Good morning, ladies and gentlemen. Welcome to Vale's conference call to discuss third quarter 2022 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. This call is being simultaneously translated to Portuguese. If you should require assistance during the call, please press star 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 is 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 provisions of the Private Securities Litigation Reform Act of 1995. Actual performance could differ materially from that anticipated in any forward-looking statements as a result of macroeconomic conditions, market risks and other factors. With us today are Mr. Eduardo de Salles Bartolomeo, Chief Executive Officer, Mr. Gustavo Pimenta, Executive Vice President, Finance, and Investor Relations, Mr. Marcello Spinelli, Executive Vice President, Iron Ore, and Ms. Deshnee Naidoo, Executive Vice President, Base Metals. First, Mr. Eduardo Bartolomeo will proceed with the presentation on Vale's third quarter 2022 performance. After that, he will be available for questions and answers. It is now my pleasure to turn the call over to Mr. Eduardo Bartolomeo. Sir, you may now begin.
Thank you very much. Good morning, everyone. I hope you are fine. I'd like to start guiding you through our main accomplishments in the quarter. We have made significant progress with regards to operational stability. In iron ore, our production was close to 90 million tons, an increase of 21% quarter-over-quarter. While the world is facing growing inflationary pressures, we remain focused on cost discipline. Our C1 cost decreased $1.5 per ton. In our base metals business, performance improved significantly after extended assets maintenance. In nickel, production increased 51%, but sales lagged production impacting our EBITDA. Deshnee Naidoo will give you more details on that later. Moving to our strategic agenda, we are delivering on our commitments to lead the low carbon mining. Our solar project, Sol do Cerrado, is coming online to further reduce our carbon footprint.
We are refining our strategy, positioning Vale as an iron solutions company and the partner of choice of the energy transition and the EV megatrend. We continue to strengthen our business to deliver the products essential to a more sustainable future. In this sense, we are making progress in growing our supply of low carbon nickel and other critical minerals for the energy transition. In Canada, we have successfully concluded the first phase of Coleman Mine in Sudbury. The project will nearly double our production at Copper Cliff Mine. In Brazil, the reconstruction of the Onça Puma second furnace was approved recently by our board of directors. On capital allocation, we stay committed to returning cash to our shareholders and to our share buyback program.
We are shaping the value of the future, supported by the uniqueness of our assets and resources, our investments in technology and productivity, and in our discipline in capital allocation. To lead the mining transition, we are promoting solutions to expand the use of electricity to substitute diesel in our operations. We just received two electric mining trucks with 72 tons of capacity. We are not only cutting emissions, but also reducing noise, minimizing the impact to our communities. Our strategy to electrify assets already includes 49 electric vehicles in our Canadian mines and the operation of two battery-powered locomotives in the yards of the ports of Vitória and São Luís. To further move our electricity consumption towards clean energy, Sol do Cerrado solar project is coming online this month, as I mentioned, and will ramp up until July 2023.
The project has a capacity of 766 mw peak and will supply 16% of Vale's electricity needs in Brazil. This energy would be enough to power a city of 100,000 houses. We are delivering on our climate agenda. We are doing that because we are vigilant to the needs of society, but also because sustainability is crucial for the future of mining. Our society expects the mining industry to leave a positive legacy. Mining companies play a key role in addressing global warming by supporting the global energy transition. The transition to a net zero economy will be metal intensive. Significant expansion of low carbon technology such as wind turbines, solar panels, and electric vehicles will boost demand for the metals needed for these technologies.
For instance, producing battery EVs requires 30-40 times more nickel than the traditional ones. The carbon footprint of these batteries is very critical, and we have a distinct portfolio for that. Our high quality Class 1 nickel in Canada is the lowest CO2 footprint, and we have third-party certification validating it. Now, moving to iron ore. As I mentioned before, we are committed to provide decarbonization solutions for our clients. What do we have different from others? Assets and technologies. We operate the largest high-grade deposit in the world, Carajás, with 66% FE content reserves. We are developing products to help decarbonize, such as green briquettes, which can reduce over 10% of the emissions in the BF-BOF route. Our plants are under construction in Brazil with capacity of six million tons per year, and the startup is expected for the first half of 2023.
With those differentiators, we are a partner of choice for our clients. We established a partnership with steel mills to jointly find new solutions that help to decarbonize the industry. We have signed with clients represented almost 50% of our Scope 3 emissions. Finally, shifting gears to dam safety. I'm very proud to announce that we have completed the works in three more upstream structures that were eliminated in September. As promised, in 2022, we have eliminated five structures, and so far we have completed 40% of our program to eliminate upstream dams in Brazil. On top of that, we have removed the emergency levels of five dams in Minas Gerais. The structures also received declaration of stability, DS, which attested their safety conditions. Since the beginning of this year, seven dams had their emergency levels removed.
