’s not easy at all, but we are managing to have it. For this actual operation, we are trying to have for the – by the end of this year the compensation for the existing caves that we have there. We have about I could say 200 caves and their studies are complex we have to one year study to classify the caves because if classified by relevance. There are caves that are maximum relevance they should be preserved, the high relevance must be compensated and the compensation based is true by one, that’s exactly what we are negotiating because we have for S11D for instance, we decided to buy a land to compensate the caves and for this already area that we are operating, we are deciding yet what we are going to do to compensate. And we have to make a simulation because they are going to release this step-by-step. So we are considering a range in our volume of operation that is already in the budget, but to get it faster we are a bit conservative. But as we get it faster it can increase, I don’t know it Martins would like to add something in the value.
If you allow me I think that is important to say that in this context the discussion we have with Brazilian’s authority, we have – we wanted to solve this question, but we have some constraint in the logistics side as well. The volume that we intend just to go – we first of want to see if it’s possible because as Galib mentioned we are able to reach next year just 128 million, then if you are looking for the number that we are working for next year 120 million. We have – we can increase but not so much because the problem with logistics I think that the level of flexibility is not very high, Martins?
José Carlos Martins
Yes, Murilo. We already considered the possibility of some relief in our volumes today, but depending upon the size of the relief that we can get we can bring a little bit more. But for the time being for this year 2014 we have some constraints on the logistic side because the railway is only for 128 million tons. For 2015 things will be better, so any kind of relief we get relating to the caves more flexibility we can have because the whole infrastructure and the mine is already there or the capacity to process the ore is already there, the port is already. So to joke with you sometimes you eat the meat before the bones and our case we are eating the bone is before the meat, so that’s the situation we are facing today with those issues of caves.
Thank you so much. Just to follow-up on these after you get the permit how much time would you need to bring – start bringing production into the market? And also on this logistic capacity, if you could comment on the ramp up in the coming years of that additional capacity that would be highly appreciated? Thank you.
José Carlos Martins
As I have told you, infrastructure is already there, okay. So the main constraint we have today is first mining fields. We have all the equipment in place, but we can touch that area, because there was caves there, which quality is not defined yet if it’s high (indiscernible) and things like that. So as long as you don’t have this classified, you cannot touch it. So but what we are doing, we are advancing in every step of the investment. And then as soon as we get this, we can start the mining immediately. I would like to take this opportunity to tell you something 25 years ago, I was working in the steel industry and I had a seminar in Paris to discuss supply of iron ore, scrap and things like that. And I have opportunity at that time to talk with the Australians. And the Australians at that time were very pessimistic about their potential to produce iron ore, because they have those environmentalists, very strong system there and politically very strong. It can remember me Midnight Oil okay, the band that was very much involved the environmental songs, Blue Sky Mining, Beds are Burning, and River Runs Red and all of the stuff. And the guys told to me one of this guy, we never going to be able to mine in Australia anymore because of these environmentalists.
Last government in Australia Peter Garrett, which was the band leader, was the Minister of Environment. And Australia has increased their production a lot. So I think in Brazil we are suffering 20 years later the same situation that the Australians suffered 20 years ago. We are a little bit late in this. So we are now suffering a lot of resonation, a lot of constraints, but that will be solved, because iron ore is one of the most important product of Brazil. It is very important for the country, is very important for the world. So it will take some time to solve it to overcome this legislation. It’s a kind of step and go process, but we really believe that we can solve it and we can mine more our iron ore, not only for our company, but for our country. We are the main generator of surplus in our trade balance. The trade balance in Brazil without iron ore would be negative. So this is very important and we believe that long-term this will overcome those particular difficulties that we are suffering now.
Vania please, it’s about the process, right after receiving the permit, what happened?
No, right after receiving the permits, we can start operating immediately. There is no other constraint and it goes a step by steps. We show the studies. They see if it’s okay and then they liberate one amount of caves and then others, but it depends on the region where we are.
Thank you very much.
Logistics capacity that was the other question you made for 2015, 150 million tons.
