Good morning, ladies and gentlemen. Welcome to Vale's conference call to discuss the third quarter of 2018 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. 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 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. Fabio Schvartsman, President and CEO, Mr. Luciano Siani Pires, CFO, Mr. Eduardo Bartolomeo, Executive Director, Base Metals, Mr. Luiz Eduardo Osorio, Executive Director, Sustainability and Institutional Relations, Mr. Alexandre Pereira, Executive Director, Business Support, and Mrs. Marina Quental, Director of People. I would like to inform you that Mr. Peter Poppinga will not join the conference today. Mr. Luiz Meriz, Global Director of Sales of iron ore and Coal, will be available to answer any questions related to the iron ore and coal business. First, Mr. Fabio Schvartsman will proceed to the presentation, and after that, we will open for questions and answers. It's now my pleasure to turn the call over to Mr. Fabio Schvartsman. Sir, you may now begin.
Thank you. Good morning to all. It's a pleasure to be here and to discuss with you the latest results of Vale. On top of everything, we think that we are moving forward in the right direction, becoming, as expected, a more predictable company, showing consistent results during time with a meaningful evolution. It is important to emphasize that even with the reduction in price of the index of iron ore from the third quarter of last year to the third quarter of this year of 4%, we were able to more than compensate that through our quality premium, actually. This is how the company is dealing with the scenario. We've been helped by the lower volatility in the iron ore world in comparison to other ores, where the change, the volatility is much more meaningful these days.
I want to make a quick remark on capital allocation. I think that this is the most significant thing for a company in the mining universe, and because of that, we are taking a very cautious look towards anything that relates to capital allocation. Our primary goal is to distribute dividends and to buy back shares in order to compensate our shareholders. Marginally, we are making investments as the two that we are announced today, the Salobo investment and the Gelado investment. Both are brownfield investments that they have a very meaningful return on investment, and they basically showcase how we think about investments and how we think that we should handle them from now on. One quick word in our business strategy moving forward. First, iron ore. Iron ore, we have a very simple equation in front of us. We are ramping up S11D.
We are ramping up the three pelletizers that we have restarted this year. Our goal is to introduce more high-quality ore in the market, a market that is today driven towards higher quality, and therefore the right product for the right market. It's important for you to understand that we have a clear strategy for base metals as well. Base metals, as we anticipated since last year, we made on purpose a reduction in production, not reduction in capacity, but in production of around 50,000 tons of nickel per year in 2017, 2018, and 2019. Our play in nickel aims towards 2020 when we will have, at the same time, much higher production. We are aiming to have 310,000 tons of nickel production. That's just coming back to our capacity in 2020.
We are working towards a total restructuring in our business that will reduce, in a very meaningful way, costs, and this will be present in 2020 as well. Finally, it is expected to see a clear reversion and increase in price of nickel by that time. While we are going to enjoy the good moment of iron ore, we are preparing ourselves to substitute or to add to it the good performance that base metals will show with a jump in results in 2020. One quick word about next quarter. Our expectation is to continue to deliver next quarter in a comparable basis. With the fourth quarter of last year, we are expecting a very nice growth in results as it happened in the third quarter, driven by the recent increase in iron ore prices in the market that is passing quite well.
You have all this noise regarding trade wars, but you see that iron ore is a physical demand, and it is working accordingly. This was my introduction, and I now pass to Luciano to complement with some information. Please proceed, Luciano.
Good morning and good afternoon. I will start with costs. As you could see, iron ore costs reduced from $14.7 to $12.4 per ton. We delivered on our promises. We should expect for the fourth quarter this level to remain. As you are aware, in the first quarter of next year, due to seasonality and the rain season in Brazil, likely volumes are gonna be lower and costs should slightly creep up. In terms of base metals, I want to point out that not only we have higher unit costs because of lower dilution, because of lower volumes, but also there was extra spending in the maintenance shutdown for Ontario. Therefore, more spending over less volumes, and not only less volumes. In terms of coal costs, although you saw improvement in volumes, the costs did not come down accordingly.
