Vale S.A.
Q4 2016 Earnings Call Transcript

Published: 23 Feb 2017

[Operator:]

Good morning, ladies and gentlemen. Welcome to Vale's Conference Call to discuss the Fourth Quarter of 2016 Results. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference is being recorded and the recording will be available on the company's website at vale.com at the Investors link. The replay of this conference call will be available by phone until March 1, 2017, on 55-11-3193-1012 or 2820-4012, access code 4280600#. This conference call and the slide presentation are being transmitted via internet as well, also through the Company's website. Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Actual performance could differ materially from that anticipated in any forward-looking comments as a result of macroeconomic conditions, market risks, and other factors. With us today are Mr. Murilo Ferreira, Chief Executive Officer, CEO; Mr. Luciano Siani, Executive Officer of Finance and Investor Relations, CFO; Mr. Peter Poppinga, Executive Officer of Ferrous Minerals; Mr. Roger Downey, Executive Officer of Fertilizers and Coal; Mr. Humberto Freitas, Executive Officer of Logistics and Mineral Research; Ms. Jennifer Maki, Executive Officer of Base Metals; and, Mr. Clovis Torres, Executive Director for Human Resources, Sustainability, Compliance, and General Counsel. First, Mr. Murilo Ferreira will proceed to do the presentation. And after that, we will open for questions and answers. It's now my pleasure to turn the call over to Mr. Murilo Ferreira. Sir, you may now begin.

[Murilo Pinto de Oliveira Ferreira:]

Ladies and gentlemen, welcome to our webcast and conference call. Thank you all for joining us to discuss both our 2016 and fourth quarter results. In 2016, we reached at an important milestone with the startup S11D project, the largest mining complex in our history with a nominal capacity of 90 million tons per year and average ferrous content of 66.7%. The completion of S11D is a landmark in the mining industry as it presents technology with low cost, high productivity operations. Moreover, the complex is a clear statement of Vale's ability to make things happen. For 2017, we stand firm in our pursuit at significantly lower net debt while we conclude our investment cycle and prepare the foundations for (03

[Operator:]

Ladies and gentlemen, we will now begin the question-and-answer session. Our first question comes from Carlos De Alba with Morgan Stanley.

[Carlos F. De Alba:]

Yeah. Good morning. Very strong performance. Congratulations. Just wanted to ask two questions. And Murilo, maybe with the balance sheet in fast repair mode (12

[Murilo Pinto de Oliveira Ferreira:]

Carlos, thank you. I think that we have learned in the super (13

[Gerd Peter Poppinga:]

Carlos, thanks for the question. The ramp-up of Carajás is going well. In the last 30 days or so, we produce or expect around 1 million (14

[Operator:]

Our next question comes from Jon Brandt with HSBC.

[Jonathan Brandt:]

Hi. Good morning. Good afternoon. Congratulations on the results and thanks for taking my questions. I first wanted to ask about iron ore prices and the fact that they are much higher than what everybody thought. I'm wondering if that changes your mining plan where before, you were very vocal about only producing – or not producing sort of your less profitable volumes. With iron ore above $90, I'm sure everything that you have is very profitable. So has that strategy changed at all? And I'm thinking more from the South and Southeast systems, are you going to start the producing as much as you can? And then sort of the second part to that question, have you noticed or are you expecting any restarts from some of the higher cost countries like China and India, and sort of what does that mean for your 2018 supply/demand outlook? And then secondly, I'm just wondering if there's an update on Samarco, if you're still expecting a potential restart in 2017, or if we should only expect a Samarco restart next year. Thanks.

[Murilo Pinto de Oliveira Ferreira:]

Thank you, Jon, I will relate with (17

[Gerd Peter Poppinga:]

Thanks, Jon. Regarding the iron ore prices, what we see for 2017, in a nutshell, would be, we see a much higher demand for several reasons than we had in 2016 – steel demand, I mean that translates into iron ore demand, steel prices and everything. What we also see is that there is much less new supply coming into the system than it was the case in 2016. And finally, we see a completely imbalanced stocks, the ratio between high-grade and low-grade sitting in China is imbalanced, which will probably mean an additional demand pull of equivalent of more than 5% what China imports. So from that perspective, I think we have a very strong 2007 team ahead of us. We see the – the question you asked me about how – are people coming back. We don't think it's so easy, so immediate, the elasticity is not there so easily. What we have seen is in China, for instance, for environmental reasons and also for quality discounts which translates into cost, the breakeven is, if you add sustaining, is probably higher than $70, $75. That's sort of the floor. And the same applies to the seaborne supply, the extra supply where you have seen huge discounts in terms of quality, which also translates into higher cost. So the whole cost curve have shifted a little to the right and is now much more steeper than it was in the past. And I don't see – really I don't see average prices below $70, probably more in the 80s in 2017. Regarding if we change our mine plan, we will not change our mine plan. What we have said is we are committed. We have a new long-term target. We have a capacity of 450 million tons but we have a long-term target of – a base case target, which is 400 million tons, which we expect to achieve the pace (20