As part of our strategy, we have materially de-risked Vale. As well in Brumadinho, we are fulfilling our mission to the integral reparation in a quick and a fair way. We are delivering on our commitment to a safer and more reliable company. We are building a better Vale. With that, I now turn the floor over to our Vice President of Base Metals, Deshnee Naidoo, for her remarks, and I'll be back soon to our Q&A session. Thank you. The floor is yours, Deshnee.
Thank you, Eduardo, and good morning, everyone. I would like to start by highlighting the progress we continue to make towards achieving our base metal growth goals. I'm happy to announce, and as Eduardo mentioned, we have approved our Onça Puma second furnace project this quarter, which will see our nickel production grow by 15,000 tons on average per year in South Atlantic. We are making progress at PT Vale Indonesia on the approval to establish the Pomalaa 120,000-ton JV with Zhejiang Huayou Cobalt and Ford Motor Company. Looking at our projects delivery, we officially opened the Copper Cliff Mine Complex South refurbishment project earlier this month and are at 98% physical progress at Salobo III. There, we are on track with our commissioning activities. We are also on schedule with our revised Voisey's Bay Mine Expansion project. The next slide, please.
Now looking at the performance in the quarter. On the operational side, we recovered production in quarter three for both nickel and copper following the completion of our major plant and some corrective maintenance work in H1, specifically the Furnace 4 rebuild at PT Vale Indonesia and the SAG mill maintenance at Sudbury. Both safely concluded last quarter. On the nickel sales, we have an 8,000-ton difference to production this quarter. Some tons were retained to meet quarter four commitments given our scheduled current maintenance at Onça Puma, Long Harbour and Matsusaka. Linked to global supply chain constraints, we faced challenges to hire container ships at Onça Puma and shipping issues in the U.K. due to port industrial actions that led to port congestions. These also affected sales.
This timing lag will be trued up at the end of quarter four, where we would see higher sales than production volume. In copper, and as previously highlighted when we revised the copper guidance, we have increased our maintenance activities at our Salobo operations in H2. We are already seeing the results of the work to date translating into improved plant availability and throughput rates. We have improved our throughput by 10% from June to September this year. The next slide, please. Now turning to our financial performance. We had a significant impact from LME prices quarter-over-quarter. Nickel dropped 24% and copper 19%. Nickel price drop had a significant impact on our quarter-over-quarter EBITDA.
In copper, however, the quarter-on-quarter price impact was largely neutral as we had a huge adjustment in PPAs in quarter two, given the significant backwardation of forward curves from quarter one to quarter two, as explained in our call last quarter. We also had timing impacts on cost this quarter as we had carry-over inventory from quarter two priced at a higher cost, mainly due to major PMPs. In addition, the quarter two fuel cost increases at Pomalaa, Indonesia are reflected in our consolidated results this quarter. As you could see in our latest reports, we are looking at ways of maximizing our downstream capacity while we ramp up our projects. This means some portion of our production originated from processing third-party material. This quarter alone, we produced 6,000 tons of nickel from purchased feed, while in quarter two we had produced 3,000 tons.
There are positive takeaways. The improvement in operational performance would have translated into better financials had we translated all production volumes in quarter three to sales and not seen the timing impact of price variations. I now hand over to Marcello for his comments on our iron ore business. Good morning, Marcello. Over to you.
Thank you, Deshnee. Good morning. Good afternoon. Good to hear you all again. I'll start my presentation, give you some colors about our production in Q3 and also Q4. We are back to 19 million tons. That's a good news. After some headwinds with the heavy rainy season in the Q1 and the moisture problem in Carajás in Q2. We increased 10 million tons in the north system. It is below our expectations in the planning of the beginning of the year due to the delays of some license. That made us increase the waste movement in that mine. We have better news in this regard. I'll give you an update in some minutes. Production guidance remains 310-320. You may notice the gap between the sales and production.
It is the same pattern of previous years related to the seasonal of production and the lead time to reach China. We may expect a higher sales comparing to production in Q4. Now moving to the next slide. I'll give you now some update about the production plan. We had some important progress. North Range, Gelado project, we already started the commissioning of the first phase, and we expect to ramp up next year. N3 project. We got the previous license, the LP, after some delay that we are really working close to the agents to get the installation license by the first half of next year, start the construction and bring volumes in the first half of 2024. The rolling licenses as an example, is the vegetal suppression or a redesign of a mine cave.
We had a wave of small licenses in the last month, in September, and we expect another group of licenses in the first half of next year. A closer approach with the agencies is helping us to progress in this area. We've been investing in technology, studies, universities, and people to help them increase their capacity to analyze our projects and process in terms of quality and also in terms of time. Moving to S11D. With the improvement of the Orebody Knowledge, we addressed the small jaw crusher last two days, you know that. By the end of 2025, we'll be able to bring the bigger crusher that will allow us to move the larger jaw crushers. Until then, we have the + 10 coming online in December, and we expect to offset that problem.