The reason for that is because we are moving a lot of material in the mine as part of the debottlenecking process. There's a lot of overburden being moved. This should continue for the next three quarters, and we expect a meaningful uptick in product volumes in the second half of 2019. Probably we're gonna be running close to 17 million tons of capacity on the second half. Average for the year, the total for the year will be lower, but the rate of production in the second half will be very meaningful for coal in 2019. Moving on to the projects. Some color on Gelado. The investment of $428 million will be roughly half financed by the savings on replacement of equipment in Carajás because the remaining mining operations of Carajás will be reduced.
In addition to that, because it operates without trucks and zero transportation distance, the operating costs, the C1 cash costs of Gelado will be three and a half dollars lower than the operating costs of the Carajás mine, which are already amongst the lowest within Vale. Very accretive project. In terms of Salobo 3, the expectation is to receive the bonus from Wheaton in 2023. The risk associated is very low given that the production targets that we need to achieve. We're very confident. It's a sister plant of the two that we have already there. Very detailed engineering in place. We see very low risks of achieving the bonus. Even if there is a slippage in terms of ramp up, the sensitivity of the size of the bonus received is very low related to the timing of the ramp up.
We're talking about tens of millions of dollars, therefore it's a given that we are gonna get a substantial amount of money in 2023. Capital expenditures also hit a low in the quarter. That's a consequence of finishing some important projects like the emissions reduction project in Canada and the beginning of other important projects such as VBME and Gelado. Also of the comprehensive review during the year aiming at optimization capital allocation also in sustaining investments. You should expect capital expenditures to go up in the fourth quarter to more normalized levels. Finally, looking into balance sheet and capital allocation, you saw the 50% sale of Eagle Downs. We have not touched on this before, but this is just an example and a proof that we continue to streamline our portfolio aiming at a more simplified company and bringing in proceeds.
We also performed, I would say, quite well on our share buyback. We have almost 50% of it completed in the third quarter alone at an attractive price of $13.27. We were very opportunistic riding the volatility in external and internal markets. Finally, debt management. We are very close to our net debt target. We reduced overall indebtedness by $800 million. If you look at debt maturing until 2021, the reduction was even greater, about $1.3 billion. We continue also to optimize the overall profile of debt. Having said that, we can jump straight to Q&A.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press the star key followed by the one key on your touch-tone phone now. If at any time you would like to remove yourself from the questioning queue, please press star two. Please restrict your questions to two at a time. Our first question comes from Carlos De Alba with Morgan Stanley.
Hi, good morning or good afternoon. My first question, maybe for Fabio Luciano. How do you decide between paying dividends or buying back shares? Is there a particular inclination? What should we expect going forward? What are the parameters that we would need to consider in order to understand your rationale? Then, second, if I understood correctly, Fabio, you basically suggested that this year the story has been about iron ore and high-quality premium or high premiums for high-quality material. Then in 2020, the story will be base metal. How you see next year? What is going to drive the company's performance in 2019? Thank you.
Carlos, thank you for your questions. First, the discussion between dividends and buyback is basically opportunistic. It's a decision that we will make every time that we have a decision on this. Last time, we made a decision to invest in buyback instead of more dividends. First, because we had just created that policy, and we were pleased to pay dividends according to the policy and not in a different level in order not to confuse the market. Second, we thought the opportunity for buying back was a good one, and it seems that we were right because we bought back shares around $13, and the value of the shares today are around $15. Therefore, the return on investment here was quite fast, actually. This is a good thing. It reinforces that we made the right decision to move in this direction. It will depend on circumstance.
It will depend, say, how it's gonna be the environment in the fiscal area that impact or not dividends. This decision will be affected by a number of things that will be evaluated at any given moment. Secondly, about 2019. 2019 will be similar to 2018, but better. That means that we will have more of the same in iron ore. We are going to have more high-quality ore coming on stream, more pellets coming on stream. Therefore, our average price should be higher than this year. On top of that, in base metals, our cost reduction is in process, we are going to see some initial good results coming out of it.
base metals is a story basically for 2020, where we are really expecting a big jump in performance that will achieve the goal that we have for, say, 30% of our results coming from the base metals.
Thank you.
