Earnings Call: Q1 2018

Apr 26, 2018

Good morning, ladies and gentlemen. Welcome to Vale's Conference Call to discuss the First 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. As a reminder, this conference is being recorded and the recording will be available on the company's website atvalley.com@theinvestorslink. 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. Fabos Bartmann, President and CEO Mr. Lucia Nucianepiris, CFO Mr. Peter Poppinga, Executive Director, Feroz Minerals and Co Mr. Eduardo Bartolomeo, Executive Director, Base Metals Mr. Luis Eduardo Zorio, Executive Director, Sustainability and Institutional Relations Mr. Alexandre Pereira, Executive Director, Business Support Mr. Juarez Saliba, Director of Strategy, Exploration, New Business and Technology and Ms. Marina Quintao, Director of People. First, Mr. Pavel Swartzman 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 Swartzman. Sir, you may now begin. Good morning to everybody. It is a pleasure to have all of you connected in this call. And so I would start making a brief remark on the performance of Vale in the last quarter. And then I will pass to Luciano and afterwards we are going to take your questions. First, I would like to mention that this quarter was a special one for the quarter. We had to work hard as a team in order to face the difficulties of this quarter. We had to face lower production in iron ore in comparison to last quarter. We had to face an expected shutdown of our Coliman mine in Sudbury, Canada. And we have to face a tremendous rainy season in all of the country in Brazil. We've had consequences for everything that we do. Then we consequently, we had to use our flexibility in order to overcome these difficulties. As for example, we use the inventories that we built outside Brazil in order to be able to increase sales even in lower even with lower production. And we are improving quality of our products and therefore, we are getting a very meaningful premium. This quarter, the premium was $5.2 per ton. That's obviously a very important premium in comparison to plants. On this quarter, we evolved meaningfully regarding deleveraging. We reduced our debt net debt below $15,000,000,000 that was one of the targets that we had. And we are moving forward in the direction of getting to the $10,000,000,000 that we are aiming till the end of this year. And we have announced a new dividend policy. This is very important for you to understand how this dividend policy works. We already have for regarding Q1 of 2018, $1,000,000,000 of dividend that will be paid in the second half of the year. In other words, it means that for instance, if we had the same kind of EBITDA and investments that we had in the Q1 in the next quarters, we would have $1,000,000,000 every quarter of dividends. And therefore, regarding the year of 2018, it would represent a payment of $4,000,000,000 in debt. Dollars 4,000,000,000 in dividend, in other words, represent a 5.5% yield regarding the stock price as of yesterday. Consequently, we think that the company is really moving forward to a very aggressive dividend policy. Let's remember that 5.5% is so important that if you compare with where the interest levels are worldwide, you see that 5.5 is something that is not usual, not in this business, not in any business. So for conclusion, I would like to give you a quick idea of what's going to happen in next quarter. The markets remain sound. It's true that with the iron ore price went down in the today, the ore price is more or less $8 below the price that we had in the Q1. That means that we have to use all of our capacity in order to overcome that. And even with the in this situation and now having the benefit that in base metals, we are going to have the we already had the return of the Coliban mine into operation in the end of April. Therefore, the impact will be much lower than it was in the Q1. If you put all together, we are expecting to deliver this more or less the same kind of EBITDA that we made in the Q1 of this year. So it seems that in this we are moving forward with the idea of keeping the company as predictable as possible and delivering a very constant results flow even in a very negative scenario. It is important to compare that with the EBITDA that we had in the Q2 of last year. You are going to see that we have meaning a very important improvement if we can deliver this kind of result. So this was my first comments. And now I will pass to Luciano that he will give more details on the results of the Q1. Okay. Good morning, ladies and gentlemen. Just a few very specific remarks on the results, starting by costs. You saw the iron ore C1 cash costs at $14.8 per ton. It was a small uptick compared to the 4th quarter. That's good news given that usually the uptick is greater given the lower volumes, lower production volumes. So that encourages us that we will be running at below $14 per ton in the second half. So reaffirming the guidance we gave you last quarter. On base metals costs, the Coleman stoppage impacted EBITDA in the Q1 by around $100,000,000 Important for you to note that. About half of this impact was cost themselves, repair costs, higher feed costs to keep our plants running and the other half was lost margin on the volumes that we missed. On the expenses, first remark is that SG and A, R and D and other operating expenses, they are back to Q1 of 2017 levels. This is very important because there was a trend upwards during the year of 2017. Now we're back into 1st quarter levels. But pre operating and stoppage expenses are much lower. If you look at the Q1 of 'seventeen, they were at $125,000,000 They are now down to $78,000,000 so an annualized reduction of over $150,000,000 And why is that? That's because of the ramp up of S11D, which reduces pre operating expenses. That's because of the return of the 3 palletizing plants, which reduce idle expenditures. So we've been saying that the long term