+20 is under construction and on time. Southeastern System. First phase of Itabira two raising works is done. Mission accomplished. That will bring flexibility to Itabira to improve the quality. It is a hybrid operation with dams and dry stacking tailings disposals. This is a point of attention when you have dry stacking. We need continuous expansion of area to stockpile, and that rely on continuous licensing process in Minas Gerais. In Brucutu, port construction is ready for now almost three months, but we are still waiting for the final permits. That's a new regulation that came after Brumadinho. That increased a lot of steps and multiple agencies approvals related to the emergency plan. It's taken longer time, but we still expect the operational license by the end of this year.
In summary, I'd like to reinforce some messages here. We are adjusting our production plan based on more realistic expectations about licenses, regulations and project accomplishment. We are working closely with the licensing agencies to improve their capacity to analyze our processes. On the other hand, we always assess the market to understand the demand and the balance of supply and demand. There is no excuse for the headwinds to speed up our production plan. But it is very important to take into consideration. Finally, moving to the next slide. There is a huge transformation happening in the market regarding the decarbonization and the necessity of high-grade ores. We are in a silent transformation. It's Vale. We are running an aggressive action plan to lead the class one market for iron ore with higher premiums. I'll give you more color in the Vale Day in one month.
In Q3, our fines premiums decreased due to the negative margin in the Chinese market, driven mainly by the downstream demand, the downstream sentiment demand. The pellet premiums stayed in a high level with a strong demand for direct reduction pellets. I'll be here for further questions. Now I hand over to Gustavo.
Thanks, Marcelo, and good morning, everyone. Let me start with our EBITDA performance for the quarter. As you can see, we delivered a $4 billion EBITDA in Q3. $1.5 billion lower than Q2. This decline is largely explained by the 20%-25% decline in the benchmark prices for copper, nickel and iron ore during the period. The other two external factors, bunker and FX, basically offset each other out. On volumes, we have delivered a strong quarter across the board, contributing to better financial performance on a quarter-over-quarter basis. Same for costs and expenses, where we start to see the benefit of the efficiency program we launched last year. Just to remind everyone, our objective here is to keep our total fixed cost and sustaining CapEx flat versus 2021 in local currency, and we are on track to deliver that.
Now moving to iron ore all-in costs. Our C1 cash cost ex-third party purchase decreased by $1.5 per ton, mostly driven by higher production and the positive effects from the Brazilian real depreciation. Another important component of our all-in cost structure is freight, which went up from $21.3 per ton to $22.4 per ton. This is explained by two factors. One is the seasonally larger spot freight demand following the strong production in the quarter, as CFR shipments increased over 25%. Some of these cargoes are still in transit and should be recognized as sales in Q4. The other is the lag effect. It takes about 30 days for the bunker cost to be recognized as cost of goods sold.
Therefore, Vale Q3 bunker cost has not yet captured the drop in prices observed in September, and we should see a benefit in our Q4 performance. The premiums we earn in our products also play an important role in our all-in cash costs. The average premium decreased by $0.7 per ton, despite the record pellet premiums contracted in Q3 and an improved quality mix within our product portfolio. This, as Marcello explained, is a consequence of lower market premiums for low alumina products and the absence of seasonal dividends from JVs. All in all, our EBITDA recurring closed at $51.2 per ton, and we continue to expect our Q4 performance to be in line with last year. Now turn to cash generation. Our EBITDA to cash conversion increased from 41% last quarter to 54% in Q3.
The positive working capital variation is mostly due to better days payable outstanding, as we continue to improve the efficiency of our working capital management with clients and suppliers. This one is offset by regular uses of cash such as CapEx and debts, and by about $4 billion of cash returned to our shareholders, reinforcing our continued discipline on capital allocation. Now moving to the next slide. This quarter, we reviewed the expanded net debt concept to be more aligned with the market and have an indicator that better informs management on capital allocation decisions. As a result, we excluded from the expanded net debt concept the provisions for the CFEM tax renegotiation and the dam decarbonization program. These obligations are distributed over a longer period of time and are operational in nature as compared to the Brumadinho and Mariana provisions and obligations.
This change does not affect our target $10 billion-$20 billion expanded net debt, which we continue to see as a very adequate through-the-cycle leverage ratio. Before opening up for Q&A, I would like to reinforce the key takeaways from today's call. We delivered a strong operational quarter across all of our products. On de-risking, we have eliminated five upstream dams this year, reaching target structure of 40% since the beginning of the program. We announced the start-up of the Copper Cliff Mine Complex South in Sudbury, and the approval of Onça Puma's second furnace implementation in Brazil. They are important milestones as we position these metals as a critical supplier for the energy transition.
Finally, we remain highly committed to a disciplined capital allocation, as evidenced by the $3.1 billion dividend paid in September and our continuous progress on the highly accretive share buyback program. With that, I would like to open the call for questions.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. We advise that the questions should be asked in English. If you have a question, please press the star key followed by the one key on your touchtone 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 Leonardo Correa with BTG Pactual.