[Murilo Pinto de Oliveira Ferreira:]

Jon, regarding Samarco for sure, (21

[Operator:]

The next question comes from Jeremy Sussman with Clarkson.

[Jeremy Sussman:]

Yeah. Hi. Thanks very much for taking my question. I just want to talk a little bit about inventories. First – my first question, can you guys give us a sense of sort of where Vale's inventories are across the whole system, maybe compared to this time last year? And then I think you touched on – second question is, you touched on high-grade inventories being much different than lower grade inventories in China. Again, can you maybe give us a sense of order of magnitude? I think overall inventories at port are probably up 25 million to 30 million tons year-over-year. I'm curious, kind of, where you see high-grade inventories year-over-year. Thank you.

[Gerd Peter Poppinga:]

Well, thanks, Jeremy. It's Peter speaking. In terms of Vale's products in iron ore, we have reduced our inventories from last year, from 2015 to 2016, by roughly 2 million to 3 million tons. At the same time, our inventories they have shifted downstream. They are less concentrated in the mine now and more in the ports. So we have actually blended – last year, we have blended roughly 40 million (23

[Operator:]

Our next question comes from Alfonso Salazar with Scotiabank.

[Alfonso Salazar:]

Hello, thank you and congratulations on the results for the full year. The question I have is regarding cost. We saw an increase in the quarter, it was in part related to labor, but also there is a stronger Brazilian real today. So I was just wondering if you can give us some guidance on what to expect in terms of costs for 2017? And how the cost is going to be impacted by the S11D ramp-up this year?

[Gerd Peter Poppinga:]

Yes, Alfonso, thank you for your question. Yes, the cost in the fourth quarter has increased a little bit. In the freight, it was the bunker, you saw that it was exactly the effect of the higher bunker. And in the C1, there is mainly a non-recurrent cost increase where we had some stocks adjustments, but also we have some provisions for variable remuneration and also the deal with the unions for the wages for this year. So, that is mainly the reason why the costs have increased. If you compare the costs in the fourth quarter, the C1, and compare it to last year's fourth quarter, it's in reais, it's more or less in line what we had then. Looking forward, I don't expect in 2017 to have a big effect of S11D, given that we will still be in ramp-up. But what I can tell you is that we are working on, in the next two to three years, what we will have is, yes, there will be $1 or so less in C1, due to the effect of S11D, I mean, diluted in the whole Vale. You will have another dollar coming from our global recovery. Remember that we are more and more dry processing instead of wet processing, and reducing our strip ratio not because we are leaving ore behind, but because we are actually using former (27

[Operator:]

Our next question comes from Christian Georges with SocGén. Christian Eric Andre Georges - Société Générale SA (UK) Yes, hi, thank you. I just have a couple of questions. One of them is on your coal production in Mozambique, if you could update us on what you're looking at in terms of production at Moatize next year. I think I saw that Moatize II will be in action in this quarter, but I suspect it's only going to be happening perhaps in the second half. So, if you could give us some detail, And just I'm not sure if I missed in your comment, but you're mentioning that you want net debt to reduce further, do you have any kind of target of where net debt should be ideally in the coming 12 months? Thank you.

[Roger Allan Downey:]

Good morning. It's Roger here. We are ramping up the Moatize II plant. I think we're going well. We're targeting a 13 million to 14 million ton production this year as we ramp up. We had a very good January, which has boosted our confidence in terms of achieving that goal. Obviously, there is always a challenge, but all the systems are doing very well, both the mine, the plant, and the Nacala Railway and Port. So, we're on target.

