Earnings Call: Q3 2019

Oct 24, 2019

Good morning, ladies and gentlemen. Welcome to Vale's Conference Call to discuss 3Q 'nineteen 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 The recording will be available on the company's website at valley.com@theinvestorslink. 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 slides change, has a few seconds delay in relation to the audio transmitted via phone. Before proceeding, let me mention that forward looking statements are being made under the Safe Harbor of the 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. Eduardo Gisales Bartolomeo, President and CEO Mr. Luciano Cioni Piris, CFO Mr. Marcelo Espinelli, Executive Officer for Ferrous Minerals Mr. Mark Travers, Executive Officer for Base Metals Mr. Carlos Medeiros, Seifi and Operational Excellence Executive Officer Mr. Alexandre Pereira, Executive Officer for Business Support Mr. Alessandri D'Ambrosio, General Counsel Mr. Juarez Aliba, Director of Coal, Strategy and Mineral Exploration and Mrs. Marina Quintao, Director of Peoples. First, Mr. Eduardo Bartolomeo will proceed to the presentation on Vale's 3Q 'nineteen performance. And after that, he will be available for question and answers. It is now my pleasure to turn the call over to Mr. Eduardo Bartolomeu. Sir, you may now begin. Okay. Thank you. Good morning, everyone. I would like to begin our conversation about the 3rd quarter's results by recalling 2 messages, which I have been reinforcing since I took Vale's leadership. First, that we will fully repair what happened in Brumadin. 2nd, that we are committed to making Vale one of the safest and most reliable mining companies in the world. To recap, our priorities are safety, people and reparation. 9 months have passed after Bruma Gino and we continue to be extremely committed to these three words. We are paving the way for new forms to make our business better, safer and more stable. We are working day after day with a very high level of rigor in the manner of our risks, but also with a very keen eye for everything that society is demanding. As you can see in the slide, our objective is the full reparation of Brumadinho and each day we've moved toward this goal, taking the lead to bring dignity back to the affected families and communities. 1st, we have opened a number of negotiations front to advance with compensation as quickly and broadly as possible. Public authorities have been key players and together we have been able to close 3 very important agreements addressing emergency, civil and labor indemnities. Over BRL2 1,000,000,000 or around BRL500 1,000,000 have already been paid to individuals in compensation for material and model damage. As for the labor perspective, we have signed agreements already considering the families of more than 230 victims. In addition, we have entered into another 22 agreements with different stakeholders covering a variety of objects, including environmental remediation. On the environmental front, the second water treatment station was already delivered and the work of daily removals and treatment continues at a fast pace. Next slide, please. Well, speaking now about safety, I want to reinforce this message. We are working intensely to decharacterize 9 upstream dams. The Fernandinho and the 8 B dams will be completely decharacterized in 2020. Well, next slide, please. I mentioned a little bit what we are doing outside Vale. Now I would like to refer to some changes that we are taking place within Vale. A very relevant step for agorominance was to open more informations, channels and discussion for us about risk management in the company. We currently have 4 specialized committees, one which is fully dedicated to geotechnical risk management. We have also reinforced our models of lines of defense with the new Safety and Operational Excellence Executive Office, which already has a work plan in place. In our BIM assessments and management, we're implementing a very high level of rigor with the most conservative methods. Thinking on our portfolio management, the company's assets on a global scale are passing through a risk assessment at a fast pace. We want our asset portfolio to represent the value of the future. I will not anticipate further details today, but I'll give you a better view during the Vale Day in December. Okay, next please. With relation to our business, we are actively working to reduce Vale's uncertainties and achieve our objectives. Our 3rd quarter results indicates that we are on the road to stabilization. Please remember that we said that the 2nd quarter was a transitional period when we started to resume operations with a strong impact of fixed costs and demurrage in the C1 and also a large impact from stoppage expenses. Well, in this Q3, we have already moved towards a higher normality. As we anticipated, we had higher volumes, higher cost dilution and a good reduction in C1, above $2 per ton. Brucutu is operating and we have resumed part of the dry processing at the Vazin Grandeur complex. In the Northern system, production headed by a result after heavy and unusual rains that occurred in the last quarter. Please, next slide. Well, with this performance, as you can see in the slide, we are sustaining a strong cash generation. Another point that deserves your attention are the provisions. As expected, we had no provision