trend for this line is towards 0 and this is going to happen. Another line of the below the operating line that is improving is interest payments. You can see that gross interest payments in the Q1 of 'eighteen were $336,000,000 That compares to $452,000,000 1 year ago. So again, an annualized gain towards $500,000,000 per year. That's a natural consequence of the reduction of indebtedness, And that does not capture the repurchase of debt that happened in the late March early April. So as time progresses, you should see more and more reductions in the in gross interest payments. Capital expenditures, they have been running below $900,000,000 the lowest for the Q1 since 2,005. But not only that, the quality of the expenditure is improving. We're spending less in environmental compliance, for example, the emissions reduction program in Canada and in tailings dams, for example, with the dry process in the south, and we're spending more in upgrading and optimizing our operations. For example, we approved in the Q1 a very comprehensive automation and digital transformation program in iron ore. So the money we're spending will generate more and more results into the future. On free cash flow, we may discuss this in more detail. There were some seasonal effects that brought down the cash flows when compared to EBITDA. But there was at least one one off event, which is positive, which is the increase in prices of pellets. So volumes of pellets maintained somehow constant Q1 compared to Q4, but the price has increased a lot, which means that the accounts receivable was impacted from a working capital perspective negatively. So we recorded more EBITDA than cash collections, but the cash should be coming on the 2nd quarter. So these were the specific remarks for the quarter. And now let's move to Q and A. Excuse me. Ladies and gentlemen, we will now begin the question and answer session. Our first question comes from Alex Hacking with Citi. Hi, good afternoon everyone and thank you for taking my question. I have two questions if it's okay. First for Peter, can you give us a sense about how your iron ore production profile is going to play out for the rest of the year? Obviously, you maintained the 390,000,000 dollars guidance. I assume the production is going to be a bit more back loaded as usual, but could you clarify or quantify on that? And then second question for Luciano, if it's okay. Is there any way you can quantify the working capital needs for the rest of the year? I guess, if we assume that prices are flat? Thank you very much. Hi, Alex. Thanks for the question. Yes, we are keeping our guidance of 390,000,000 tons production. It is, as you said, backloaded as usual and this time maybe even more because of the progressing ramp up of S11D, but also because of the intense rains we had we were experiencing in the Q1 of this year, higher rains than normal. So what we are aiming at and managing is that the first half of twenty eighteen will have roughly the same production of the first half of twenty seventeen of last year, right? There is a balance between ramping up the S-eleven D and also the reduction of some low grade from the Southern system. But in the 3rd Q4, this year, we will be distinctly over 100,000,000 tons per quarter. And that means ramping up the SL 11D will prevail and will be bigger. The effect will be higher than the reduction of low silica of high silica in the sulfur system. I just want to take the opportunity, there was some misunderstandings about papavels 11D, which is going very well. We are at a pace today at a pace of 45, and we are forecasting to come to an average in the year between 50,000,000 55,000,000 tons in the S11B. Thank you. Alex, when I talk about seasonality, just reminding some on working capital, just reminding some effects typical of the Q1. The first one is payment for our employees of the profit sharing. Usually, you make the provision along the year and you pay it in the Q1. So you can see that there was a there's a line which is a payroll which consumed working capital in the quarter. So that has no implication for the following quarters. It will happen again in the Q1 of 2019. The second reason why you sometimes worsen your working capital position is when prices go up. So as I mentioned, pellet prices went up. So this had a negative impact in working capital, accounts received increased, but absent variations in price, this shouldn't happen anymore. A third factor is that usually spending also in the company accelerates towards the end of the year, which means that there are some bills to be paid in the Q1. That also happens in the Q1, won't repeat itself in the second, third and fourth quarter. There's only one aspect that we are evaluating and also decreased a little bit of working capital position, which is accounts payable. We are shortening payment terms in exchange for discounts and better commercial terms. And it's the opposite that we did during the crisis. Sometimes in order to preserve cash, we accepted worse commercial conditions in order to extend payment terms. So this will tend to happen over the next perhaps 1 or 2 years as contracts are being renewed, but shouldn't be meaningful in terms of impact on cash flows. Thanks. Thank you very much. Our next question comes from Carlos De Alba with Morgan Stanley. Mr. Dalba, your line is open. Our next question comes from Jon Brandt with HSBC. Hi, good afternoon. A couple of questions for me. First, I guess on Vale New Caledonia. We've seen cash costs coming down pretty significantly over the past couple of quarters. I'm wondering how much more there is to go and what the I guess if there's any update on the tailings dam that you need to spend money on and or a partner? And then secondly, I'm wondering if with the completion of the Mosaic deal, if this sort of ends your asset sales? I know there's still some vessels to be sold. But I guess I'm thinking specifically on the Mozambique coal, if