[Unknown Speaker:]

Christian, as regards net debt, we do have a target to reach $15 billion to $17 billion of net debt. This can be achieved over the next 12 months depending on prices, but even in a scenario of lowering prices, we are very confident that we will achieve this in the near term, helped also not only by the increased cash flow of the company, but also by the divestitures of Fertilizers and Coal. Important to note is that one of the reasons behind the increased cash flow generation of the company is not only higher prices, not only higher volumes, and reduced costs, which are already reflected on the results you're seeing, but also lower investments, that's very important, so freeing up more cash, and lower expenditures with the derivatives. For example, in 2016, we had a lot to spend on settling open positions in bunker hedge. And also we had a toll (31

[Operator:]

The next question comes from Daniel Lurch with BNP Paribas.

[Daniel Lurch:]

Hi. Thanks so much for taking my questions. Just two quick questions on Base Metals. The first one is on capital allocation. You were posting obviously very considerable costs (32

[Jennifer Anne Maki:]

On the unit cash costs, when you look at the Canadian unit cash costs in 2017, it will be slightly increased as 2017 is a year of transition. We go down on March 15 with one of the furnaces that will be rebuilt, and it will be down until we come back up in July. And in June, the whole surface plants in Sudbury are shutdown for the annual maintenance that happens every 18 months. We didn't have that maintenance in 2016, so it's an additional $60 million and a loss of four weeks of productions out of the refinery in Sudbury. As well as highly necessary this year, because we'll also be doing the tie-ins for our Atmospheric Emissions Reduction project and we come back up on July 1. And at the end of Q3, beginning of Q4, we'll move to one furnace in Sudbury permanently, and that one furnace, albeit, will have an expanded capacity. The long-term reduction in (33

[Operator:]

The next question comes from Andreas Bokkenheuser with UBS.

[Andreas Bokkenheuser:]

Thank you very much for taking my question and also congratulation on the solid set of results. Just one clarification on the balance sheet, obviously, you've seen net leverage per EBITDA come down quite significantly, can you update us on your target on your deleveraging process? I mean, initially, I think you were mentioning $15 billion to $17 billion in 18 months. Obviously, EBITDA is driving down the multiple but the actual absolute number seems unchanged with net debt still around $25 billion. What's your timeline to get it down to $15 billion? That would be my first question. And my second question just on the ramp-up at S11D, as you also mentioned on the Portuguese call this morning, Vale certainly is going to go in and imbalance the market, which is certainly understandable. I guess my question is hypothetically speaking, if you did want to ramp up S11D within the initial 24-month period, which I understand is now four years, but if you did want to ramp it up in 24 months, could you do that or are you constrained on the Railway? Thank you very much. Those are my two questions. 36.38

[Gerd Peter Poppinga:]

Yes, Andreas, thank you for the question on the ramp-up, but it's like I said before, we have decided to go for four years. Yes, we could, a little bit, we could speed it up. But we don't want to do that. We don't want to do that because we have a very well structured profile now, ramp-up profile. And our expansion of the Railway is following a very well defined system. And also, we don't want to change that. And that's the answer. So we don't want to change this four years ramp-up.

[Operator:]

The next question comes from John Tumazos with Very Independent Research (sic) [John Tumazos Very Independent Research] (38

[John C. Tumazos:]

Thank you very much for the nice dividends and great performance, and good job. First issue, dredge (39

[Unknown Speaker:]

About the potential acquisition of Samarco, John, I think that it's something that it's out of the contest at this stage. We believe that our priority is to reduce our leverage. And my understanding that BHP is very committed with the whole process, into the river, in the region and mainly going back with Samarco (40

[Unknown Speaker:]

(40

[Operator:]

The next question comes from David Wang with Morningstar.

[David Wang:]

Hi, morning. Thanks for taking my question. I just wanted to see if you could offer some thoughts on the dynamics for supply and demand going forward. I know previously you mentioned on the call that a lot of the new supply will be coming from Vale, but I'm wondering with the higher pricing, are you seeing a lot of other smaller players wanting to reenter the market because they would be profitable as well? And what's your, I guess, longer term outlook on the sustainability of the sort of credit fueled boom in demand that we saw last year.

[Gerd Peter Poppinga:]

David, hi. So the supply and demand and about other players coming back, well, I already said that we have a better demand than last year. We have less new supply this year coming in than last year and we have imbalanced stocks. This means a very strong environment for our enterprises (42

[Operator:]

The next question comes from Jamie Nicholson with Credit Suisse. Jamie Eileen Nicholson - Credit Suisse Securities (USA) LLC (Broker) Hi, thanks so much for the call. Just quickly, given your comments on strong net debt reduction, do you expect to continue with liability management on your bonds and buyback, some additional bond debt? And if so, would you be focusing on the higher coupon debt or the near-term maturities, or what objectives would you be looking to achieve? Thank you.