adjustment in this quarter. What we have done is the gradual disbursement of amounts provisioned while paying indemnities and various initiatives that we have developed related to Brumadin. As for the nickel business, we had higher productivity in this quarter with greater stability at the refiners in North Atlantic and Asia. We expect as well a stronger Q4. In Brazil, the resumption of Ronsa Puma was a symbolic step toward the stabilization of production as well in the base metals business. Please. Well, in this context of stabilization, I want to highlight that we are working to ensure that our asset portfolio and operations represents the value of the future, a value well positioned in a scenario of growing demand for social and environmental responsibility. The flight to quality is a necessity. Currently, there is a higher offer of better quality product in the market, but that means a moment of temporary imbalance. We believe that the demand for better products will continue to grow. As some of you may have seen in the Investor Touringale October, Vale has a great potential to contribute to the reduction of green gas emissions by the industry. Therefore, we are evolving to ensure the best and most flexible product portfolio in this new reality. Okay, the next slide please. As for capital allocation, I've been repeating this message and I will do it one more time. The payments of dividends or buyback depends on the progress of preparation. Clearly, we have made progress in this process and I believe that at some point, we will have the appropriate conditions to talk about dividends, but that moment has not yet arrived. In the meantime, we have some options for capital allocation with discipline. We have recently announced bond repurchases to continue on a debt reduction path. As I said before, I hope to bring you a clear idea about this team at Valley Day as well. Okay. To conclude, I would like to refer to our guidelines to reduce Vale's uncertainties. We have been working hard on each of these four points, starting with Brumadin. First, I believe that reparation is key to building a better value. Our governance is getting stronger and our risk management evolves every day. In this quarter, we took important steps towards stabilizing iron ore production. At the same time, we are working to have a portfolio that is even more adjusted to market demands. Finally, I reinforce that we will continue with our discipline on capital allocation. Well, as I said, with the commitment of our entire team of more than 70,000 employees, we will build a valley that is stronger, safer and more reliable. With that, I would like to thank your attention and pass the word to Luciano, who will give more color on the Q3 results. Thank you. Good morning. Four topics I would like to highlight, starting by in the Iron Ore Business. A note on the costs. As you've seen, we've delivered a reduction on C1 cash costs. We're guiding for a further reduction of $1 to $1.5 in the 4th quarter. And going forward, additional reductions are very linked to the resumption of production. We're still operating at a level of $2 to $3 above what would be normalized costs, even after the 4th quarter reductions. The reason for that is our production flows, especially in the South, are very much hindered. We're trucking or where we didn't want to truck. We're not loading at the right loading points for our railways, we are not blasting the mines, we are in some cases using dismantling using mining equipment. This all adds to costs. Also within IOR, freight rates have increased, our average freight rates importantly, in this quarter. And that had to do with the sudden increase in spot rates following the restart of Brucutor. What we did was we had volumes, which were contracted on 1- to 2 year contracts of affreightment. We sold these contracts in the market because we didn't know if we were able to use them in order to for Brucoutou or not. And once Brucoutou restarted, we had to go back to the market and rehire freight, but now at much higher rates and exposed to the spot market. This has been normalized. And in the Q4, you should expect a reduction of Vale's freight and a further reduction on the average of 2020. However, slightly higher freight rates in the Q1, but slightly lower on the Q4 reductions across the year with the installation of scrubbers and less exposure to low sulfur oil with the IMO regulations. 2nd, on the nickel business, just wanted to call your attention to the 30% hedging of production. We have very strong CapEx outlays in the nickel business next year and the following year, especially with the completion of the Voisey Bay underground mine expansion. Because of capital discipline, the businesses have to stand in their own 2 feet, and therefore, 30% of the nickel production was hedged after the spiking prices following the Indonesian ore ban. 3rd, on the cash flows. As you've seen, we had USD 3,000,000,000 of cash flow generation, which together with US1.8 billion dollars of funds, which were freeze and were released for a total of US4.8 billion dollars less the acquisition of Ferrous led us to $4,300,000,000 of total cash inflows, which is exactly how much our net debt decreased in the quarter. Some things helped cash flow generation, some things didn't help. On the positive side, we had a €900,000,000 positive effect on