Yes, good morning, everyone. My first question on base metals to Eduardo. The unit is posting results which are, I mean, below what the company had been doing over the previous years, right, Eduardo? I mean, looking at the annualized EBITDA figure for base metal now the number is slightly above $1 billion, right, in EBITDA. I just wanted to hear more about the, let's say, this path to normalization, right? I mean, I know that several issues have been impacting. We've been seeing maintenance issues and several other issues on the cost side. I just wanted to hear more about this normalization process and how long you think it can last.
On a similar topic, I mean, does this delay the monetization of this base metals unit, right? Because, I mean, results being depressed, I can imagine this could impact, I mean, the perceived value of the assets. Second point, on volumes, on iron ore volumes, and maybe we can bring Spinelli in the discussion. Spinelli, there is a big debate on Vale on how this normalizes as well, right? I mean, how iron ore volumes will normalize in the medium term. The company is running on, let's say, 310 million tons of production now, right? Your nameplate capacity is 400 million.
The market discusses whether 400 million is achievable and/or whether this, let's say, effective production, would be much lower than that, maybe 340, 350. I can understand that you'll give more guidance during Vale Day, right, December 7th. Can you just help us out understand exactly how the medium-term path on Vale is in terms of production increases and, let's say, what is the more realistic long-term targets for Vale's production? Thank you very much.
Thanks, Leonardo. Thanks for the question. I think I'll try to separate maybe and bring Deshnee Naidoo to help as well. Anyhow, let's put this way. It's not fair to analyze a quarter like that because as Deshnee Naidoo mentioned, there was one, like, some carry from one quarter to the other. It's not the number that you should look at as, by the way. On specifics, some of the first quarter and first half of the year events were largely hangovers from COVID, a lot of maintenance that were postponed. I think we're pretty good on track on what we're trying to achieve in North Atlantic with the refineries. The underground mines are improving their productivity. I'm pretty comfortable with the nickel production.
We just finished, I think, the highest quarter since I was there, I think since 2019. Pretty comfortable with the nickel within the guidance. I don't see issues there. As Deshnee say, we have to replace the fleet. We're doing that very well in Voisey's Bay. That's not for me a question. On the copper, yes, more challenges than we expected in Salobo, but Sossego is back on track after the very long maintenance that we had last year. It's going to your second question, I think it's more importantly because this game is about R&R, resources and reserves, and we have the best of all in the world. This is where the value is. We'll fix the asset.
It needs to be fixed, as I mentioned in nickel. I have no doubt about that. In copper, as I said, but the assets are there. The assets are located where you should be. First world jurisdiction like Canada, Brazilian that we know the whereabouts in Carajás with the growth projects. Salobo, I've been there last month, is 98% complete, Salobo III. Our growth plan is there. People that has understanding of value know where the value is. I don't think it changes perspective. They're not buying past performance, they're buying reserves and resource and future performance.
By the way, that's why we believe that ring-fencing the business, bringing a partner, we will speed up this performance that you're asking us to deliver, and we are 100% with you on that sense. But the value is above and beyond that. By the way, of course, you cannot analyze this quarter because it doesn't make any sense. You know that. We already had more than what you analyze as results for this year. But anyhow, I think it's a good point. Again, we're very, very, how can I say that? Very sure that we are in the right track to fix the assets.
The ring-fence will help speed up that, but fundamentally the value's in the reserves and resources, and we have the best and unique ones in the world. I'll pass to Spinelli to go over the R&R.
Leonardo, thank you for the question. You know, first point, we weren't able actually to predict it, to plan the impact after Brumadinho and also Mariana that happened when we changed the way we are mining and disposing the tailings dams in the Southeastern transition.
We got it and we are replanning our growth, our recovery plan to the future. This is the first point, on one side. The other side is we need to change the approach with the agencies, and we just did it. We are closer to them. There is a lack of capacity with a huge amount of licenses that we need to bring online in all the systems, in our system mainly, but also in the Southeastern System. We work differently with them. We bring regularly this volume. We'll give you some numbers and colors in the Vale Day.
Our next question comes from Caio Ribeiro with Bank of America.
Yes, good morning, all. Thank you for taking my questions. My first question is on the different avenues, right, that you're exploring to unlock value in the base metals business. I know, Eduardo, that you recently mentioned at the Financial Times conference, right, that IPO-ING the division was an option that you guys were looking at. There are other options on the table, right? As you've mentioned in the past, you know, like selling a minority stake in the business, setting up a partnership with another miner. I just wanted to see if you can give us more color on, you know, which of these avenues that you tend to be leaning more towards. Also if you can give us a sense on timing, you know, that would also be great.
Secondly, in regards to your value over volume strategy, right? Iron ore prices, they've come under considerable pressure lately. In the fourth quarter of last year, you know, similar situation unfolded. I wanted to see if this time around you would consider removing lower quality or higher cost tonnage from the market to try and protect prices. Thank you very much.