that's something that you're interested in keeping or if you're having negotiations to possibly sell that asset? Thank you. Well, a quick answer regarding VNC. VNC, we are operating at a level of 40,000 tons per year. This is below capacity. The capacity is 55. So we have an upside of capacity utilization that can go up to 25%. Therefore, you can expect costs to go down. Fixed costs will be diluted because of this future increase in production. And this is what my colleague Eduardo Bartolomeo is focused on doing in the next few quarters and stabilizing and improving the production of the operation. Regarding Mozambique. We do sorry, I had missed your comment on Mosaic. And Mosaic the Mosaic is done, it's finalized. We are ready. Now we have a lockup of 3 years, so nothing will happen during this period of time regarding our relationship with Mosaic. And certainly, there are no further meaningful assets that can be sold by Vale in the next several quarters. So you can say that the divestment program is all but finalized. Regarding Mozambique, Mozambique, the goal of this group of directors of the company is to realize the potential of that operation. That means that now we have a strong basis of operation there that can and will be improved during the next few years. So we are certainly not going to make any decisions regarding Mozambique because we have the opportunity of creating a lot of value by just using the quotation that we have, given the quality and the size of the investment that was made. Great. Thank you, Fabio. If I could just follow-up on the VNC. My understanding is there needs to be a tailings dam built in order to keep that asset running, and you are also looking for a partner in that asset. Is there any update on either of those two issues? The process of looking for an investor continues. We have a goal of having a decision on this by the end of the year, either having an investor or not. And regarding the tail demo, I think that we have good news because this delay that we had in this process give us the opportunity of look more deeply into how to build it. And now the good news is instead of a demo of $500,000,000 that was the idea a while ago. Today, we are considering an investment that will be lower than $400,000,000 in this debt. So this we are using the time in our benefit in order to optimize the project. And if we decide to move forward, the total expense will be significantly lower than we were expecting before. Great. Thank you very much. Our next question comes from Carlos De Alba with Morgan Stanley. Yes, good afternoon and sorry about that. My line dropped for the second time in this morning. I wanted explore the situation in San Marco, Fabio. Could you give us an update as to maybe to the extent you can as to how the conversations with the prosecutors in particular are going? Are they considering a more reasonable level of potential payments for the companies given that the example that they had used before was a little bit extreme? And also, what how do you see the evolution of getting the licenses and getting the production up and running? And then the second question, if I may, is related to could you comment on the strategies, different commercial strategies that Vale is putting in place or will put in place in the future to be able to capture a higher premium for the nickel products that are more related to higher quality material and premium sectors? Sure. Thank you for your questions, Carlos. First, regarding Samarco. Samarco's conversations with the prosecutors are ongoing right now. Actually, we are having conversations today with them. We certainly we are in a constructive mood and we hope that they are too. So unfortunately, it's impossible to disclose the terms of this conversation because we are in the middle of them. And as soon as we have a decision or a qualification, we certainly are going to transmit it to the market. Regarding the restart of Samarco, there are no further news here. The best scenario is to expect Samarco to restart by the beginning of 2019 today. And we are giving all the information. We are fulfilling all the necessities that are raised regarding the licenses. But we don't control the timing issue here. We depend on licenses and authorization and giving the huge oxygen that we have there. People are very cautious on providing this license. But BHP and ourselves, we are doing everything that we can in order to make it happen as soon as possible. Luciano will make a comment on this point. Carlos, without disclosing the details, it's not that we're negotiating a number with the prosecutors. We have the agreement with the federal government for BRL 11,000,000,000. The initial claim of the prosecutors was BRL 155,000,000,000. So maybe we were thinking that we are trying to negotiate a number in between. That's not absolutely not the case. It's being negotiated from a principal standpoint. It's a process to manage the remediation program going forward. So what is going to be the governance, how the communities are going to be involved and so on. So from this point of view, this is positive because it will be whatever it will be. So it's not a preset number that will be negotiated. Regarding the commercial strategy for Nikkyo, let me just give you a broad idea what I'm looking for and then Eduardo will complement that. Look, we have a very simple model. We do have more Class 1s sold to the wrong market. We are selling Class 1 nickel to steel part of our production to the steel makers. That's an impossible deal. The cost is just too high and the quality is too much for the needs. So that's the wrong thing to do. And we are facing this in a very clear way by reducing our production. We are presenting ourselves from producing something that will destroy value when it's sold to the steel makers. This is our very simple strategy in this case. That means that we keep the optionality, we keep the capacity and we can use it even when