working capital, of which about half of it comes from the collection of invoices issued in the 2nd quarter at very high prices and the outstanding invoices from the 3rd to the 4th quarter, they are accounted for at much lower prices, a very, very big difference. So you see this change in working capital because accounts receivable goes down. But the nature of it is collections from the very high prices of the 2nd quarter. So this is not something that should be reversed. On the other hand, about $400,000,000 comes with things that we will need to pay in the following quarters, especially suppliers as investments accelerate throughout the end of the year, some provisions for variable compensation for our employees, freight payments, leasing payments and the like. So you should expect $400,000,000 to reverse over the next two quarters. Calling your attention also for the amount of disbursements related to Brumadin, dollars 386,000,000 were disbursed against provisions and another $225,000,000 were disbursed against EBITDA. So more than USD 600,000,000 and this should be a good proxy of what to expect going forward over the next many quarters. So this is an important reduction in cash flows going forward. The $225,000,000 for Brumadinho come mostly from day to day expenditures that are not provisioned for. For example, the 400 people that are working on the reparation are employees of Vale, the source of water for the populations around the river, the operation of the water treatment stations, the monitoring of water, small civil works of reparation that or have smaller values and do not relate to a specific legal agreements. So again, as I said, this should be typical going forward. And again, also something which was nonrecurring in the quarter was the USD 243,000,000 that were paid as premium for the retirement of the bonds that Eduardo mentioned. So those bonds were trading above par, so we had to pay a premium in order to retire them. That reduced our cash flows. So all in all, the factors that helped our cash flows are similar in magnitude to the fact that helped that decrease our cash flows. So USD3 1,000,000,000 is very much a proxy of what the business effectively generated in the quarter. Lastly, just to comment on net income. Some of you might have noticed that the financial expenses have increased in the quarter. There's US486 million dollars noncash charge because of the mark to market of our participation debentures. They have increased in price by almost 20% in the quarter. They lagged the increase in iron ore price. Probably part of this price increase should reverse in the next quarter as iron ore prices have come down. Those debentures are very illiquid, so they tend to lag iron ore price movements, and therefore, part of this $486,000,000 charge should reverse. We now open for questions and answers. Thank you. Ladies and gentlemen, we will now begin the question and answer Our first question comes from Carlos De Alba, Morgan Stanley. Sir, you may proceed. Yes. Good morning, everyone. Thank you for taking my question. The first one, maybe Luciano, just to clarify, so the almost $600,000,000 disbursed related to Brumadinho, about $346,000,000 on coming out of what was provisioned before and the $225,000,000 that went against EBITDA. So this is something that you expect to be more or less recurrent on a quarterly basis for the next few quarters maybe until late 2020 or first half of twenty twenty one? That's my first question. And my second question is, given the around $3,000,000,000 normalized cash from operations that you expect to generate per quarter going forward. What can we expect and what are the next steps or the road map in terms of liability management? What do you want to tackle given that the repayment of dividends or the resumption of dividend payments is still unknown. What do you want to tackle? When do you expect that we're going to see some announcement in terms of what other liabilities the company will pay with this strong cash flow generation? Thank you. Carlos, thanks for your question. Yes, you should expect similar disbursements related to Brumadinho going forward. Things that could abbreviate part of those disbursements are, for example, if the populations resume sourcing water from the river, then you should see some decline. But whilst we're still waiting for good news and that's a conservative assumption of what to expect going forward. On the $3,000,000,000 normalized cash flow, I didn't say that we should generate $3,000,000,000 each and every quarter coming forward. Remember that there is some seasonality in Vale's cash flow generation, tends to be stronger in the 3rd Q4 and less strong in the 1st and second. So this is a normalized cash flow generation for a Q3 for Vale, just this note. In terms of liability management, there are some non debt liabilities that we want to address. 