Thiago Lofiego - Bank of America/Merrill Lynch
Thiago Lofiego from BofA Merrill Lynch. I have two questions. First one on your 321 million ton supply number that you provided, does it consider the ballet losses and also some kind of destockings of where you are going to use inventories. I am just trying to get a sense of what’s the potential sales volume for 2014 if 321 makes sense? And also what’s the quality of this material? Are you selling more lower quality material than the normal or not? That’s the first question. Can I go for the second one? On dividends, it seems like $4.5 billion, which was a dividend in 2013 seems to be a reasonable floor for 2014, is this a right assessment even in a scenario in which you don’t sell assets and you don’t close any of the partnership deals. So even in a worst case scenario in terms of asset sales and partnerships of $4.5 billion seems to be a reasonable number?
Unidentified Company Speaker
As quality is concerned, we start improving quality with this new processing plant that we are building in the southern system like Itabiritos, Conceição and all of these that will come on stream in the next two or three years, but the big jump in quality will be done when S11D starts operating. And as soon as we get this permits to enter in new areas in existing mining sites in north of Brazil. Probably the big jump in quality will be from 2016 onwards.
In terms of supply, the 321 is comprised of 312 production. When we say third-party purchases, we mean we purchased run-of-mine from third parties. We flow them through our processing facilities and that’s additional product available for either the market or the pellet plants. We are not considering the 321 stocking or destocking, right. So for instance, the Pico-Fábrica numbers for 2015, which are going to be bigger they are not included in the 348, which you saw there. So it’s an additional opportunity on top of that.
Unidentified Company Speaker
It’s already produced.
Yes, because they are already produced. They are not purchased from third-parties, they are not own production. So they are in addition to that, any stocking, de-stocking is in addition to that.
Thiago Lofiego - Bank of America/Merrill Lynch
So on the 312 there could be pellet losses right? And then if you consider inventories maybe?
We don’t give guidance for sales just saying that stocking and destocking is in addition to those numbers.
Thiago Lofiego - Bank of America/Merrill Lynch
Okay, alright, that’s clear.
First of all, we are talking about $4 billion in 2013 and for the next year we are confident that we can pay that in all scenarios we have analyzed, okay.
Unidentified Company Speaker
But you must pay attention that as Roger said, we have some discussion in place regarding not doing at least part of the investment in Nacala corridor, for instance or even who are receiving some money in case of to continue with our M&A process. We are very confident that the cash flow perspective 2014 can be a good year for us. Thank you very much.
Thiago Lofiego - Bank of America/Merrill Lynch
Just one thing, I think that it’s important to register that if we have exit cash flow generation, we can give it to the shareholders. That’s from the company policy, then we are confident that we can do that, okay.
Leonardo Correa - HSBC
Yes, hi, Leonardo Correa from HSBC. Thank you very much to all senior management for the excellent presentation. My first question, I have two points that I wanted to touch on. The first one is on asset divestments Murilo and Roger both mentioned that you have been delivering over the past two years is $6 billion in asset sales. Looking forward, what can we expect clearly you have an opportunity in the coal business for de-risking and bringing on minority partner, just wanted to understand and maybe Peter can help out on the non-ferrous division if there is anything in terms of divestments that we can expect going forward depending on how the ramp up of VNC and Onca Puma turns out. So I just wanted to understand if there are other sources of asset divestments that are still not on our radar? That’s the first question.
The second question is regarding costs, Luciano mentioned on the working capital, I mean $1 billion of additional working capital release, just wanted to understand on the cross side after this $2 billion cost reduction, which you say is sustainable if there is anything else left and what type of cost structure Vale will have going forward 5, 10 years from now with the ramp up of the lower cost mines (indiscernible) and also Carajás 40? Those are the questions. Thank you very much.
If you allow me just to restart, we have discussed many divestments and we have to complete our program in the oil and gas, but we are taking steps in order to reduce our capital commitment in power generation as well. It’s not in a stage that could be announced today, but we are analyzing everything in Vale in order to see if it’s in our core business or not if it’s bringing the merit that it was forecasted in the past and be confident that our – it’s our best interest to provide all the funds that we needed to our cash flow to our core business. In case of not doing linkage with our core business portfolio analyze deeply in order to bring value to our shareholders.