the market reacts regarding the EV market. The EV market will be perfectly compatible with this excess nickel capacity that we have. So this is basically what we are doing. And Carlos, just to add on what Fad mentioned, just put some clarity that if you look at our numbers and you do a proxy of the size of the Class I market that we serve, last quarter we put 12,000 tons more and this quarter 5,000. Our focus basically on the short term, again going to the point that we have an opportunity and an optionality in the future is to regulate supply demand, not to overflow or sell high quality product. What it doesn't need, it doesn't mean that we won't sell Class 2, because of course we're selling Class 2. And that's another optionality that if you read our primer, we have we are able to transform New Caledonia and PTVI in operations that can serve Class 1. So it's a double I would say double sword, but a double way. We're going to in the short term commercially explore the supply demand and balance production to leave production by the way, because it's extremely expensive to dig underground this high quality material and to operate New Caledonia to serve market when it's there. So I think it's a well structured way to wait, but generate cash on a very reasonable way. If you look at our margins comparison to Q1, it's doubled. So I think it's working. And the price is coming back as well as the market is facing deficit. So I think as a leader in the market, we have the responsibility to do that. Just to finalize, with this movement, we've been able to produce cash positive operations in all of our sites that make our life sustainable, while we wait for the success of the EV demand. And as what we just explained, we are preparing ourselves for this surge in the market that will put a valley in the front end of the suppliers for the EV market. Thank you very much. Our next question comes from Andreas Bokkenhauser with UBS. Thank you very much. Just one question from me on freight. We've obviously seen a lot of freight volatility in the last few quarters. We saw freight rates hitting $21 a ton in Q4, I think down to $13 in Q1. Now we're back to $18 a ton from Brazil to China. Obviously, your Vale Max construction cycle has kind of come to an end and you're waiting for delivery on the last vessels. But is there anything you can do from here to kind of mitigate or hedge your freight exposure? Or do you just want to expose yourself to whatever fuel pass through there is in the Vale Maxes? How are you thinking about that volatility? Thank you. Thanks for the question. You're right. There's lots of freight volatility. But maybe you have seen also that our freight cost came down from 1 quarter to the other. We are managing it more actively. In the past, it was not the case. We had the freight department still detached from our business and now we are more integrated in the supply chain. And what we are doing is exactly against this volatility, we are it's a long term strategy, which started some years ago. And but the vessels are not they have not yet arrived. So you have the 1st generation Valimant, which are they are all there, 35 vessels. Now the 2nd generation is arriving, more efficient energy wise and less emissions than the 1st generation. But it's just the 2nd or 3rd vessel arriving now. It will take another year for us to be delivered. And yes, we are thinking and we are discussing some more vessels as a 3rd generation. It's not decided yet and it's in the studies. But we if you compare those generations 1 after the other, they are dropping progressively. And just take a bunker of $300, it's coming down, right, from $13, dollars 12, dollars 11 a ton. So this is a net advantage visavis the recent spot markets and will reduce exactly the freight volatility you're referring to. So but it will take some time because those ships, they are not delivered yet. Thank you. And I just want to compliment on Kupak's remarks regarding this new generation of vessels. We are studying, as Peter mentioned, And I expect that in the next quarter, we will have a better scenario in order that we eventually will be able to announce a new generation of ships coming in. That's very clear. Thank you very much. The next question comes from Naveed Hosseoli with Cowen and Co. Hi, this is Han Daoli in for Naveed. Thank you for taking my questions. I just have a couple. First, could you please discuss if the commodity price movements were taken into consideration of your new dividend policy and the net debt target in the near term? And also iron ore prices have come down from the March high. I was just wondering if you could give us a sense of your view on commodity price outlook and if it would affect the new dividend policy in any way? And secondly, on pallets, I think you guys talked about the 2018 average of $60 per ton, which is very sizable. And we're just wondering, how sustainable do you think the premium will be in 2019? And what would happen next in order for us to see the pellet premium improving next year? Thank you. Thanks for your question. It gives us the opportunity making a very important clarification and how this dividend policy was structured. It was structured to work in any price scenario. That means that this policy is here to stay. It is a minimal policy. It means that we can go further than that, but we cannot go below that. It means that, as I mentioned in my opening remarks, we already have $1,000,000,000 that is guaranteed for the next quarter. And if conditions continue more or less the same, we are going to accumulate $1,000,000,000 every quarter from until the end of this year at least. You mentioned about the iron ore price dynamics. I can only say we haven't changed our mind from the last call means. We think it's a balanced market from a supply and demand perspective. Why it's balanced? Because we see around $40,000,000 coming in from the seaborne, out of which €20,000,000 is from Vale, €10,000,000 