1st in line are the preferred shares of MBR, which is a subsidiary that holds some iron ore assets, and there's a financial investor that holds those preferred shares. It's been very we've been paying a lot of dividends because of iron ore prices on those preferred shares, so we intend to withdraw those. We're looking into some lease contracts as well, and you should continue to see gross debt reduction given that the carry is clearly negative. So not only net debt will reduce, but also gross debt needs to come down in order to eliminate this carry. And as regards dividend payments, as we said, we linked it very directly to reparation efforts, and we don't see right now as having the conditions to resume dividend payments. Thank you. Our next question comes from John Brent, HSBC. Mr. John, you may proceed. Thanks for taking my questions. I first wanted to ask you about the iron ore premiums. So it sounds like you're pretty convinced that we'll return to normalized levels. I'm just wondering what gives you the confidence? Is it an improvement in sort of the Chinese steel environment and improving margins there? And if we don't see that improvement that you're expecting in the next 3 to 6 months, would you consider potentially decreasing your the quality of your product portfolio and maybe shipping lower quality products? I guess that's my first question. And the second question, just sorry to ask about the capital management. What else would you consider doing? I mean, the shareholder debentures, is that something that you could look to potentially buy back and get rid of those? And on the dividends, depending on how the Q4 shapes up, it would appear that you'd have a net profit for 2019. So would you be obligated to pay the minimum 25% dividends in the Q1 next year? Thank you. Hello, John. This is Marcelo Spinelli. Thank you for the question. Regarding the premiums, let's talk about the fines premiums. You're right, it depends on the Chinese margins. We see still see a pressure on the narrow margins in the steel business in China. Obviously, it depends on the price of the flats, But the supply demand balance is more to decline the plats gradually in the next year. So this can make the pressure of the constraints of the margins better in this case. On the other hand, we have another component of this, the premium price that the concentrates in China the competitors in China. Most of the mines came after the problem in Brumadin and also the disruption in Australia. Almost 30,000,000 tons of concentrate are leaving the market in the next we see this leaving the market in the next two quarters. We also have a reflection of the other concentrates that came to the market. So this is a gradual process. We still see these concentrates bothering the premiums in the next quarter. But gradually, we can see the premiums for Carajas and BRBF going up after the concentrate. We don't expect to we are working hard to resume the operation. We see this as a fact of the higher price of the plats and this process will decline the plats and will recover the premiums. John, we do not intend to withdraw the you named it shareholder debentures. I understand you're talking about the participation debentures because they are extremely expensive right now because of the increasing iron ore prices. So there's a disconnect between the price of those debentures and the price of the share price, for example. On the what else to do, there's something to highlight, which is although the headline net debt is just USD5.3 billion, one has to remember that we still have USD4.7 billion provision to face the Brumadinho expenditures. So at this point in time, we're considering this liability to be like an expanded indebtedness for the company, and we have to have clarity on how this is going to progress in order to be more bold in terms of retiring other liabilities. So you've heard many times that we are targeting a net debt of US10 $1,000,000,000 As a coincidence, if you just sum up the US5.3 billion dollars with the 4.7000000, you get exactly to 10,000,000,000 U. S. Debt. So that's something we want you to have in mind. We are having a large view, a comprehensive view of our indebtedness at this point in time to be on the conservative side. Next question? Our next question comes from Timna Ternes, Bank of America Merrill Lynch. Yes. Hey, happy Friday. Just wanted to ask a little bit about the pellet premium and the Samarco update that I've heard you're getting closer to perhaps a restart. Just thoughts on the pellet premium and Samarco, please. And then my second question, I just wanted to dive in a little bit more to the thoughts about Green Pig HBI. China has been moving slowly toward adopting more electric arc furnaces, but the constraint has been the high cost of scrap. Do you think that this additional volume, 1st of all, is it short term or long term? And will it cannibalize your existing sales to China? Or is it kind of a necessary evolution to complement your and sustain your existing sales? Thanks a lot. Hi, Timna. This is Penelli. Thank you for the question. Talking about the pellet premium, the dynamics of the market is quite different from the fines. You used to have annual negotiation of the premiums with our clients after the disruption of offer and the index that went to almost 130 dollars with a $60 of premium price, the pellets almost reached 200 dollars in premiums and make a lot of pressure made a lot of pressure in our clients and the sustainability of their business. So as a company that we are really focused on our clients, we decided to adjust the way we negotiate the premiums in a quarterly basis. Just then these changes happened to the Q3 and we are now moving forward with these dynamics. And considering what is going on in the market, this scrap cost is a key element for this dynamics. After