Ladies and gentlemen, welcome to Vale's conference call to discuss fourth quarter and fiscal year 2018 results. At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer session, and instructions will be given at that time. If you should require assistance during the call, please press the star key followed by zero. 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. This conference call is accompanied by a slide presentation, also available at the investors link at the company's website, and transmitted via internet as well. The broadcasting via internet, both the audio and the slide changes, has a few seconds delay in relation to the audio transmitted via phone.
Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Private Securities Litigation Reform Act of 1995. 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 is Mr. Luciano Siani Pires, CFO and IRO. First, Mr. Luciano Siani Pires will proceed to the presentation on Vale's 2018 performance, and after that, he will be available for questions and answers. It is now my pleasure to turn the call over to Mr. Luciano Siani Pires. Sir, you may now begin.
Ladies, gentlemen, we're here in a moment of deep sadness and grief because we lost 131 of our sons and daughters, the employees of Vale, 121 brothers and sisters amongst our working partners, employees of suppliers of Vale, and 53 brothers and sisters and neighbors from the community. Nothing will bring back those lives, but everything that we can do now is dedicate ourselves 24 hours a day to alleviate the suffering of the families of the victims and all the people affected, recover and remediate the environment and the affected areas. Every organization is made by people, and Vale, this abstract entity, is made up of 70,000 people which are now suffering.
It is in these moments of suffering that the best within us come out. I'm here to particularly thank more than 600 colleagues which are tirelessly within Brumadinho and other communities, working 24 hours a day, weekends included, to organize and deliver the necessary response. We understand that no response can face the losses, but it's our belief that if there's a best that can be delivered, that Vale is capable of delivering this best. We're here to be accountable to yourselves, our partners from the capital markets and our shareholders about the efforts of the organization to support the victims, the affected people, to remediate the environment, and hopefully engage ourselves in this roadmap and path towards revisiting the meaning and the purpose of Vale as an organization for the future. Today, I'm by myself.
My colleagues, which are leading now the businesses, Carlos Alves in iron ore and Mark Travers in base metals, they wish to be very soon sharing their own ideas with you about the lines of businesses. Eduardo Bartolomeo, our acting CEO, he's fully dedicated in this moment, first and foremost, to ensure the safety of our operations and prepare the organization to the challenges that come. In due time, he will be with you sharing his ideas as well. Today, I'm going to speak a little more than usual because we do want to go through the efforts that I mentioned that we've been doing. I refer to the webcast presentation on page five, starting by the medical support and the health centers which were established shortly after the tragedy.
The picture you see is our knowledge station, is a property of Vale within Brumadinho, very equipped, very capable, where we organized a very large health center. We mobilized containers very quickly to bring health professionals from other areas to Brumadinho. We also engaged the private health units around the city not to stress the public hospitals, we provided everything that was required for the very first aid and first assistance to the affected people. On page six, we obviously disrupted the lives of people of the community after the event. People moved to hotels, we are now working together with them to provide temporary housing as a step towards definitive housing for the people who were displaced from their homes. We're providing potable water for animal consumption, mineral water for human consumption. We are providing transportation.
Some more distant communities within the Brumadinho town municipality, they had their accesses cut from the main town. We are recovering those accesses. We're providing alternative roads within our property. We're providing transportation for the public. We also thank the authorities for the help that they are doing in order to issue documentation and restore the formal lives of those who left their documents behind. We acknowledge the people who were affected and displaced, they were temporarily housed in hotels, but they also lost part of their economic activities. The week after, again, the dam breach, we provided donation for many affected people. We provided donation for the families of the victims. Many of them lost their bread-making heads of families.
We provided donations for those who had their residences affected, those who had their business activities affected, those who had any type of disturbance in the short term, this was without any counterpart. We didn't want to characterize this as indemnification whatsoever. We provided help to the public sector, which had its resources stressed to face the challenges. For example, 10 days ago, we committed to equip the firefighters of the state of Minas Gerais. We received a list of equipment ranging from gloves to uniforms, to notebooks, to sophisticated equipment, excavators, special vehicles, trained dogs, everything that they needed, they wanted in order to equip the whole of the firefighters' corporation of Minas Gerais. We granted them. As a big thanks for the heroes that were recognized by the nation as such because of their efforts, following the tragedy.