from Australia and €10,000,000 from others. There are some people exiting. So we think there's a 20,000,000 symbolic 20,000,000 tons surplus, which easily gets absorbed by the higher steel demand worldwide. So for me, this is balanced. Steel margin influencing that as well. We have sustained synchronized growth in the world economy and we have the supply side reform in China. We don't see the steel margins collapsing. And the cost curve, which is the other dimension of this analysis, as we have said before several times, the cost curve is getting steeper. Why is it getting steeper? Because of deflation. The inflation is returning to some of our competitors, not in Brazil actually because industrial inflation in Brazil is because of the low inflation is quite low and because we have no depletion. And because of why is the cost curve also getting steeper because of low grade penalties, which are very substantial. So if the cost curve gets steeper, price gets at the higher support, that's I don't see any reason why we should have prices on average of the year lower than last year, which means something around $70 That's the rough analysis, right? So on the pellets, on the pellets, we have a 60 premium average for the whole year. Some of our customers have annual contracts and others they have to negotiate now and we are negotiating already. We see the pellet market very strong. We are completely sold out. We are doing whatever we can to anticipate our new pellet plant in Tubarajo and in the northern system in San Luis to anticipate the ramp up. We in those countries where we see actually the which counts for the pellet demand is for instance Europe, the big iron production went up by 2%. In the Middle East and other countries producing DRI, it was a 16 percent growth year on year. So the demand is very strong and the supply is lagging behind also because of some suppliers which are out of the market and others which are on strike and so on. So it's a very tense situation. And we for the annual contracts, it's far away to start negotiation. And for the second half of this year contract, there is probably going to be a very stressful and intense negotiation for this pellet supply. Again, just a quick compliment. There is a very interesting phenomenon that I think is important to look into it that now that the market has been segmentated among different qualities of ore, with a meaningful premium for Carajas, for instance, and with a meaningful discount for the lower quality, the consequence is that prices are actually less volatile in the iron ore as they were in the past. If you look for a longer period of time, you are going to see that now the variation is typically contained between $60 $80 for the plants. Why? Because these segmentations is absorbing part of the volatility. Got it. Thank you, guys. The next question comes from Grant Spohr with Macquarie. Good afternoon, gentlemen. I have two questions, if I may. The first one is really on the nickel market and your outlook. And I guess my question is, what do you need to see in the nickel market for you to start investing in the business again, for example, going underground at Voisey's Bay? That's my first question. And the second one is perhaps one Luciano is just can you give us a sense of in your copper business, in your nickel business, what percentage of your costs are fixed costs And what are variable costs, please? Regarding nickel and specifically regarding Oasis Vio, Oasis Vio is a very important investment decision for Vale. It will be taken if we can have a scenario where this investment will become profitable in no matter what nickel price levels. That's what we are working in. And the good news here that we are highly confident that we are getting to this equation. And if we get there, the investment will be made because as I'm saying, it will be basically independent of the nickel price. As regards to cost breakdown, typically in Brazil and that works for the copper mines in the north as well, Proportionate is 2 thirds fixed costs, a third variable costs. And fixed costs, you have labor, you have some services, maintenance and there it goes. However, for nickel, the tendency is to have more fixed costs, like 75%, 25% would be more of the proportion. And that's because for example in Canada, the wages are higher. And in surface plants typically as well, the cost of material inputs and reagents, it's more marginal in relation to the fixed costs. An interesting example, for example, if you take New Caledonia, the total cost base of New Caledonia currently is about $520,000,000 per annum, and that doesn't increase much if you increase production, let's say, from $40,000 to $55,000 per ton. And curiously, if you take cobalt, once New Caledonia reaches full ramp up, it will be producing approximately 4,000 tons of cobalt per year. At a price of $90,000 per ton, you get $360,000,000 of annual revenues in cobalt. So you see that Cobalt alone will be able to pay for a significant portion of the fixed costs in New Caledonia once it's fully ramped up. And I wanted to clarify that what I said before regarding voice and data is the same thing. The cohort content that we expect to have in Voises Bay will make the magic of guaranteeing the feasibility of the investment. Thanks very much. I appreciate your answers. The next question comes from Alfonso Salazar with Scotia Thank you. Again, I have two questions. The first one is regarding free cash flow generation the minimum dividend. If we assume that the price of iron ore is going to stay at least similar to last year, I think Vale will be generating a lot of free cash flow above the minimum dividend. So what is the plan for once you reach the EUR 10,000,000,000 net debt level, what is the plan if you don't have any massive or important investment opportunities? What is are you going to be buying up cash or you prefer to be paying dividends? What's going to be the final decision