Hey, Caio, thanks for your question. Well, it's true. We've been very clear on the path to unlock value in base metals. As I mentioned in the previous question, is exactly where we see enormous, how can I say that? Amount of value to be delivered. The execution path that we've been discussing, and again, as you mentioned, the IPO, I'm gonna get back to it in a minute. We've been very disciplined on that. We've been communicating to you. First of all, no decision has been taken within our board, but we were going to segregate our assets. We did that.
We just announced that very recently because yes, we see avenues, but the avenues, they have a path to that. The path goes back to the execution of our operating assets, the execution of our growth plan. Within that, we could see a partnership being built. I think this is the most natural, and has been, again, voiced by us in, even in the event that you mentioned and in our calls. We have engaged the advisors to help us on that. If we are able to find partners, because one very strong point here for you and for everybody, we're not selling iron, and we're not selling base metals. Base metal is the best asset in the world, Vale, we keep it.
What we want is a partnership eventually to look at these values that you just mentioned. The word that I used there was eventually, and might be a confusing word for English investors, Portuguese. IPO is an optionality. It's not the one that we believe that's gonna be happening now because of the previous correction. We need to fix the assets still. Partnership can be done now because we can find partners that see this value that we see in this business, help us deliver the growth, help us deliver the execution, help us with creating a new course to go after these avenues. Timing wise, I'll pass to Gustavo because he can give you more color on that. Then Spinelli can come up on the value over volume correction.
Thanks, Eduardo. Caio, on the timing, I think what we've been saying since beginning of the year is that we expected to be able to give you more color at Vale Day, so we continue to work with that timeframe. It's gonna certainly take some time for execution, probably early next year. It's gonna be more the ideal time. You know, stay tuned. I think Vale Day, we will probably be in a position to share more information in terms of the specifics there.
Caio, thank you for the question, and I'll split the answer in two parts. The first one that can address also to Leonardo from BTG. You know, value over volume, we have all the time to check the value part, the volume part of the value. We really have to check, you know, the amount that we're bringing to the market, to not give a problem to the cost curve and to create a whole system. That's the reason why we must take care about the way we're bringing volumes in near future. This is important when we are talking about the mutual long-term production plan. We have a window to adjust that.
It's important to say that. You talked about quality. All the volume you're bringing to our production plan is related to quality. We need to address that mutual long term. Long term, we have
High demand for high-grade ores, even agglomerated products with pellets or briquettes. That's a trend. That's the volume we want to focus on. Every day, Caio, we assess our supply chain. We have a flexibility to hold low-grade ores, concentrate later in China, concentrate in our supply chain, and that's what we do. Today, if you ask me, if we have in our supply chain low-grade ores, we can hold it, blend it, or concentrate. We are not selling in negative margins.
Our next question comes from Amos Fletcher with Barclays.
Yeah. Good morning. Good afternoon, everyone. Couple of questions. First one for Deshnee Naidoo. Just looking at the base metals business, and the cost base at the Sudbury assets, it seems to have blown out to quite a big degree. If I look at the revenue minus EBITDA number at Sudbury, it reached over $1 billion in Q3 against a quarterly average for the last few years, around $600 million. My question is, what happened there? Should we expect it to mean revert in Q4? Second question on Onça Puma, the CapEx for the second and third, it seems to have gone up quite a bit to $555 million against $320 million dollars you spoke about previously. Can I again ask why is that? Thanks very much.
Thank you, Amos. On the first question regarding the cost, as I guided in the presentation itself, you know, and as you said, there's about $300 million in terms of the quarter-on-quarter increase. $200 million of that actually comes from the purchase of third-party material. Let me explain that. The third-party material that we buy is actually concentrate that we buy at market prices. Now, during quarter two, you would recall that the nickel prices were... Well, actually, it was above $26,000-$28,000 per ton, and that led to a very high price.
When we consumed that material, about 60,000 tons at a 10% grade, that affected our cost of about $200 million in quarter three itself. Now to put that number into context and as current LME prices, I will possibly treat about 7,000 tons in the coming quarter, and that price is around $120 million-$130 million. That's the impact of price. And as we indicated, there was inventory that we priced again at a higher price in quarter two that came into this quarter. That's a one-off of $15 million dollars. As with everyone else, we are experiencing inflationary pressure, and I did have some inflationary pressure both on a bit of fuel that came into my Opex services.
Going forward, Amos, definitely not seeing those numbers, and we should see the numbers from quarter one, quarter two, somewhere around the middle of that materializing. On the next question, on Onça Puma Furnace Two. You are right, that number is at a higher capital intensity than we were previously planning to. A big factor there in the last six months when we finalized the estimates, we had a very high inflationary uptick coming into these costs, and we approved it with, in parallel, the team working towards relooking at some of those estimates. Inflation is a big factor there. In addition, I mean, we can't be building, you know, furnaces in 2022 without relooking at the greening of these furnaces.