We're also equipping their training academy, state-of-the-art facilities to make them better and better professionals. We also compensated financially the town of Brumadinho in order to keep the public services in good condition because of the loss of taxes. We helped them buying emergency equipment. We helped the Legal Medical Institute of Belo Horizonte also with equipment. We compensated the state of Minas Gerais for the extraordinary expenses on the rescue operations. We're trying to make whole also the public sector for all the disturbances that we caused. We'll talk later about the indemnification process, but internally, our board of directors established three extraordinary committees to address the key issues in response to the dam breach.
We acknowledge that the management of Vale, the board of directors of Vale, we have lost credibility. We're resorting to external prominent specialists in their fields to address support and recovery, investigation, and dam safety. Their work is ongoing. It will last many months. Very careful work. We're receiving a lot of input, and hopefully, in due time, we'll make public their conclusions for the benefit of society as a whole. We also established a crisis organization within Vale. Today, we have approximately 300 professionals fully dedicated to support the activities of everyone which is on the field. It's based in our Mutuca mine, which is nearby Brumadinho. The board of directors also suspended shareholder dividends and variable compensation for executives. We announced, and we'll talk about this, the decommissioning of upstream dams.
We have a comprehensive technical investigation, which is led by the law firm Skadden, with the help of a panel of experts from universities in the US, Canada, and Australia. This has the role of determining the technical causes of the accident, of the tragedy. They will do mathematical modeling. They will go through all the records of measures from all the instruments. They will look at the dam designs. They will use the top-notch science that is available in the world in order to uncover what happened and led to the rupture. This is different from what the investigation committees are doing, which is more of a forensic investigation, having access to internal documents, emails, reports, and trying to establish conclusions about perhaps individual behaviors.
There's the forensic investigation and there's a technical investigation ongoing in parallel. In terms of indemnification, we established very quickly an agreement with the public authorities, the public prosecutors at the state and federal level for a preliminary indemnification. We acknowledge the grief and mourning of the communities, so maybe that's not the best time to engage in discussions about fair compensation. In order to allow everyone involved the necessary time to make those very important discussions and decisions, we are providing financial support on a monthly basis for, we estimate, 100,000 people located in the town of Brumadinho and in the vicinities of the Paraopeba River. This is a tremendous effort. We have 21, again, health centers being established.
We hired the locations, we equipped the health centers, we hired the staff, organized the back office, put in place the systems in order to make the registration of all these 100,000 residents. We've already paid about 2,000 people as of now, which is just a fraction of the 100,000. Over the next few weeks, we'll go through all of them, all of the communities, to make whole all of those people. We're putting the best of Vale's resources and knowledge and personnel in order to make this happen. As a consequence that we will discuss as well of the increased safety standards across the industry for dams, we are now unfortunately disturbing the lives of more communities beyond Brumadinho. We've evacuated a number of communities.
Today, we have about 1,000 people affected, and those are communities which are downstream dams, about which we have doubts about their security according to those new industry standards. We're providing also drills within the towns that potentially could be reached by an eventual dam rupture several hours downstream. We're doing all of this to ensure the safety, but nevertheless, those about 1,000 people will have their lives disrupted, and we will engage in discussions as well. We are accommodating them in hotels. We provide temporary housing. We provide definitive housing. We will provide indemnities for all of those people as well. This, so you know, isn't constrained and limited to Vale. Many mining companies within Brazil are going through the same, because as I will explain further, this is a widespread consequence of this increasing safety standards across the industry.
Finally, just so you know, you can read, we are also taking care of the fauna and have a full-service campaign hospital to deal, to rescue, and to treat, and to house the animals in the affected regions. I'm gonna speak now about a very important issue, which is the environmental impact, especially on the Paraopeba River. I'm not going to follow quite the sequence of slides now, but I do have some important information for you. Of the estimated 12 million cubic meters of tailings, we estimate that around 2 million have been carried by the river. The rest of it either stayed within the dam sites or in the vicinity of the dam sites.
We're monitoring water quality on a daily basis and the sediments on a weekly basis through 65 monitoring points everywhere, in creeks, in affluents, in the tributaries of the rivers, and even in the São Francisco River, which is one of the key rivers within the country. Over 300,000 analyses were performed by four special laboratories, which were hired by Vale. 250 professionals are involved, and the post-graduation engineering body of the Federal University of Rio de Janeiro is auditing and validating the results. A few key conclusions. First is that the tailings have a composition which is very similar to the soil in the area. Which means, yes, the tailings, they have heavy metals above legal limits, the tailings themselves, but this is no different from what happens in the soil of the region.