The next question comes from Andreas Bockenhueser with UBS.
Thank you very much for taking my question, and thank you very much for doing today's Q&A session as well. It's been reported that obviously you're considering investing a bit more in S11D, but obviously you don't want to bring more iron ore volumes to the market, so effectively displacing some of the volumes in the southern system. Can you talk a little bit more about your plans there, if that is in fact what you're considering? What are you thinking in terms of timeline? What are you thinking in terms of CapEx? What's required in terms of infrastructure and licenses and so on? Thank you very much.
Andreas, thank you for your question. You're right. We are studying to extract a little more from S11D with marginal investments. We are actually in this phase, so our information is not sound at this point. That's the reason why we are not sharing the precise information. I think that we stand to have a chance to deliver that by Vale Day moment, when we should have terminated all these analyses, and we'll have all the information regarding this. It will be developed in a very short period of time.
Understood. If I may then, instead ask another follow-up question, more on the freight side of things. In the last couple of quarters, you've obviously mentioned that you are in negotiation with some of your ship vessel providers ahead of the whole new IMO regulation that's coming online in 2020, effectively trying to convince them to invest in more environmentally friendly equipment, scrubbers for the ships and so on and so forth. Do you have any update there? How are these negotiations doing, and how do you think you could be affected by the new IMO regulation? Thank you very much.
Just to correct a little bit, we are not convincing them. Actually, we will be paying for the equipment that is going to be installed in all the ships for this purpose. As we are paying, it means that we are getting a lot of traction here, and we can say at this point that we have most of our fleet converted already for the scrubbers. That means that we are poised to actually benefit from the reduction in the cost of the bunker that is more pollutive. Therefore, we are good here, exactly as we mentioned in the last call from here.
That's very clear. Thank you very much.
Our next question comes from John Brent with HSBC.
Hi, good morning, good afternoon. Congratulations on the very strong results. I first wanted to ask you about, I guess, your shares. Firstly, on the share buyback. You said you did about 50%, and I can see that they're still sitting in treasury shares. Are there any plans to actually cancel those, or should we expect to see them as treasury shares, going forward? Related to that, I see that BNDES has been selling down part of their stake. I know it's not really your decision, but I was wondering if there's any update, if you have any update as to whether or not the controlling shareholders might be looking to sell down. I guess my second question was related to the iron ore price and the premiums. You said about 79% of your volumes that were sold were premium products.
My understanding is you're not actually getting a premium price for all of those products because of contracts. I'm wondering if you can sort of shed some light on how much of your volumes are being sold on contracts. I'm really trying to get a sense of, if iron ore prices stay the same because of the mix shift going from contracts to using the new Metal Bulletin benchmark that you've created, how that will impact premiums, how much higher they can go. Thank you.
Okay. Let's start with the share buyback. If I understood properly, you want to know if we are going to continue to buy back in the same speed that we've done so far. Was that your question?
No, I guess I was wondering if you were going to cancel the shares that you've bought back or if they will stay on your balance sheet.
The idea will be to eventually cancel that. We have no other plans for the shares other than canceling that. Regarding BNDES, the only thing that I know is what I hear from them, and what I hear from them, especially from pension funds, is that they are not willing to sell in the short term. I have no idea if on the other hand, BNDES is aiming to sell or not to sell. It's something that unfortunately I don't have the information. Now regarding iron ore prices, I will pass to Luiz Meriz to give you more color in this issue of contracts that you asked.
Alex, thank you for your question. Basically, the premium we are capturing arises from three major families of products, let's say, right? You can say that the pellets, which have their prices discussed on a yearly basis, the Carajás, which is already fully indexed to the index which represents pretty much the value of the Carajás. The third part of that will be related to the blend, which is a lower alumina price. The majority of this blend is sold on a yearly basis. We expect as from the next quarter, we already will be in a position to capture the value that the market is recognizing on lower alumina quality under our products. Does that clarifies your question?
Yes. Thank you very much.
Okay.
The next question comes from Alexander Hacking with Citi.