Yes, if I can just add to on the coal and fertilizer side, Leonardo, these two hidden gems, okay within the company, there is not a lot of value perception, value perceived by the market for these two businesses. And these initiatives to not only reduce the CapEx burden, but to unlock the value from these very rich portfolios that we have with this business should demonstrate that we have like I said two hidden gems there. If you look at the fertilizer business, we are talking about a business that has tremendous amount of potential and growth, not just in Brazil but worldwide. We are looking at operations that will be on the low end of the cost curve and be competitive anywhere. That’s what we want to do. And the Bayovar project that we delivered and is now a very successful operation is just an example of that. With coal, again, we have got a unique asset in Mozambique and if we can bring it upon it to demonstrate the value that’s in that business, then there is a lot of upside to be reached from these transactions.
Yes, for sure. We intended to have a deal not just with our Moatize asset, but all the Australians as well.
On the cost side, just to give you a few drivers, not to give you numbers, on the Northeast, on the northern Brazil, we believe that by opening new pits, we can operate the Carajás region with costs about 10% to 15% lower than they are today. If you factor in S11D, which already said that we are going to have $15 per ton free on board, you have pretty much an idea of how cost will behave for the north. For the south, you shouldn’t expect much structural changes, because the new projects they actually add up costs, because there is more processing. However, they have the advantage of also increasing our own content in adding revenues as well. So it’s pretty much balanced. So the additional processing yields additional revenues as well. And on the base metals, all these structural changes, we don’t have a figure yet to comment on, we are still evaluating.
Alex Hacking - Citibank
Good morning. This is Alex Hacking from Citibank. Let me add my thanks to Roberto Castello Branco for all of his many help over the years, it’s greatly appreciated. Thank you. I have two questions on iron ore. Luciano, you just mentioned the $15 operating costs for S11D, are you still comfortable with this cost structure considering a mine plan you mentioned earlier to preserve 137 caves, like basically as the mine plan changed, has the operating cost estimate changed given this requirement to preserve the caves? And then the second question on iron ore also will you be accumulating inventory in the new Malaysia facility next year and if so could you give some guidance on how much inventory would be built next year at this facility? Thank you.
On S11D, the estimates that we gave once we had the license approved already consider all the mine plans which preserve the existing caves. So there is no interference on that estimate.
Yes. The S11D is a low cost mining even considering the situation with the caves, because it’s already included in the mining plan, is already a factor on it and only to give you a number in the existing operation in Carajás we have nearly 10,000 people working for 100 million tons of ore. In the S11D, we will be less than 3,000. So it’s a much more automated and more innovative mining. Looking at the present operation, the situation of caves probably increased our costs around $3 per ton, because we needed to avoid mining area. So that’s the situation. So we have possibilities not only to reduce the cost because of S11D, but also we have the possibility of reducing the cost in existing operation as soon as we get solved these permits for existing operation. As far as we talk about Malaysia, it’s very – I would say a very efficient operation, the maximum started (indiscernible) 3 million tons. The idea is to have a very fast rotation in inventory. So it’s more than 10 times. The ore will not be there more than 10, 15 days. Only the time for mixing it or using smaller vessels is not the place that we intend only to start the ore is not the idea.
Rodolfo De Angele - JPMorgan
Okay. Rodolfo De Angele from JPMorgan. My questions are on the iron ore side, I wanted to ask Martins, in the very short-term, we are listening, we are hearing about price premiums going up, it seems that Chinese are starting to buy also lumps, so can you comment on short-term trends on pricings didn’t change in the mix of what the Chinese are buying? And I also wanted to hear your thoughts on how do you see the changes that seemed to be happening at the steel industry in China and how that affects for good or for bad your business?
José Carlos Martins
Well, as you know in the premium for good ore decreased a lot. Two years ago, we have almost a $1 per 1% additional point in the iron ore content, now it’s around $2.50 and this went down because of coal – metallurgical coal price went down sharply. So the bigger advantage of high content ore is to reduce use of coal. So that’s the reason the premium went down. Also, the discount based on silica increased because of the same issue you use more, use more coal to burn the silica and you will increase this lag rate in the blast furnace. What’s going on now is that as Vale is not able to increase production of high-quality ore, a lot of ore that come into the markets are lower quality. So the best ore now is recovering some kind of premium. This is not really captured by the market yet, but we are selling Carajás ore between $6 to $10 above the (indiscernible) system, which is on top of the 2% additional content we are charging additional premium on this ore and I believe that moving forward this will increase because as you probably know the changes in China, one of the very important topic is the pollution. If you follow up the situation of pollution in China is becoming really a issue, not only attracting the environmental or health issue, but it’s also political issue. And the government is addressing a lot of efforts to curb carbon emission. So moving forward, the high quality ore, you have probably much better price. If you take a regular ore and compare with Carajás ore, for instance, consumption of coke can be lower around 10% by using high content ore. So these points are very important moving forward and that I think you bring an additional value for our ore.