Carrying tailings to the river is no more harmful than carrying, for example, when it rains heavily, carrying soil from the riverbanks to the river. However, those heavy metals, they are not free, and they will not be absorbed by the biofauna within the river. They are isolated and encapsulated. They won't be assimilated. We know this because we conducted tests, ecological tests with several organisms in natural fauna of the river, including microcrustaceans, bacteria, and fish. Between 97% and 100% of the sampling that we did indicate that there has been no contamination, and we are now conducting tests with the animals and the plantations nearby the river.
Also, we proved through our laboratory tests that once you make the water from the river go through what is called the ultrafiltration, which is the usual kind of treatment that we have in treatment stations for water sourcing for cities, that the water, the heavy metal levels will stay below the legal limits. Therefore, the water treated through ultrafiltration should be adequate for human consumption. Finally, the Environment Institute of Minas Gerais, together with other agencies and the sanitation company, up to now have not observed any change in the quality of water downstream the power dam of Retiro Baixo. That's important because downstream this power dam, there's another large power dam called Três Marias, which connects to the São Francisco River, which is one of the most important river bases in the whole of Brazil.
Unlike was reported, this Minas Gerais Institute confirmed, now IBAMA, the federal agency, this morning also confirmed that the plume has not reached the Três Marias big power dam, therefore not reached the São Francisco River. Even if the Retiro Baixo Power Dam doesn't hold all the remaining tailings, mathematical models show that about three-quarters of them should stay at the Retiro Baixo Power Dam, only a quarter of them should go to Três Marias, because of the size of the reservoir at Três Marias, again, the plume should not reach the São Francisco River. What is it we are doing that you can read on the several slides? First, we need to stop the carrying of tailings by building dikes, hydraulic barriers, screening structures.
We have already a full plan in order to remove the tailings which are today being carried to the river. We haven't started yet because of the firemen, they are still rescuing for additional bodies. We are working with the sanitation company to reestablish the sourcing from the river, we are investing in additional water treatment stations. Finally, on the city of Pará de Minas, which is the first one downstream from Brumadinho, we are building, again, a new pipeline in order to increase the sourcing level from other sources. We will entirely replace the sourcing from Paraopeba River with this new pipeline from other water sources. As a result, once the Paraopeba River recovers, the city will have a legacy of twice the necessary capacity for water sourcing and treatment. Other municipalities downstream, they have alternatives.
With all of this that I told you, we believe that from an environmental perspective, the containment of the impacts obviously continues to be a challenge, but is a challenge that can be tackled and addressed and surpassed. Moving into financial and operational impacts. The first thing you see is a graph currently with the amount of production which is halted across Vale, reaching 93 million tons, grouped into four complexes. The question that arises from this graph is: When is the uncertainty about the production levels of Vale will be removed? That's what I'll try to address in the next few minutes.
The first thing for you to take out of your mind is somehow because of the succession of announcements that we have been doing, all those legal actions and suits from prosecutors, and also restrictions from the mining agency and others, may give the impression that the authorities and Vale are adversaries, and they are in different trenches fighting against each other. That is not the case. We all have a common objective. We all want to ensure the safety of the dams and the operations. The National Mining Agency and the public prosecutors, they are exercising their role, and from the information they receive, they believe some dams and operations are not safe. Vale's on the same page. We are also working preventively with respect to, for example, the recent evacuation that we promoted and the stoppage of some operations.
For example, in this graph, the mine of Alegria, we were not triggered by any authority to stop this mine, but by our own evaluations and concerns about safety. What are those concerns? The question that you exposed is, has the safety perception within the industry, the regulators in Vale changed with respect to the upstream dams? The answer is yes, and this is a natural outcome of two tragedies within less than four years. The perception of safety has changed. The National Mining Agency started to request a minimum safety factor in the undrained condition of 1.3 for upstream dams, this was not required beforehand. The engineering companies that provide external audits of the safety of the dams, they are changing their methodologies to calculate those safety factors to more conservative methodologies. Within the conservative methodology, they are using more conservative parameters.