Yeah, thanks for the questions. On the first question, I just wanted to follow up on the previous answer. Is the goal to sell 100% of Brazil blend fines linked to the low alumina index next year? And second question just on Moatize. As the mine ramps up, what's gonna happen to the mix of met coal and thermal coal? Because obviously, I think there's been a bit more thermal coal in the mix than what was originally anticipated. I'm just trying to figure out, like steady state, once the mine's at full capacity, what does it look like? Thank you.
Yeah, Alex. Thank you. On the first query related to the goal, contracts have a different duration. Majority of those contracts are done on a yearly basis, as I just mentioned. On those ones, this will be implemented in a faster way. For some others, you may have a small part of that which will be slightly longer, and it will take a few more time to happen. Yes. In general, the market recognizes the low alumina. It's a natural movement in terms of pricing. We have a specific index now, which has been published, which represents the low alumina on our sinter feeds, and is the most fair way to assess the value of this product.
Alex, in terms of Moatize, the mix, we have several different pits and sections on the mine. The current sections we are mining, you're correct, so it has a slightly lower proportion of met coal. The new sections which we are going to be opening as of now and next year are much richer. Therefore, the situation in 2019 will be similar in terms of, so volumes will improve strongly in the second half, as I pointed out, but the mix will continue to be similar. In 2020, the mix improves a little further. In 2021, it improves dramatically. The profitability of Moatize will increase over time but gets a big jump from 2020 to 2021.
Thank you.
The next question comes from Christian Georges with Societe Generale.
Yeah. Thank you. My first question is on the pellets. Could you give us an idea of what is the breakdown between the pellets, or how much of your pellets do you send to China these days compared to what, I guess, you send more to Europe? Linking to the contract question earlier, do you have some contracts on pellets, which are maybe 6 months here on the European destinations?
Yes, Christian. Thank you for your question. Well, China is not traditionally a big consumer market for our pellets. I would say that the majority will stay in Europe and Brazil. That basically is, I would say, about eventually less than 10% of our volumes are directed to China. Our full production is committed in the long-term contracts. That's the scenario. Mm-hmm.
Right. The proportion going to China is increasing, right?
Not necessarily, right. This year, eventually you might see a small amount heading to China as the production increases. That had to be eventually spot sales, right? The majority of the volume is in long-term contracts of which China is a relatively small part of that.
My second question on Moatize. We're looking at 17 million tons in 2020. What is the target for 2019? Are we going to be flat versus 2018 and gradually going on to 2020 at 17 million tons, or is it just linear?
We'll also provide the full guidance by Vale Day. I just wanted to give you a directionally where we're heading. We should be at a rate of 17 million tons for the second half, but we're still sorting out the details. We'll give you precise guidance for the full year 2019 at Vale Day.
Okay. The last thing, VNC was back in losses. Does this, in New Caledonia, is that a disappointment to you, or is it part of the plan that you currently have?
Look, we never hided the fact that VNC is a very difficult operation that Vale has. We have the new management of base metals very focused on changing that for better. We are now in this process. We want to reach a decision of what is that we are going to do with VNC shortly. As soon as we have this decision, we are going to share with the market.
Okay. Thank you very much.
The next question comes from Grant Sporre with Macquarie.
Good afternoon, gentlemen. Thank you for hosting the call. My first question is just a little bit more on VNC, if you're able to share anything. The question really is around, it would seem to me it's more of a revenue problem than actually a cost problem at VNC in terms of some of the realizations you might be getting from the intermediate products. I don't know if you could share any details on that. That would be my first question. The second one is back on Moatize. You gave some guidance at Vale Day 2018 in terms of how the costs would evolve. Is that still your current thinking as to how those costs would evolve over time? Thank you.
Hi, regarding VNC. VNC is not only an issue of price, it's an issue of cost as well. It is an issue of capacity. We are operating at low capacity utilization at this point. We are focused on increasing that. If we can increase that, we are going to save thousands of dollars per ton. That will be as important as a price increase. There are two issues. The future prices, obviously, eventually can help. We are not counting on prices. We are looking if we are able to be in a position to produce a lot more from the same equipment that we have there. Regarding Moatize?