On the other hand, it’s sure that China is putting a lot of pressure on there still in the industry. They are eliminating a lot of extra capacity. They have near 200 million tons of either capacity. I think the first issue is to get rid of this capacity and probably that they will keep the most environmental friendly capacity available. It will not have a big impact on the iron ore. On the other hand, China export near 60 million tons of steel and does not make too much sense in pollution to exports still. So probably, China will reduce exports, but this still has to be produced somewhat else, okay. And I think that can be a good news for the steel industry. I think the main impact of these measures will impact favorably the steel industry and we believe that in our case it will be neutral. Although this high quality ore will probably have a much better price in the marketplace.
And unfortunately you have time just for the last question please.
Marcos Assumpção - Itaú BBA
Marcos Assumpção from Itaú BBA, just gathering a little bit of parts of your presentations and trying to talk a little bit about free cash flow next year. I think that will be mentioned about all of the projects that were already ramped up and will add capacity in next year Peter Poppinga mentioned about $1 billion additional EBITDA coming from the base metal business. Martins mentioned about relatively flat iron ore prices and now he is saying about higher quality iron ore premium, which could add for the next year EBITDA as well. And Luciano, you pointed also a slide with a couple of initiatives on cost cutting and further working capital reductions. So the question here is how comfortable are you in beating the average estimate for EBITDA for next year of $20.5 billion? And one last question here to Martins if you can add a little bit on the Valemax issue, we had been hearing that a solution to build the ships in China could be closed to be announced. So if you can add a little bit on potential benefits for the company and for the potential partner as well will be interesting? Thank you.
Marcos, I am sorry, we will not comment on EBITDA estimates. So that’s just – it’s an estimate. This is the average that you are estimating.
Well, as I present in my chart we are very comfortable with the iron ore price for next year. We do not see big changes. For sure there is some additional volume of ore coming to the market, but the market is able to absorb it that we see – that we saw it in the last two years and I don’t believe it will be different next year. As far as Valemax we believe that we are close, but with China the first quality you need to work with Chinese is to be patient. It’s a 5000 year country. So you cannot be in a hurry because they are not. So you have to wait their time and for the time being the constraint is there. But I believe that all the chances that China do is normally – China does is normally to open more on the market and we see it every move they make they make things more market oriented. So I believe Valemax is a good solution because it reduces pollution 35%, it’s much more efficient. So it’s according to the Chinese strategy nowadays. And it’s market-oriented decision. So they have the ports. They already invested a lot in their ports to receive big vessels, so they can increase their productivity. So I think it’s the most rational decision, but we needed to wait their time and we are patient as I have told you.
Our legal counsel, he is very sad that you know that now (he has passed), he is not answering so many questions as he used to be, but let’s go ahead. I think that will have some flexibility for us to further questions.
Anthony Rizzuto - Cowen and Company
Thank you very much for taking my question. Anthony Rizzuto with Cowen and Company, I also want to give my thanks to Roberto for helping me understand the company over these last few years, I appreciate that. My question is iron focused on China, the consensus view is that Chinese are in ore production costs continue to rise and if we just look at the empirical data and look at where margins are, it would appear that margins for the steel mills are pretty low and yet they continue to produce near all time high. So I am wondering are we missing something about Chinese production costs because of all the infrastructure and rail build out, are costs coming down in certain areas that may be part of this China riddle if you will? That’s part of my question.
Well, any kind of business Vale migrates to the more cost factor, okay. I think that the fact that the price of iron ore and the steel, they coupled is because of iron ore is more cost than steel. Chinese are making a little bit profit in their operation, but they need still. So the question for them is to decide if they are going to produce by themselves or if they are going to be produce this somewhere else or to import. Anyway I think this equation is very important because the steel industry is not making too much money and they have to address this issue. Nowadays they are discussing internally in their association the situation, how to cope with that and they put a lot of blame on China. But China indeed is the only country, which the steel consumption is really growing. So I don’t think there will be a short solution for it unless they address the issue of overcapacity worldwide. And if they do it probably situation for is to makers who improve, but there is nothing that iron ore companies can do. I think it’s a consequence of their supply and demand balance, which is completely different from ours.