There is money in the capital budget to make sure that we can continue to work on fuel switching, and we are looking at using biomass down the line as a fuel option. That's the other larger one. We have put some money into the budget for some of the social obligations we have in the region. This is not your typical budget, you know, from a capital point of view, that we would typically see. I think just to also mention that this project does bring a lot of synergies and to the current operation, because as you know, the complex was built for 40,000 tons.
Returning the complex to 40,000 gives us a significant cost benefit, and we're seeing that at least a 15% reduction in unit cost once the project ramps up. I hope that gives you sufficient color. Thank you, Amos.
Our next question comes from Carlos de Alba with Morgan Stanley.
Yeah. Thank you very much. Good morning, everyone. A couple of questions. One on iron ore costs. I think, Gustavo, you mentioned that the expectation for the fourth quarter is to for iron ore unit cost to come down to levels similar to the fourth quarter last year. But we're a little bit surprised relative to our expectations on the third quarter. Very optimistic outlook for the fourth quarter. What can you talk about the outlook for the costs going forward? Every single mining company in the world is facing inflation pressures. How you see that iron ore unit cash costs moving into 2023, maybe beyond that?
On the one hand, you have the benefit of higher production, but again, the inflation costs, inflation pressures are negative. If you can share some color, that'd be great. The other would be in terms of the Mariana negotiations. I mean, Vale has done a tremendous effort to basically turn the page and do everything right to repair the damage that was done in Brumadinho. Obviously, tremendous efforts as well done by your partner, Samarco in Mariana. To finally really move ahead from this situation, I think, you know, the Mariana situation needs to end. If you can share any colors there, will also be very useful. Thank you.
Thanks, Carlos. I'll take both. On cost, yes, we've shown some improvement quarter-over-quarter, $1.5 per ton. This quarter, particularly, we had a little higher percentage of third-party purchase, which impacted the all-in, the C1, particularly, which should be normalized in Q4, as I said in my prepared remarks. In the all-in, you've seen freight coming higher as well. A lot of the drop in cost, especially in September, wasn't yet materialized, but we should see this in Q4. Overall, we should see a better picture in Q4 as we continue to bring volume and some of those pressures reduce. Right? Looking forward for the next couple of years, we'll talk in more detail at Vale Day. Certainly, I think the entire industry is suffering from high inflation.
It's affecting, particularly in terms of fuel cost, being diesel, fuel, and bunker. We are seeing some impact on it. We'll share with more details during Vale Day what is our view for 2023. I think one thing that we are doing very well is we continue to move on our cost reduction program. Remember, we had announced the $1 billion cost reduction. It's moving super well, and that's certainly helping to offset some of those external pressures. On Mariana, look, we are positive about reengaging and reaching an agreement. I think for all parties here, including ourselves, a solution makes sense, and a potential settlement makes sense. We think it's, you know, we'll be able to sit down again and resolve this.
As you said, I think it would be beneficial for Vale and for BHP for sure as well. You know, we are optimistic that within the next couple of months we will be able to resume conversations and hopefully reach an agreement that works for everybody.
Our next question comes from Rafael Barcellos with Banco Santander.
Good morning, and thanks for taking my question. My first question is a quick follow-up on iron ore production. So could you please elaborate further on your production outlook for S11D operations? And in your view, what are the main challenges for Vale to deliver a better production figures in the Northern System into 2023? And my second question is related to your new expanded net debt concept. So could you please give us more color on how was the decision process of revising this concept? And as a result, can we assume that Vale will accelerate cash returns to shareholders after this announcement? Thank you.
Thank you, Rafael, for the question. Well, let's talk about S11D. The nameplate capacity for S11D is 19 million tons. We are below that. Yeah, we had that knowledge with the OBK with the founding of the huge amount of jaspilite that made us change the mine planning and the way we are processing the ROM. What we can expect in stages here, we have the small jaspilite is already done. In the medium term, we expect to solve the problem only by 2025.
We have coming online the +10 , so +10 can offset this nameplate difference between what we are producing today and the nameplate, so that will bring a volume for next year. We can consider that. The +20 is under construction. By 2025, we have an additional capacity solving definitely the problem of the jaspilite. Until there, we have an improvement coming from the +10 . The whole picture for North system, the other side, North Range, we are facing the increase of strip ratio because we've been waiting for continuous license. It is delayed, so it forces us to move more waste.
Increase your cost and you decrease your production volume. What we have to do is keep the path to reach the license to bring the license. N3 is an orebody, not a big one, but it will be important. We already got now the LP, the previous license, so we expect to have the final license by the end of next year. We bring volumes in 2024.
We call it this a small license, so every time we need to have a suppression in the mine or to reduce the radius close to a cavity that we redesign the you know the cave that we have, we have to keep the ICMM view and the IBAMA agents together to speed up this. We've been doing this, but it's not as fast as we can. We are adjusting the plan to reflect this all this sophistication and in the right timeline for that. But that's what we have to do. Bring Gelado now this year in three, and this is small license, try to be as fast as we can, but in the right lane.