On Moatize, we have no change to the cost guidance that we provided at Vale Day. Just reminding everyone of you, we look forward in the longer term to have a total cost structure at Moatize at around $80 per ton cost at port, which means $60 per ton of operating costs, plus $20 per ton of an additional tariff required to service the project finance. Very competitive. Obviously, this will take a few years to get there.
The next question comes from Tyler Broda with RBC.
Great. Thank you, and thanks very much for the call. Excellent performance on the quarter. I just wanted to ask, on Salobo, the third concentrator coming in, is that gonna be the same size and design as the previous two concentrators, or are there any changes, or what we should be looking for in terms of any specifics on what that might change in terms of the cost profile? Secondly on that, if you could just provide a bit more clarity exactly on what needs to happen before the Wheaton money comes through. Just secondly on Samarco, the pellet market's still quite strong. Just if you could give an update on where things are there at the moment. Thank you.
Okay, Tyler. On Salobo, this expansion is exactly equal. It's a sister plant than Salobo 1 and 2. In theory, it should add 50% of capacity. The reason why Salobo doesn't go from 200,000 to 300,000 is because copper grades decline over time, therefore, the peak production will be actually 268. When you think longer term, there is a trend for Salobo costs to come slowly up, although from a very low level. You all know that we have costs there close or below $1,000 per ton.
On the other hand, on the first few years of the startup of Salobo 3, actually there's a counter effect that keeps costs at the same level, which is the fact that there's an already mined stockpile of ore very close to where the new crusher will be for treating for Salobo 3. Transportation distances will be zero, mining costs will be zero. Expect Salobo costs to be stable at least over the next five years.
Well, regarding Samarco, this year was a year of important achievements in Samarco. First, we had an agreement with all the parties involved, especially the prosecutors. That was a very complicated thing to get. This was the most important step forward because it's taking out the uncertainty of which will be the impact of the liabilities that Samarco had because of the accident. The second good news is that very recently we decide to start the construction of the tails dam that will support the restart of the operation. It's called Alegria Sul, where we not only decide to start, but we got the licenses to build it, and we are under construction right now. That means that by the end of 2019, we'll have everything in place to ask for the license for restarting operation.
Therefore, if we are able to get these licenses, we'll have everything ready for restarting the operation by the beginning of 2020.
That's perfect. Thanks very much.
Our next question comes from John Tumazos with John Tumazos Very Independent Research.
Thank you very much. Two questions. Should we expect another cobalt stream in New Caledonia to finance the next tailings project there? Second, I was rereading my notes from the October 2011 Mozambique Vale tour. The guidance was 77% met coal trending to 22 million tons future output fully developed. There was emphasis on the Chipanga seam 25 meters thick, but the other seams were 17 or 10 meters or smaller and variable. Is there a difference where when you open up and get into the mine, it just isn't as good as when promised?
John, this is Fabio. Let me start a bit about stream. I will gladly pass on Luciano, because I was not there. I have no idea what was promised back then.
I will send you my notes, Fabio. I already started to write you a letter.
Thank you. Regarding cobalt stream, I would like you to understand that in our point of view, it's a totally different story, a cobalt stream in Voisey's Bay from one in VNC. The reason is a very simple one. In Voisey's Bay, we didn't have the cobalt. The cobalt was totally dependent upon opening the mine. If we didn't open the mine, no cobalt would be available, therefore, we sold something that we didn't have in order to make the mine feasible. That was the purpose. VNC is a totally different story. We already have the cobalt in our stream of revenues. The cobalt is there. The impact of a streaming in New Caledonia will be neutral. The benefit that we had in the case of Voisey's Bay would not be present in the case of VNC. I hope it answers your question.
Thank you.
John, on Moatize, starting by the production volumes. The 22 million tons encompass 18 million tons through the Nacala corridor, plus 4 million tons through the Beira corridor. As you know, we ceased operations in the Beira corridor, so we would theoretically be limited to 18. However, we're gonna go to 20 based on the debottlenecking of the logistics corridor. What's going to limit the capacity currently is the logistics. In terms of the split, the 77% will not be achieved over the life of mine. Now we know more about the ore body, and it will probably peak once we go to the new sections that I mentioned, section five and section six, at 65% from today's about 55%. Chipanga will not be as meaningful as it was before, so the quantity of Chipanga is reducing.