regarding the size of the dividend? And another question regarding this iron ore price. Do you see any challenges in the long term regarding iron ore demand? There are many moving parts today you see India is planning to increase steel capacity substantially. On the other hand, you see China promoting more electric furnaces. So I don't know if you can give us like a long term view on what do you expect for iron ore demand beyond this year? Thank you. Thank you for your questions. I will start with the answer regarding the free cash flow and dividends. For the time being, any excess cash flow will be paid out as further dividends for the shareholders. And we don't have as you did mention, we don't have any massive investment in front of us. So there is no reason for holding this cash back. We are trying to deliver a very clear message to the market here, where we want to build trust in the management of the company that we are in such a way that we are going to be able to use the market if and when we find the investments that are worth doing it. And now, I'm going to pass to Peter to mention a little bit about the market of iron ore as he is our specialist in Asia. Right. Thanks for the question. The iron ore price in the long term, of course, depends on lots of supply and demand. You mentioned the scrap price, the scrap increase of scrap usage potentially in China, right? I think this is correct. This is one element which has to be considered. But we have to also look at what's realistic. Today, the scrap price in China is higher than the big iron price, right? Because it's not only about scrap, it's a good scrap for steelmaking. After the shutdown of the induction furnaces, we had lots of scrap available, but the distribution channels are not ready and the good scrap is not available. So yes, I think they will build some new capacity on electrical arc furnaces. But first of all, this will have a balance because energy is very expensive in China, right? Energy is based, as you may know, in China, mostly on thermal coal, which goes against pollution and the supply side reform of the government. So it's not so easy to justify electrical arc furnaces by when you look to the energy. So I think the there will be yes, there will be a long term evolution. There will be some iron ore being substituted by scrap. But I don't believe in that in the next 5 to 10 years that you don't you will not feel it. You will not feel it substantially hurting anybody in the next 5 to 10 years. On the domestic mines in China, they would come down further. That is very important. We have breakeven today of roughly $55 probably $65 on the average, but you may go to $60 when you look to the 4th tier producers getting complicated the situation and less and less investment in the mines means that you will see even in the SOEs, you will see a reduction and reduction of concentrates in China. And if you go seaborne, there are some marginal suppliers. If you look at the situation today where you have this 30% discounts of when it comes to penalties, you will need at least $65 price for the breakeven and there is probably 100,000,000 to 150,000,000 tons out of the market if the price falls lower than 65,000,000 because of the you multiply by 0.7, which is the penalties. And then you come to production cost of breakeven cost of 40, 45, which lots of people will be having trouble with. So that's why I see scrap not in the near term, concentrates in China coming down further even in the SOEs. And the seaborne, there's also this it's not only cash cost, it must you must consider the huge penalties with margin suppliers under 65, some of them will struggle very much. So that is the it is my view. Thank you. Excellent. Thank you. Very helpful. The next question comes from Jean Lorenzi with Bank of America Merrill Lynch. Good afternoon, everyone, and thank you for the questions. So my first question is regarding the strategy on nickel. It's a follow-up question mainly made from Carlos previously. So what would make Vale change things regarding nickel production and increase it again closer to the total capacity? Should you look at premiums for Class 1 nickel, meaning that you would continue to save premium assets for higher demand of EVs even if you see rebounding prices? Or should you look only at absolute prices? And how fast and costly would it be to increase the production closer to the 300,000 tons capacity? And my second question is on iron ore. We can see that the current pricing increased this quarter likely as of a result of the sale of the unsold volumes from the 4th Q. My question is, is there any strategy on item 1 pricing regarding the share of current and provisional pricing going on? I will start with the comment on nickel. Look, the scenario that we are looking for in the nickel business is similar to the one that we were able to build in the iron ore business. The segmentation is the right answer in order to each market pay the right price for different products. And this will allow the nickel market to grow and Vale to produce more because it is very important that the steel makers, they need lower cost and lower price in EKEL. And this has to be the fact. This has to continue like that. On the other hand, the Class 1 I is not for this purpose. And the cost of using and having Class I is much higher. So it is very important to separate one thing to the other and that will enable companies in general, being them companies like Vale that have high quality nickel or companies that are producing nickel pig iron to have the right pricing for their products. And Jean, just to add on Fab's comments, I think we're going to follow-up closely as we said prior as well to supply and demand in a sense not to overflow Class II with Class I. So any reserve or reserves that are very expensive to the future. We have no rush. We need to balance that. I think it's sensible, it's reasonable, it makes sense and we capture. Our numbers