Rafael, Gustavo here, just to close on your second question. I think the objectives were, one, to make sure we had an indicator more aligned with market. I think that was one of the reasons why we've revisited. The second one is to have an indicator that could inform us better in terms of our capital allocation decision, right? The items that we took out of the expanded net debt were very long-term in nature, operational in nature. We thought it didn't make sense to have them included in our expanded net debt concept. This at the end just provide us with more financial flexibility.
We've been extremely disciplined over the last several years since Eduardo came, and you should expect us to continue to be very disciplined and focused on cash return to shareholders.
Our next question comes from Rodolfo de Angele with JP Morgan.
Hey, good morning. I think most my questions are already answered, but I just wanted to insist a little bit on what's happening in the north. So the issue with licensing, just wanted to understand exactly what is the issue. 'Cause, you know, those, you know, that operation has been around stable. You had, you know, mining plans defined already. So, you know, there should have been a lot of visibility of which areas need to be licensed. Just wondering what is happening. Is it, you know, the authorities are being more or tougher or, you know, what exactly is the issue? And how is it that it's going to be overcome? Thanks.
Thank you, Rodolfo. Well, many points here. First one, after Brumadinho, we have a huge transformation in the mining business in Brazil. Not only regarding the license, environmental license, but all the permits. This is one point that we must take in consideration. The other point is the capacity of the agencies. Many times we have to prioritize, they didn't have enough capacity for that. That's the main thing that we've been working together with them, bringing a priority to the agency and giving them tools and hands to help them to speed up the process to define the license as a whole.
The mine plan consider that, but your mine plan. If your mine plan consider to get a license in one year, and if you don't get, you have a problem in your mine plan. Every time you have to do this, you made a mess in your mine plan. Two things here as I mentioned, we need to be more realistic in our mine plan to consider that it's tougher. Yes, it's one point. It's after Brumadinho, definitely yes. Don't forget that this is a common I can say wave of you know the environmental push in every place in every world is getting more sophisticated. We need to bring more studies.
This is not a problem only in Brazil, but in every part of the world. The combination of these three factors, we need to implement a different approach. That's what we are doing, bringing more capability to the agencies.
Our next question comes from Daniel Sasson with Itaú BBA.
Hi, everyone. Good morning. Thanks for taking my questions. My first question may be to Eduardo. If you could comment a bit, Eduardo, on how you think the entrance of Cosan into your shareholder base could help you to develop in your strategic operations or your strategic planning. How have been the first conversations or interactions that you've had with members from Cosan? How you receive this increase or this participation that they just acquired in the market? That would be great. Maybe my second question to Gustavo or Spinelli, if you could comment a bit on your expectations for China now that the Party Congress has finished, and Xi was reelected for a new term.
If you could comment a bit on the conditions on the ground that you're seeing for the property sector. Just wanted to move a bit the call towards these operational metrics or operational performance. Thank you.
Thanks, Daniel. Great question because I think we see Cosan moves as a validation of our investment thesis, right? When you look at Cosan with the record, the solid track record that they have on creating growth, people that has this mindset and take this bet on us makes us extremely positive. Our interactions so far have been great in the sense that they see the uniqueness of our assets. By the way, they sense that, as I mentioned in the beginning of my speech, we are materially de-risked. We are extremely compliant with ESG.
I think it's a great movement because somebody with track record that can obviously within our board of shareholders can help us see opportunities, help us unlock value, and see the value, as I mentioned before on my Base Metals discussion. It's only positive. It's a validation of our investment thesis. Then Gustavo, right, I want you to comment a little bit because what about confirmation, right?
Yeah. I'll just say before passing to Spinelli to talk about China. You probably saw a recent report from Moody's reaffirming our rating, but more importantly, or as importantly, giving us an upgrade on the ESG stats. I think this is, you know, one very important external validator seeing all the progress that we've done over the last couple of years, and you've seen Cosan talking about that. I think the company has evolved a lot in the last several years, and we're starting to see some external validations of that progress.
Okay, Daniel. Well, now, about China. Let's split this in short term and mid to long term. Best phrase for that is cautiously optimistic every time Gustavo says that. Coming from the Party Congress, we have some mixed feelings. You know, the negative side, the geopolitical message, you know, no change to the COVID policies in short term. Some neutrality, I think, came from the property. I know that the property is declining, the demand is. This is a bad thing, but nothing, they are controlling the implementation of the three red lines. This is good news, so no disruption is perceived, despite it declining, it is at least being well controlled.
The good side for that of the Party Congress is the infrastructure in manufacturing, though we can see the FAI, so they are betting on that. Their commitment to the environmental goals that will bring an extra demand for our high-grade ores. This is what we heard from that. Macro numbers, we see GDP last quarter higher than expected. We expect a 5% growth for the GDP next year. We see a decline for properties and an upside for infra. As a whole, we see this year, China's crude steel production in 1.02 billion tons around that, and next year above 1 billion below this year.