However, the other seams of coal that we're mining, they have also very good quality. They have strange names like Sousa, Pinto, and low-wall, whatever, but they are achieving very good price realization. The fact that Chipanga is decreasing should not be a concern in that respect.
Thank you.
The next question comes from Alfonso Salazar with Scotiabank. Hello, Mr. Salazar, your line is open.
Sorry. Good morning. Two questions. The first one is regarding the payment that you will get from Wheaton once Salobo-3 is up and running. If you can provide more details or anything else that you can share about this. The second is regarding the premium that you get for the quality, your premium in iron ore. How do you see that in the long term, and what risk you see, especially in the supply side? If you think that outside Australia, there could be more supply of high-quality ores that will compete with Vale's. How do you expect that to evolve as China uses more scrap again in the longer term? Thank you.
Fabio.
Okay. On Salobo-3, the bonus is a function of three variables. The first one is the timing of the completion and ramp-up of Salobo-3. The guidance that we gave you from 600-700 assumes that we achieve those milestones in 2023, although the startup of the project is scheduled for 2021. Therefore, we have a full year to achieve the production targets. As I indicated, because it's a sister plant of the two which are already operating, that should not be difficult. Timing is one variable. The second variable is capacity. Again, shouldn't be an issue because we've been running sister plants for a while now. The third variable is ore grades, which as much as we continue to mine and to know Salobo, there is no surprise that we expect.
These ore grades have been behaving according to the mine plans. Level of risk for receiving that bonus is very small.
Regarding quality premium in the iron ore universe. Well, we certainly think that it's a structural thing, therefore permanent. There is a fact that I would like to emphasize that helps understanding what's going on in the market these days. If you notice, in the last few days, the index, Platts, went up in a very important manner. We are now in the neighborhood of $76 per ton. That was not achieved for a long period of time. That was a combination of two things: a strong demand in China, especially because of the latest stimulus that the government is making to speed up the economy a little bit. More importantly, our competitors made the right decision of changing the quality of the product that they are offering to the market. It always come with a consequence. It means that certainly there are more costs associated with this decision.
The truth is that now, there is more high-quality blended ore coming to the market through the index. Accordingly, the index is moving forward, and is the best showcase that we can have that this trend is so real and so important that everybody is now having to adapt to it. Either people are offering more quality products if they have them, or they are cutting production accordingly because the market is punishing very much the low quality. It is implied in this comment that we are quite comfortable that this will continue like that, and we don't see anything meaningful coming in the next few years as further supply. All the initiatives that eventually you heard of are very complicated, very high CapEx, very high OpEx, and there is a clear doubt if these projects will be developed or not.
This is the situation as we see today. Excellent. Very good, Fabio. Thank you.
The next question comes from Mr. Alexander Hacking with Citi.
Hi. Yes, thanks for the follow-up. I just wanted to follow up on the nickel volumes. You mentioned that those would be back to 310,000 tons by 2020, if I heard correctly in the prepared remarks. Could you maybe disclose where that additional sort of 50,000 tons, at which mines that additional 50,000 tons of nickel is planned to come from? Because if I remember correct, the Voisey's Bay underground doesn't start until 2021. Maybe just some color that would be helpful. Thank you.
Alex, just to clarify that, the 310 is our capacity installed, so it will be around 2021 or 2022. Where it comes from is the mines, of course, they have to be sustained on the level, and you gave a good example of Voisey's Bay. Long Harbour, for instance, we have spare capacity of 10,000 tons there. We still have capacity in Sudbury of over 15,000 as well. We have clear with capacity. As Fabio mentioned, we have a huge increase in capacity in New Caledonia for nothing, just for better management and a small debottlenecking that we have to do there. There are a lot of capacity on our industrial plans to get to that. The path to get to 310 will be guided by the market, by the way, as we expect the crossing of the curve is 2020.