are proving in this quarter. We believe this is the right track. But again, it's a supply demand issue that will come with time and we have to have patience and look a lot internally to our cost base, our cost structure, even our switching from batteries because we can switch our production to batteries. So it's a long term game with a short term pain, let's put this way. Joao, all of the sales, especially to China, they are provisional. So the final price is only known when the ship arrives at port. So the difference between current and provisional is just because the current sales, they were completed within the quarter. The provisional ones were still open at the end of the quarter. Usually, the Q4 is a very strong one where Vale used to empty the pipeline. And because of demand preceding the winter in China, strong production and so on. This year was different. Part of the sales, they moved into the Q1. So these sales that moved into the Q1, they were settled within the quarter. So that's the reason why the current portion went up. But there's no whatsoever deliberate strategy towards 1 or the other. Stabilized. Yes. We had a more stable homogeneous profile time wise of sales within the quarter than in past quarters. That's the reason why. Currents went up, provisional went down as a percentage. Okay. Thank you very much. The next question comes from John Tumazos with John Tumazos Very Independent Research. Thank you very much for the dividend policy. I'm a shareholder. With regard to the 30% payout of EBITDA minus sustaining capital, should we interpret from this policy that Vale will never build a project again as large as S11D or Goro in New Caledonia? Or if Vale were to undertake a large project, would there be external financing, debt, equity, joint venture partners or if you had a large project, how would you undertake it given the dividend policy? I have my specialist here, Mr. Luciano Ciani, our CFO, delivering your question. John, if you had delivered a dividend policy, which said that you would distribute a portion of cash flows after growth investments, then we would be telling investors that look, investments take precedence amongst everything. The idea was precisely the opposite to establish a competition and give preference to dividends towards investments. So in other words, the excess cash beyond the minimum dividend, there will be a competition amongst all the alternatives for them. If we have done it differently, we would be signaling that the dividend policy would be just something left over after management did with cash whatever it pleased with it, which is absolutely not the case. We're giving priority to dividends. For the minimum dividend, whatever is left over, then everything will have to compete for that. Yes. And finally, if I may, we are not in the business of distributing dividends or making big projects. We are in the business of creating value to the shareholders. And every moment in time, what is better for creating value to the shareholders is different. Now we are convinced that given the recent investment that we have done, given the opportunity that we have in improving all of our operations that we want to have a strict focus in delivering debt. And therefore, there is no reason for keeping money back in the company. So we have no decision regarding projects as we have no decisions regarding dividends. What we are saying today it will and for the time being, it certainly will create more value for the shareholders to pay bigger dividends. And that's what we are going to do. Thank you. The next question comes from Marcos Assumpa with Itau BBA. Hi, good morning, everyone. A question for Eduardo Bartolomeo. Still on the nickel strategy, I'd like to understand a bit more on how Vale's contract work on the nickel side. And if so to understand how quickly can you stop supplying this Class II market with the premium material that you have? And eventually, what will be the impact of you reducing your production by eventually another 20%, 30% in terms of on your cost or on labor issues? What is there any restriction to do that? Thank you. Okay. Thanks, Marcos. On the contract base, we sold, we analyzed our discussions with our suppliers. So we have some contracts as well, but we are able to capture, yes. But I think I need a clarification here, because we have supplied for we supply for the Class 2 for sure from PTVI and from New Caledonia and from Moza Puma. So we'll keep this production and we reduced a little bit as well. If you see the premium for Class 2, we captured already on the Q1 as well. It's double from the last quarter. And Class 1 is the idea is to balance, as I said before, on the size of the market we can supply to, mainly plating and high alloys. And for those contracts, we fixed our price and premium. So there are some producer pricing that we do as well. So it's a myriad of strategies to capture that. And it's been proven again, as I said before, successfully because we did for Class 1 top level. And again, as I said before, successfully because we did for Class 1 top level of last year in absolute terms and even in the dollar term as well. So I think we are able to capture that. And your second point, could you repeat, please? So if by any chance you stop supplying the steel market, for example, with your Class I material, would there be any restrictions on or what would be the implications of reducing production on nickel even further, like another 20%, thirty percent? No, we don't need that. I think that's the point. I said I think I answered the first time. We don't need to do that because actually our production is going to be switched to Class 2. For Class 1, it's going to be New Caledonia and PTVI. So it's just long it's a long term thing. As we said before, the pain is for now and the gain is for the future. So we're still selling that there and it's profitable as well as we said before, but we won't have any 20% reduction. I don't