For example, for materials resistance. They are introducing new methodologies. For example, now upstream dams, they not only have the drained safety factor and the undrained safety factor, but they now also have the post-liquefaction safety factor, which is being calculated. Therefore, the safety factors being recalculated according to those new methodologies and standards are being reduced. They now have to overcome a higher standard established by the agency. For example, in February, Vale had already noticed that according to the new standards, some of its dams would not get these stability certificates. We decided to put in emergency level to some of our structures and evacuate some communities as a measure of precaution and safety.
As all those information are being available to Vale, to the external auditing companies, they are also being available to the prosecutors. As I said, in order to fulfill their mandates, they're asking for legal measures against those structures to ensure that they are not operated, and they are not put at risk until there's a clear picture about their safety. This is the priority of Vale, is to ensure the safety of all structures, of all the population, all workers downstream, and not the resumption of production. To produce is not our priority. Safety is our priority.
March 31st is very close. That's the deadline for all the mining industry in Brazil to present the safety reports on all the dams. With that proximity, I'd say the good news is that we have now more confidence that we understand under those new standards what is the situation across all of our dams. Therefore, although our goal is not to resume production and safety instead, because we have the duty to inform you what the picture looks like in terms of production, I will provide now the following explanations. If we go to the graph, the Fábrica and Vargem Grande complexes, the first bar, the 40 million tons which are interrupted, they're now interrupted both by an injunction from the public prosecutors and interdiction by the National Mining Agency. Because in those complexes, there are dams which we know were not going to get the stability certificates.
Some of those small dikes and dams are going to be decommissioned. Some are going to be reinforced. Some are going to be decommissioned. Some are going to be reinforced. We believe that over the long run, we are able to operate some of the mines without using explosives, because explosives could trigger liquefaction in the nearby structures. We presented a request to the National Mining Agency in this regard. Because of all of this and because of our intent to decommission large dams on those complexes, we believe that we should be conservative and not assume that we will have that production coming back anytime soon. If we do so, marginal volumes. With respect to Brucutu, the next 30 million tons, the sensitive question now relates to Barragem Sul, the south dam of Brucutu. That's the one which is inactive. It is a conventional structure.
It's being used by Brucutu until 2013, 2014 approximately, but now is inactive. We believe this dam will have its stability certificate issued in March 31st, even with a very conservative assessment. Therefore, we hope that with this stability certificate, that we will be able to sit down with the authorities and negotiate or revert the injunction which is in place today, not to use Brucutu. If we cannot do that. The reason why this structure, Brucutu, is currently stopped is because the processing mill sometimes eventually discharges materials in this dam. For example, when there's a maintenance stoppage. Whatever is in the pipelines of all the circuits of the processing plant has to be discharged, and this is discharged very small volumes at this dam.
We can build what is called technically a sump, which is basically a protected small pit on the ground in order to receive those discharges from the processing plant, those eventual discharges, and we could run the processing mill in this regard. We could also consider, over time, dry processing at Brucutu. We believe there are many alternatives for Brucutu, and because of the safety of [structures] , we think we're going to find ways to resuming Brucutu operations, either in full or partial. That's the operation where we're most confident about resumption. Timbopeba, 13 million tons, had its safety questioned by the public prosecutors of three dams and dikes. We are going to decommission one centerline dam, which is called Doutor, and our plan is to license the Timbopeba pits, exhausted pits, in order to throw the tailings in there.
We might have to use filtration, we might not. Also, we believe that Timbopeba has technical solutions to operate safely, but it may take more time as well. Finally, with regards to Alegria, we still need more information. This has been a Vale initiative, and we're undertaking more studies to assess the safety of Alegria right now. According to all information that we have to date in our assessment, the remaining sites of all across Vale should not suffer any additional production impacts and should have the renewal of their declaration stability certificates going forward. In summary, we believe we have a more clear picture about the safety of the structures under the new standards. We're working towards technical solutions on all the structures that are not meeting the new standards.
We believe we have circumscribed the impact on production, and we believe there's upside, especially in Brucutu. There's a lot of questions about how much would that upside be. I'm going to give you some guidance on sales. The total impact on sales on the year, depending on several scenarios about production, especially in Brucutu, and uses of inventories, should be between 50 million tons and 75 million tons on sales. Because sales for 2019 was forecast to be less than production, we're talking about anywhere between 307 million tons and 332 million tons of sales for this year, with a bias towards the conservative side. Again, reinforcing the message one more time, we're not concerned about production. What we want is to operate on a safety manner and ensure the safety of our workers and our communities. Very important as well to address the supply to the domestic market.