I will say this guidance, we need more clarity on the Vale Day, by the way. It's just a direction, okay? Just to bear in mind that we are able to produce. The minor investment just to get it very transparent, is like the second phase in Onça Puma, but that's very marginal. That gets a lot of volume as well. Anyway, the direction is 3,310, is in our plans. It's going to be achieved as market evolves very cautiously. As we mentioned before, with a better cost structure, because we're gonna reduce our fixed base to run that whole operation. I hope it clarified you.
Thank you. Very clear.
The next question comes from Thiago Lofiego with Bradesco BBI.
Thank you. Fabio, I have one follow-up question. Could you give us an update on the railroad concessions renewals in Carajás and Vitória- Minas? What's the timing expected for those renewals, and what is the potential CapEx linked to those? Thank you. I will start, then I'll let my colleagues here to complement that. The state of the art here is very advanced. We are in the agency right now. We are just waiting for a final decision of the agency. I think that by cautious reasons, the agency is waiting for the change of the elections, the change of the president, in order to move forward with this. This will be a low-hanging fruit waiting for the new president to catch. I'm pretty optimistic that as soon as he starts in the office, he will be allowing this process to move forward.
We have everything in place to deliver this as soon as the executive Brazilian executive power decides so. Regarding the investment, I don't remember the numbers and how they are going to be.
I think it's quite soon to say a number because in the agency, as Mr. Schvartsman said, we are going through a very technical analysis. It's not final yet, and after that, it's going to go to the union court for the final analysis, and then back to the government for final decision and then the renewal of the contract. Up to now, I would say that it would be early to call a final number because we are going through a technical methodology that is about to be concluded by the agents.
Only to complement that. If you take, for instance, the FICO Railroad that is selected by the government to become the counterpart for the concession. This will be built by Vale once the renewal of the concession is approved, it will take several years to build it. Therefore, the investment, no matter how much it's going to be, it will be spread among many years.
Just Luciano complementing. This is a general cargo railway, which by nature costs much less than a heavy haul railway like an iron ore railway. If you take the numbers from the iron ore industry, they're not a benchmark for this railway.
Great. Thank you, Fabio. Thank you, Luciano.
The next question comes from Marcos Assumpção with Itaú BBA.
Hi. Good morning, everyone. First question on production and sales volumes on iron ore. In the first nine months of the year, Vale sold 95% of its production volumes, basically to support the strategy of increasing blending volumes. How should we expect that ratio to behave in 2019? The second question, if you could comment a bit or give us an update on the pellet premium negotiations for next year as well, at least how the market is so far, supply-demand is behaving in the trend that you see for pellet premiums for next year. Thank you.
Thank you, Marcos, for your question. Regarding the 95% or so of last year. Most likely we will have the same situation this year, in 2019. The reason for that is because we are using our flexibility. As we today, we are in a different position from other companies as we have a lot of inventory sitting in China. We can speed up sales or slow down sales according to the behavior of the market. Naturally, the market slows down by the end of the year. Naturally, we are going to most likely hold a little bit of sales for next year. This explains the level of sales in proportion to production that we had in the first quarter.
Besides that, we are coming to a closer comparison between what is produced and sale every quarter, as we now we are coming to the end of the building of inventories in China.
Yeah, Marcos, regarding the pellets, we basically are starting our negotiation season, right? I mean, the market balance would, showing an increase on price, we'd rather not be much more specific than that due to the sensitivity of the negotiation moment that we are now.
The truth of the fact is that we are completely oversold and consequently, the demand is higher than our capacity. The natural consequence that there will be some price adjustment because of this unbalanced situation that I just explained.
Perfect. Thank you very much.
This concludes today's question and answer session. Mr. Fabio Schvartsman, at this time, you may proceed with your closing statement, sir.
Very good. Again, as always, it was a pleasure to have all of these calls with very detailed questions that were presented. We are very pleased to tell you that Vale is moving forward in every aspect that we were looking for. It seems that we are poised to have another good quarter in front of us, and I hope to have you all in the next call by the beginning of next year. Thank you so much and have a good day. Bye-bye.
That does conclude Vale's conference call for today. Thank you very much for your participation. You may now disconnect. Have a good day.