think we need to do that. As I said, we just did 5,000 tons of nickel this quarter to Class 1. And then as for Class 2, sorry. And that's normal. That's unacceptable. So it's a reasonable size. We could reduce 5,000, but that's nothing in a sense. So I would do that by the way. We are managing supply demand. That's I think the most important takeaway from our strategy. We are very cautious on supplying the right segments. We are segmenting the segments and doing the right approach. And of course, as I mentioned before as well reserving to the future because the price is wrong. Our price today doesn't pay to produce 99.9 percent nickel. So we cannot just give this away and when the future comes, we don't have our reserves anymore. So it's a strategy to follow-up the market supply demand and capture the premiums. Okay. And just a follow-up here as well on the potential agreement between Vale and Glencore in Canada. Do you see any opportunities there? Anything in the short term that we could expect? Marcos, we're still discussing with them. I think it's an opportunity of win win for both parties. We believe that we can come to an agreement, but that's still we're discussing with them. We have a good partnership by the way with the buddies and with them operationally speaking. And it's just a matter of finding a solution. We are advocating for a very simple one, and I think we'd be successful, but it's still under negotiation. All right, perfect. Thank you very much. The next question comes from Thiago Lofiego with Bradesco BBI. Thank you, gentlemen. I have one follow-up question back to the coal assets. Do you guys have any breakeven targets you're willing to reach this year and the coming years considering the ramp up of the operations in Mozambique? And would you consider divesting from coal eventually, especially considering M and A activity seems to be picking up in that space? I know you're now in ramp up phase, but eventually, let's say, 3 years from now or 2 years from now, would you consider divesting? Thiago, I will start answering. Then in detail, we will give a more precise information on this. But regarding strategy, our review of Mozambique is that we have in place a very big infrastructure. We put an investment there that is ready to leverage other size of operation there. So it would be a mistake in our opinion to consider selling this operation without realizing its full potential because the value will be in realizing this potential. And this will take time, several years. So then it means that there is no chance of analyzing, discussing, selling this business during the next few years. Thiago, look, we are ramping up in Mozambique. It's not an easy operation, but we are making lots of progress. We are aiming to get to 20,000,000 tons in the next 2 or 3 years, right? To do so, we must do some mine plan optimization. We have to increase the productivity of the mine equipments. We have to have an intermediate stockpile between the mine and the plant, which is not doesn't exist. We need to interconnect the 2 beneficiation plans, lots of actions, which they do not cost a lot of money, but we have to do that in order to improve and also get a better training to our workforce. All this is in place now. So in some years, 20,000,000 tons a year. And if you were to breakeven or something, we the OpEx, which we already discussed in the Vale Day, the OpEx, the long term OpEx should be around $60 with the real OpEx mine, railway and the port. But then you have the Nacala tariff on a net basis, you should add another $20 or something on a net basis, and that would be the breakeven, so to say. And we are confident that we, in the next couple of years, will get to the 20,000,000 tons, consolidate the business, and then we go from there. Thank you. Okay. Thank you, Peter. This concludes today's question and answer session. Mr. Fabis Wertman, at this time, you may proceed with your closing statements, sir. Well, I would start and say that we think that we made the right movement by putting our people in Al Anoa in charge of our coal business in Mozambique, given the expertise, the specialty that they have in this kind of operation. It is proven very helpful. And I'm pretty sure during the next few quarters, the results will start to show up. Well, and to finalize, I would like to say that Vale is building its future. Our future now is clearly linked to the quality of our cost, quality demands investment. And therefore, we are restarting, re inaugurating with meaningful effort 3 new palletizers in Brazil, 2 in Victoria and 1 in San Luis this year. And we are handing up S11D that will represent more capacity available of high quality iron ore. And we are increasing a lot our blending outside Brazil. What means that we are able to deliver a very standard level of quality to our customers, therefore focusing exactly in the demand and the needs that they have. So quality is it not comes as an accident, quality comes as a continuous effort that the company is making. In base metals, we are now into the process of restructuring the business. I think that we are doing the right thing. We are generating cash. Consequently, we have the time to do the right thing and we are doing a complete turnaround in all of our operations and results will start to show. And obviously, there is this optionality of DEV that is not there yet. But eventually, it will become a major source of results for Vale in the future. Finally, paying dividends and reducing at the same time the leverage is not a small thing. This is this will be delivered this year as well. So we are pleased to say that we have unfortunately no big surprises to the market, and I hope that we can continue for a long period of time without surprises. So thank you very much, and let's be together in next quarter, hopefully, without any surprises. Thank you. That does conclude Vale's autoconference for today. Thank you very much for your participation.