More a concern to the Brazilian audience, this is just to say that we're using a lot of logistics alternatives to supply the domestic market because Vargem Grande and Fábrica, especially on the pellet supply, are halted. This is requiring a lot of creativity. For the seaborne market, there are questions about what the mix of product of Vale will look like. Our goal is to stabilize the supply of the Brazilian Blend Fines, ensure the contractual volumes of Carajás, and try to mitigate the impact on pellet production. As a result of that, some of the pellet feed which formerly was blended to make up some niche products are being redirected towards the pellet plants. Those niche products are being removed from the market.
Also, because some of the operations might operate with dry processing, and because the quality of the remaining production is lower, we will need to blend proportionally more Carajás in order to ensure the quality of the Brazilian Blend Fines. As a result, the supply of Carajás, which would be forecast to increase because of the ramp-up of S11D, will probably not increase as much as initially intended. This is a scenario that I'm describing that can have several changes, especially depending on the amount of dry processing and the use of inventories of lower quality material. That's the intent. Moving to the financial implications, freezing of funds. We today have BRL 16.5 billion, which are frozen. There are different reasons why they are frozen, but the most recent freezings, they pertain to the evacuations that we made in the communities that do not relate to Brumadinho.
That acknowledges that the almost 1,000 people that we have displaced will have to be indemnified. Also on those safety drills, evacuation drills at the more downstream communities, maybe some indemnifications also will be required, especially to the handicapped people, to children, and to schools, and to some structures that will need to be relocated because in an emergency, they prevent some challenges for evacuation if need be. On the other hand, we're working with the authorities to concentrate all those civil lawsuits within one single jurisdiction in order to make sure that the judge, whoever he is, has the bigger picture of everything that which is seized and blocked and everything. Therefore, we can limit the amount of funds seized, and we can even hopefully, free all the funds and replace them with letters of credit and surety bonds.
We have indications, for example, that the environmental impact, the very first bond, BRL 5 billion, which are seized, might be the first one to be centralized with the same judge, which is responsible for the BRL 1 billion, which is seized, where we have the conciliation hearing and the preliminary agreement. This might be a piece of good news for the following weeks. Our indebtedness. Obviously, to face those seizures of funds, we had to increase our gross debt. We withdrew, just updating the number here, not BRL 1.8 billion, but rather BRL 1.9 billion in commercial credit lines. We were able to show the agencies our strength, and we believe it's a good result that we had only Moody's downgraded us to less than investment grade.
Those credit facilities we're raising with the banks have an average cost, which is higher than what we used to be. Fines. State of Minas Gerais, we've already paid BRL 99 million. IBAMA, the national environment agency, we're in negotiations to perhaps change this into compensation measures. Finally, the accounting impacts. The view is that this is a subsequent event to 2018, so the figures you saw today have not been impacted, but they will be heavily in the first quarter of 2019. Several provisions will be made for the potential indemnifications for the agreements, which already have been established, and some of the numbers you can see in the footnotes of the financial statements. Most importantly, the amounts to be used for the decommissioning of dams will be fully provisioned in the first quarter.
They will not be treated as CapEx or investments for the reason because they do not generate any further future capacity of cash flow generation, so they need to be expensed. Because you know how much the full expenditures will have to be provisioned in the first quarter. Finally, there will be write-offs of assets on the dams to be decommissioned, and obviously on Córrego do Feijão, the production site in Brumadinho. Before we open to questions and answers, I'd like to close that, saying that perhaps we won't have all the answers that you demand, simply because the full attention of Vale is dedicated towards alleviating the suffering, compensating, remediating, reducing the inconveniences of all that we have caused to the nearby communities. Now, the safety of those communities is our priority, and not resumption of production. That's what we will be working relentlessly.
Over time, as everything subside, if we do our job correctly, we will be able to start thinking about addressing the business implications. Thanks for hearing this long explanation. We will extend a little bit past the hour. The intent would be to give you 20, maybe 25 minutes of Q&A opportunities. Thank you.
Thank you. Ladies and gentlemen, we'll now begin the question and answer session. If you have a question, please press the star key followed by the 1 key on your touchtone phone now. If at any time you would like to remove yourself from the questioning queue, press star 2. Please restrict to 2 questions at a time. Our first question comes from Tina Tenes, Bank of America Merrill Lynch.