We have this macro analysis. I think another point is mid- to long-term, we see it remains intact. Stability when the party said stability, it means at least 4-4.5% GDP growth in the coming years. CSP around one billion, big market. Tailwinds in this front. We see a strong demand coming from the decarbonization infrastructure with a lot of stimulus. The remaining urbanization, we need to keep this on track. We have a huge opportunity in China and the consumption, the steel intensity in the construction. This together with the environmental commitment, we see the mid- to long-term our thesis remains intact.
Our next question comes from Tyler Broda with RBC.
Great. Thanks very much for the call today. I just had a question. The West 3 project, you mentioned that that's been halted now with the blending facilities in China. I guess on a wider basis, you know, you're according to our analysis, you'd be at record levels of inventory at the moment. I mean, how does that, the canceling the West 3 project change your blending strategy? Secondly, I mean, how much capacity do you have to be able to hold iron ore within the system? The second question I wanted to ask is just around the base metals progress there in terms of the partnership.
I think it sounds much more like this could be someone that's providing more of an industry partnership, I guess. Eduardo, from your thoughts. How do you sort of play off the difference between the benefits from a more financial or downstream partner versus a sort of a peer? Thanks very much.
Thank you, Tyler. Well, if you see the numbers of inventory in China, actually it is low. We are hitting now 130 million tons as a whole in China, and our inventory is in the low level also. We are confident we don't have any problem to raise any inventory even for our operations blending. We have spare capacity for that. You know, to raise any inventory even for our operations blending. We also can add the capacity we have in Malaysia in our center. Regarding the West 3 project, that's an expansion in Shulanghu Port and the main entrance of the Yellow River Delta.
It's more related to a Chinese strategy to reorganize their establishment of the CMRG, the China Mineral Resources Group. CMRG is they have the mandate to expand or to optimize their services. We are really close to them to make this happen. I think they are holding the decision because of their organization. In terms of strategy and synergies with them, we are totally aligned, but we don't see any. This is not a message of that is enough inventory or capacity. It's just a question to reorganization of the Chinese side.
Okay. Thanks, Spinelli. Tyler, I think I'll ask Gustavo to help me. He's leading the process. Just to get clear. I think when you look again, it's a question of value, right? We want partners, not selling. We want people that perceives the same value that we do perceive in the assets. Otherwise we won't do it, by the way. It has to be. I don't see a peer in this case because it doesn't make any sense. Gustavo can give you more color on that, okay? We want partners and partners that thinks like us.
Yeah, I think Eduardo covered well. Look, we have a very unique asset base here. We are sitting in tremendous amount of resources in very good jurisdictions. They are very well positioned for two of the most relevant macro trends of our generation, right? The mobility/EV electrification. So everybody wants to be closer to us. That's clear. We hear that loud and clear from the market. We are evaluating what is the preferred path. But as Eduardo said, it has to be, if you were to partner with someone, it has to be with someone that believes on those long-term fundamentals, is willing to invest, is willing to create probably the most exciting, future facing commodity platforms in the world. That's what we are after here.
This concludes today's question and answer session. Mr. Eduardo Bartolomeo, at this time you may proceed with your closing statements.
Well, thank you. Thank you, guys. I think, thanks for the interest and, I think this quarter, it really changed a little bit, the perspective. It was a solid one, in terms of production. Cost came in line. Freight, as Gustavo mentioned, eventually disappointed a little bit, but not because it's fact-based. It's a question. It's just a moving average. I believe we are doing the right things around cost, as Gustavo mentioned. I think it was a solid quarter. We need to do much better, but I think we're in the right path. As we've been saying since day one, we'll focus on people, on reparation and safety. We have materially de-risked the company. We have materially de-risked.
The case of the characterization on the dams is one evidence of that. The mood is changing rates is another certification. As a lot of the questions were done, I think we are taking profit of the uniqueness of our portfolio. We're able to deliver at Salobo III. We start Onça Puma, Voisey's Bay, Carajás. As Spinelli went on discussing how we can improve and accelerate that. The assets, the resources are there, and we're gonna get them out on the right time because we have a unique portfolio in unique time of the world. We've seen all the geopolitical tensions, but nobody questions that the way we are, humanity has to face the climate change, the challenge.
Vale, I believe, without any doubt, is one of the best miners and the best positioned miners in the world because we're good on both. We see this not as a threat, we see this as an opportunity, and we want to help the climate agenda and of course, create value for society. That's why we exist, by the way. Otherwise, there's no reason to be a miner. Then lastly, I think, not necessarily to be reinforced as has been discussed as well. We will be extremely disciplined. We're here to create value to our shareholders, to our society, to our employees, to all the stakeholders. We will take time and, as I used to say when we get asked at Brumadinho, it's not a sprint, it's a marathon.
It's a marathon that we still have a lot of gas to get it to the final end. I think we believe in our team and our employees are doing what it takes. I hope to see and listen to you in the next call. Thanks a lot. Keep safe.
That does conclude Vale's conference call for today. Thank you very much for your participation. You may now disconnect.