[Unknown Speaker:]

Well, we just did one example of what you're mentioning. The bond that we issued a few weeks ago, we announced yesterday that we are repurchasing the eurobond which matures in 2018. So, yes, we look forward to continue to do a liability management which doesn't mean that we will keep accessing the markets. We have other alternatives outside of the capital markets to do liability management. But it's good to use this nice window in terms of lowering costs of that in order to refinance part of the maturities. We did, in our view, a good job last year by cleaning up 2017. We have only $1 billion of major – mostly in ages, it's (45

[Operator:]

[Foreign Language] (46

[Unknown Speaker:]

Hi, thanks for the question. I would like to get, if you can provide, what is your expectations on pellet productions for this year and next year? And regarding Moatize, I know that you mentioned briefly on to 2017 production, but what is the expectation about the expansion to 22 million tons? Thank you.

[Gerd Peter Poppinga:]

Hi, Tiago (46

[Murilo Pinto de Oliveira Ferreira:]

Okay. Downey, please.

[Roger Allan Downey:]

Hi. Good afternoon. We are ramping up in tandem with the railway, expecting to reach 18 million tons next year, followed by 19, 20 million tons in 2019. After that, it really depends on the market. We will be obviously going to be disciplined and sensible about how we move towards any bigger targets. Obviously, with some investments, the market can (49

[Operator:]

The next question comes from Thiago Lofiego with Bradesco BBA.

[Thiago Lofiego:]

Thank you, gentlemen. I have two follow-up questions. One is, Peter, why do you think swing capacity is not coming back online, at least, not in a massive way for now? What do you think are factors behind that? And second question, considering no changes in oil prices from here, where should we expect your average freight rates to stabilize? You still have higher priced contracts majoring (50

[Gerd Peter Poppinga:]

Regarding on the freight, once the second-generation volume of the shipments, once they kicked in, it will be (51

[Murilo Pinto de Oliveira Ferreira:]

Just to add one further comment, we needed the attention. As you know, just recently, we have learned about eventually the government cannot allow to mine coal in some provinces. We must pay attention; we can see some chance not allowing iron ore as well. Thank you.

[Operator:]

The next question comes from Marcos Assumpção with Itaú BBA.

[Marcos Assumpção:]

Sorry. Can you hear me?

[Murilo Pinto de Oliveira Ferreira:]

Yeah. Go ahead.

[Marcos Assumpção:]

Okay, okay. Sorry. I have a question on coal. You mentioned on the press release that as the Chinese mines will be able to get back to the 330 days of production per year, the market could get back to equilibrium. So, if you could mention what is the equilibrium level that you're expecting? And also, when we take a look at the Sena-Beira, the profitability of the Sena-Beira Corridor, we see that it's actually much, much lower than the one for Nacala. So, for how long will you still have like the take-or-pay contracts for Sena-Beira? And – so, we should see some lower profitability in this corridor. And so, if you could comment a bit of the volumes that you have to carry on, on that corridor would be nice. And last question on iron ore, we're seeing some talks about the Simandou being sold to Chinalco. If by any chance this is confirmed, as you know the project very well, how long do you think it would take to put a project like that in place? Thank you.

[Roger Allan Downey:]

Hi, Marcos. Good afternoon. I'd just start off with Coal then. We – first, on the market there (55

[Murilo Pinto de Oliveira Ferreira:]

The maturity, or should I think of that business (58

[Roger Allan Downey:]

The contracts, yeah, end of this year – end of third quarter.

[Murilo Pinto de Oliveira Ferreira:]

And just to answer, Marcos, I think that the level of complexity and having a green light in the Simandou project is very high. As you know the project is facing a huge dispute regarding the past into the court and I think that before anything, it must be decided about the process, BSGR, and to solve some issues. And regardless of these, I think that's just in the first phase that used to having the Rio Tinto. Hence, I have learned that the cost could be above $20 billion, which is, in our view, (59

[Murilo Pinto de Oliveira Ferreira:]

I would like to say thank you very much for spend your time with us. And we appreciate your questions and all the best. Bye-bye.

[Operator:]

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