Yeah. Hey, good morning, and from all of us, our extreme sympathies with your situation and the tragedy. Wanted to know if you could. I've got your message loud and clear on the focus on safety over supply. But can you just explain within your guidance number, you said the big swing factor is Brucutu. But what's entailed in that number? I'm sorry if I missed it with regard to any additional volumes from some of the tonnage you had been ramping up, S11D and elsewhere. Any updates on the thinking of those projects in light of the shortfalls over the next couple of years?
I'm sorry, Tina, the second question, any updates from?
Your thinking regarding the increases in volume from separate projects that you've been talking about. Do you accelerate those in light of the shortfalls? Is there any acceleration of the timing of bringing on that additional iron ore volume from other projects? Thank you.
Okay. The guidance we just gave you includes the ramp-up of S11D, which is forecast to produce around 80 million tons this year. The production that we've guided last year is close to 400 million tons, the sales would be less than initially intended. The sales will be more like 382. That was what was budgeted. We're revising the inventory flow in order to try to compensate some of the lost production. We came down to the 50 million-75 million impact on sales estimate that we just gave you, which if you subtract 382, you subtract those two numbers, you get to 307 to 332.
The swing factor is mostly Brucutu, yes, and secondarily, the swing factor is the amount of dry processing that we will be able to do and the amount of inventories that we will consume. In terms of future volumes, the spare capacity that we've always said that we had to you, part of it has also been affected by the interruptions. Out of the 50 million in spare capacity, about 30 million is in the areas which are currently stopped. We haven't done yet a full assessment of the possibilities to bring over time back other volumes. We are more, I would say, working in the scenarios for the current year, as you may understand, those scenarios are changing on a daily basis.
We hope, as I mentioned in my explanation, that from now on, because we do know what the stability certificates we will have, we hope that the scenario will stabilize, one of my key messages today is that we believe the scenario is stabilizing. The fact is that part of that spare capacity is within the mine complexes that have been halted. We don't have an estimate of what volumes could be brought over the next 1-3 years to compensate. Important to notice as well that even though we've always said that we had spare capacity, that spare capacity needs time to be brought online because you need to hire the personnel, you need to buy some equipment. That's not just a switch that you turn on and off.
Okay.
Finally, the additional tonnages in the northern system, it's also too soon to see how much we can anticipate. As I mentioned, in due time, once the heat of the moment stabilizes, we will be able to address those questions.
Okay. Very helpful. If I could ask one more. Just on the cost side, fixed cost absorption across the company falls when volumes fall, some of these closed mines may be higher cost. I know you didn't want to quantify it quite yet, roughly speaking, what are you able to guide us on directionally for costs?
Directionally, you should do the math assuming that cost dilution will lose those 90 million tons of volumes or slightly less depending on Brucutu. There's a clear behavior between the first and second half that will repeat itself because production in the second half is higher than the first half, you have a proxy for the effect of cost dilution depending on volumes, you can apply those proxies here.
The next question comes from Carlos de Alba, Morgan Stanley.
Hello, good afternoon, everyone, and again, sympathies with the situation that Vale is going through. Luciano, do you have an estimate of the potential impact on the lost volumes where you could not claim force majeure, how much Vale could be facing in terms of either having to buy outside from what the company produces or compensate customers? Is there any potential repercussion in the production of other minerals, either copper in the north in Brazil, or even what have you seen in terms of the reaction of other jurisdictions like Canada or Vale New Caledonia? Thank you.
Look, one of the reasons why Vale has volumes in the spot market is because of seasonality of production, right? You cannot ensure a stable supply of products for customers if you had contracted all of their volumes because they vary across the year. We did have some spot volumes, and also, especially because of the ramp-up with S11D, we were testing with different alternatives for example, supplying Carajás directly to Chinese pelletizing plants to grind and to use as pellet feed. We were actually in the process of developing new markets for some of our products. That process will be reversed, we will prioritize attending to the existing contracts. We don't foresee any disruption in contracts in force majeure, but in specific cases on pellet contracts, we have less specific contracts declared force majeure.
The effects of force majeure will be limited to those pellet contracts. In terms of reaction of other jurisdictions, we have not had any regulatory reaction. Just anecdotally, I've been talking to my peers across the industry, and there is a sense across the industry that safety standards will need to be raised everywhere. Even ICMM, which is the body association for the major mining companies, is working on a proposal in this regard. No reaction specific from regulators or any impact in our operations outside of Brazil.