And if you look forward as you said they are internal iron ore cost is increasing much more than outside China. So the situation will not improve much of the country. So now we know that some mines are producing ore with costs around $170 per ton, but you have many mines that are linked with steel producers, okay. They are captive mines. And they have managed stake on the companies that cannot stop it. But moving forward I think this situation will be solved by the market and I really believe that managed steel capacity will be cut. And then I believe that most probably the adjustment will be done by increasing price of steel than in decrease of price of iron ore. I think the situation is much more relating to the steel makers, how they managed their overcapacity.
Anthony Rizzuto - Cowen and Company
Thank you. How should we think about Vale’s strategy in DRI, where there is increasing growth, is the U.S. a target market for your company from a DRI standpoint?
Yes, we believe that United States has a potential to produce around 30 million tons of DRI moving forward. And that means something like 45 million tons of iron ore. Part of it will be supplied locally because in the United States you have mining capacity, but big part of it will come from abroad. You will depend very much where people you put the DRI facilities. They have to be build on the coastal area, but for sure sales guys is bringing a change in the steel market in the United States, and not only in the United States, but also outside. We know about one of the projects that will be build in Texas. People will produce HBI to send it to Europe. If you use HBI in blast furnace you can reduce carbon emission a lot. So it’s another possibility for the States to export HBI because it can be environment friendly and it’s cheaper to transport gas with iron ore than to transport gas by pipelines or by ships, it’s much more economic and much more efficient. So we are very bullish about the potential of shale gas bringing more market for iron ore.
Unidentified Company Speaker
It can be good for us that regarding the pellets. I think that’s new field is a new opportunity.
It’s a very good opportunity. We are closely monitoring what’s going on in this regard. States today imports 30 million tons of steel that could be more efficiently produced locally. And I think shale gas and pellets we have a very important space in the market going forward and which is good is closer to Brazil, closer to Brazil than China. So for us it can be a very good development moving forward.
Anthony Rizzuto - Cowen and Company
Thank you gentlemen.
Andreas Bokkenheuser - UBS
Just the last question from me my apologies if you will permit it me. Andreas Bokkenheuser from UBS. I also would like to extend my thanks to Roberto. I only had the pleasure of having one meeting with him back in March, but it was a very colorful meeting and he added lot of value to that day, was in fact my best meeting of the entire week, so thank you very much to Roberto. Just a very quick clarification on your iron ore volumes please, your previous guidance for 2014 I believe was 326 million tons, can you remind us did that include third party purchases or was that just Vale’s pure production. And also for your five year guidance you have given today you have included third party purchases in your iron ore supply what are you basically forecasting for your iron ore third party purchases over the next five years? Thank you very much.
Well, our capacity will move as we explained to 450 million tons of ore in 2018. And we normally buy between 6 million and 10 million tons of iron ore from local suppliers. That depends upon the price, okay. If the price goes down we stop buying. If the price goes up we buy more. So there is always a measure that we use if we are able to produce more by our system then we buy less. So it’s a kind of – we can consider it as our capacity because those mines are trapped. The only customer they have is a company that have infrastructure to move it. So you can heartfully consider that around 10 million tons will be around all the time. So and for 2018 our capacity will be 450 million tons that could go to 460 million tons if you buy more ore or not.
Andreas Bokkenheuser - UBS
But the numbers on the slide include those third-party purchases?
Andreas Bokkenheuser - UBS
So the previous guidance for 2014 that was 326 million tons, did that include third-party purchases?
Andreas Bokkenheuser - UBS
It did okay.
All the information we delivered is including third-party ore not this time, but before.
Andreas Bokkenheuser - UBS
Murilo Ferreira - Chief Executive Officer
Okay, we are in the end. I think that I would like to thank you very much, Dan Conrado. He is here with us. It’s a clear demonstration that we are working together. We want to say thank you for all the Board members, they are supporting us during the whole time. I think that it’s impressive the level of coordination that we have today and extremely important for the future of the company. We strongly believe that in the next 20, 40 years that at Vale Park, we stay in order to support the future management of the company. Thank you very much for coming. Thank you very much for having some time for us. All the best.
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