The next question comes from Andreas Bokkenheuser, UBS.
Well, thank you very much. Before I ask my question, Luciano, thank you very much for being available and also to the entire investor relations team. Since January, I know you guys have been working around the clock, even doing very, very late-night calls and whatnot. Thank you very much for that. Just one question from me. On the lost shipments that you're guiding for this year, do you have any take-or-pay contracts within that? If so, how do you expect to meet those obligations? Would that be by buying iron ore from other major miners around the world, or how would that dynamic actually work?
The dynamic for freight is similar to the dynamics for commercial contracts. We do have a significant amount in the spot market because of seasonality. We believe that spot contracted freight provides the cushion that we need in order to absorb that variation. Yes, we do have take-or-pay contracts, but we believe we do have the production and the sales and the volumes to be shipped in order to absorb all of that capacity. Where we do face perhaps a challenge is in the railway MRS, where we do have take-or-pay, on the other hand, we do have some flexibility. The contract provides some leeway for reduced volumes, but there might be some impact at MRS. Remind you that Vale owns 40% of it. In some way, part of this impact is within our own turf.
The next question comes from Alex Hacking, Citi.
Thank you, Luciano, and let me add my condolences. My first question would be again around production. You mentioned earlier some of the constraints around using the flex capacity. Does that imply that in all probability it would take Vale probably at least three years to get back to sort of a 400 million ton per year rate? The second question would be around dry processing. If you choose to move to dry processing at Brucutu or other mines, do you have an estimate of what that would cost in terms of CapEx per ton? Thank you.
Okay. Well, Alex, thanks for the question. It might be too early to assess how long will it take for us to go back to previous guidance. If one thing I learned on 11 years within Vale is that, the set of assets that we have, they do have a lot of flexibility. Obviously, we've never gone through a situation like this which impaired that flexibility, I'm confident that we will be able to find mitigations over time. Again, this is not the priority right now. Conversion into dry processing is easy. You just don't flow the concentrates through the run of mine, through the concentration phases of the mill. You just go with through grinding and screening. Obviously, the resulting product has less quality.
That's the reason I pointed in my presentation that because the resulting product will have less quality, that it will do require more Carajás in order to blend and guarantee the supply of the Brazilian Blend Fines. That's one wild card as well. Dry processing should not be confused with dry concentration. Dry processing, you change the granularity and the physical properties of the ore. Usually, you get the ore, and you mix with other ores, and you blend to get to the final quality. Dry concentration is something that has never been achieved on a large scale, and it's our goal with the acquisition of New Steel earlier this year. Yes, we will invest more heavily on those technologies to try to achieve dry concentration, which increases the grade of the ore.
Another alternative, which will certainly be accelerated over time and we were already investing, is dry stacking. Which means you still continue to use water to increase the grade of the ore, but the tailings are filtered, and the amount of slimes and tailings that are actually deposited on tailings dams is reduced by 75%, and the rest is stacked into waste dumps, for example. We have investments ongoing, but again, this takes time, and this is not, I would say, significant investments that would change dramatically the size of our capital expenditures there. Where probably we'll spend more is on the commissioning, but it will not be accounted for as CapEx. It will be accounted for as a large provision in the first quarter of 2019.
The next question comes from Gustavo Alevato, Banco Santander.
Hi, sir. Good afternoon. Two questions regarding investments. How should we think going forward for investments regarding safety and other maintenance for Vale? Does the company expect an increase in the CapEx guidance for not just 2019, but for the next years? The second question is also regarding investments. How does the accident impact the projects that the company was developing for this year and also for 2020? Thank you.
I'm sorry, I did not understand your second question. If you could repeat, please.
Does the accident affect the projects the company has for this year and 2020, and to increase production in other sites or not?
One thing that needs to be very clear on the first question on CapEx guidance is Vale never did a trade-off between safety and CapEx. The amount of money which needs to be spent to ensure the safety of operations is not meaningful compared to the overall CapEx program of the company. Therefore, there wasn't, and there is no reason to make any kind of calculation regarding those safety investments. To give an example, last year, for example, we approved a few individual investments of BRL 15 million to BRL 20 million just for the removal of pipelines of tailings that would be passing through communities. We don't want to spill in this community. We don't want to spill in an inhabited area, let's move it somewhere. A buttressing of a tailings dam, depending on the size of the dam, could cost perhaps BRL 30 million, BRL 40 million, for example.
This spread over two years. We never did that kind of calculation, therefore, safety will continue to be our priority and will not affect CapEx guidance going forward. For the decommissioning of the dams, which require, yes, more significant interventions. In terms of projects, the main projects that the company is developing is Salobo III will continue. Vargem Grande mine extension will continue. The project in the north, the expansion of S11D to 100 million tons, with increased capacity on the railway. The Gelado project to recover tailings and to decommission the Gelado tailings dam . This will all continue. We believe all those projects are in the right direction.
The next question comes from Tyler Broda, RBC.
Good afternoon. Thank you, Luciano, thanks very much for the call, and sympathies from us for you and the tragedy. I have two questions. The first one's just on pellets. I think from what I understood, apologies if I missed this, you're able to shift tons down to the pellet plants. Is there any impact to the pellet guidance? Secondly, could you just walk through the current status of the Asian stockpiles, where they are and how much you need to run down within this guidance? Thank you.
Tyler, if I understood, your first question has to do with pellet production. Even if we shift additional pellet feed to feed the pellets, we're going to be short. Our last estimate is that we're going to be short 11 million tons. As regards stockpiles, we do not disclose this information. We believe it's part of our commercial strategy, and hope you understand that.
The next question comes from Chris Terry, Deutsche Bank.
Hi, team, and thanks for taking my questions. Sympathies with you as well. The first question is just on inventory. You've given the guidance on the sales, the 50 million tons-75 million tons offline. We calculate around the 40-million-ton mark has been built over the last three years or so, just taking a simple sales and production number. Just wondering if you could comment on the ability to use some of that inventory within China and Malaysia, et cetera. The second question is specifically around the 65% and 62% pricing mechanism that you've worked very hard on, the 65%, and blending strategy.
Just wondering if you could give an update on whether there's any targeted policies around the 65% material, or whether at this stage, because you're focusing on safety, the prices of iron ore will, or whether you've got a specific strategy around that sort of BRL 20 margin that I think you'd previously talked about between the 62% and 65%. Thank you.
Okay. The inventories that we have flexibility to use in order to offset production or sales losses, they are located in China, they're located in Malaysia, but they're also located in Brazil at the mines, especially material of lower quality that we can use and ship. Because of being lower quality, it requires more Carajás to fix the quality. In terms of the policy and strategy, the most important goal is to provide the supply of Brazilian Blend Fines that we are committed to our customers. We are committed to the product. We need to position the Brazilian Blend Fines as a premium product in the 62% segment. The reason why the premium ore, the 65%, is our flagship.
The use of more Carajás in order to fix the quality and to provide the necessary amount of Brazilian Blend Fines will somehow affect the supply and demand of the 65%. As I mentioned, the growth in the supply of, let's say, unblended free 65%, is not going to be the same as intended before. The reason why you are seeing now more weakness on the 65% is because of the low steel margins. We have pointed out in a few events before that steel margins and coking coal prices are the main drivers of the price of 65%, and that's exactly what is happening now. February was a month, because the prices have come up very quickly because of the expectations relating to Brumadinho, and because it was still a month of slow economic activity, the market was very slow in terms of trades.
One thing for you to have in mind is that the impact of the production loss and the shipments lost at Vale will start to be felt now because of the time it takes for the ships to arrive in Asia. So far the price increases have been driven by expectations. Now the physical consequences will start to reach the market at a moment where we expect that the economic activity will go up. Therefore, we don't have a crystal ball, but one needs to have a lot of attention what will happen in the months of the second quarter, because it could be a completely different dynamics. Steel margins, in any respect, will continue to wait on the 65% premium over the 62% now. As final remarks, first, I would like to thank all of you that offered your condolences and your sympathies.
We're feeling the support of all our partners on a daily basis, this gives us a lot of strength to move forward. To move forward means make whole, compensate, alleviate, reduce the suffering, ensure the safety. If we do that properly, we'll have the sympathies, and we'll have the support to resume production, to resume generating wealth, and to try to establish, as I mentioned in the start, a new meaning, a new purpose for the relationship between Vale and the surrounding communities and states and towns. Our effort will be relentless. We are committed to continue to inform you on a timely basis, we hope you understand that this is the best path towards restoring Vale to its former position. Thank you very much.
That concludes Vale's conference call for today. Thank you very much for your participation. You may now disconnect.