China, they closed the market to import scrap. There is the price went down and also very important consumer of scrap that is Turkey is under pressure in their production there probably they will reduce 11% to 12% of their production. And there is a lot of scrap available that made a lot of pressure in our reduction pellets in the market. So we just adjusted the production to guarantee that the premium the prediction, the volume is not over volume to the market. So that's what happened in the pellet premium side. From the second question of HBI, well, we are in the process to seek what is going on in the market. We have many legislations around the globe. Europe is leading the process of the carbonization of business. And in our chain, the steel businesses, they have to make a lot of effort in the future in the next 10 years. So what we see that we need to be ready for the right portfolio to guarantee a feed the iron feed for what the client will need. HBI, it's a possibility to solve part of the problem of our clients. And what we are doing is to anticipate the movements and seek the technology, the right technology and be ready to lock in any perspective of iron ore in the future to feed the right process or the right way that our clients will solve this problem. So we are really committed to them and we're going to check and see what will be the right solution for each market. And HBI is part of our portfolio to understand that we will be or not a trend, but we will be ready to be the producer and the supplier for the iron ore for the future. We have the best iron ore in the market, and this is very good for this problem to solve this problem. Okay. Just to add on Cristinelli, Eduardo speaking, it's not a move downstream and it's not cannibalizing our main product. So it's a matter of facing the reality, the scraps are going to increase, the need for a green product is going to increase and we're going to be able to supply that if the client comes together with us. So it's a process of joint ventures or ideas together to fulfill a need, a niche, but necessary to protect our core and not to move downstream. And Luciano is going to give some clarity on San Marco because we are very optimistic that we're going to have the license today. So as you wish, Timna, we hope to have a good Friday today and receive the permit for San Marco restart. We will issue a press release once it happens to give the full information to all the markets at the same time. It will contain estimates of when Samarco will restart, what is the forecast for volumes going forward and some details about the restart. Just giving you context, as you know, Samarco does not have tailings disposal systems. So that's a big constraint for a full Samarco restart. And that's why you're going to see what you're going to see on the release. But let's await for the good news and the details are going to be known to everyone. Our next question comes from Gwen Spoor, Macquarie. Two questions from my side. The first one is just a thought on some of your the sort of, let's call them the poorer performing assets in the portfolio at the moment. So obviously, Mozambican Coal and V and C. Just your thoughts on when those may turn EBITDA positive. And perhaps if I link that to your earlier comments on a risk assessment and having the right portfolio for the Vale of the future, if you could just make some comments around those. And then just on the hedge, just so that I'm totally understand, my understanding is the hedging is just for 1 quarter or does it go until the end of 2020? I wasn't quite sure on that. If you can just have some clarity around the nickel hedging. Thank you. Hey, Grant. Thanks for your question. First to get back to you on a broader view. It's true. We're revising all the portfolio, not only the low performing ones. The matter is not only financial performance, but a holistic view on risks. So you'll get more information, as I mentioned on the call, when we're able to discuss that after our strategic cycle. But I will ask Marc Travers to talk a little bit about VMC. I was closely linked to it before, but I want Marc to detail a little bit more to you what the strategy is to get back to a better position and Juarez to detail a little bit more about Mozambique. Please, Marc. From an operational perspective and profitability perspective, the results have been quite disappointing to date. With respect to the question of getting to EBITDA neutral or positive, clearly stabilization of production would be necessary. Clearly higher nickel prices that we've seen and cobalt prices will help, but we really do need to find a stable position in New Caledonia. But however, I think because of the disappointing nature of the results, we really are evaluating all options for the operations and looking for a basis for stable operations with good cost performance and operating performance. We expect to be able to inform you of our conclusions about what those viable solutions are in the near future. In the meantime, we have taken some steps to moderate costs and also to protect or to minimize capital expenditures. We've rescoped and extended the schedule of Project Lucy, which is our dry tailings project. We've extended that out a couple of years and really significantly reduced the capital in that project for next year and the year after. Yes, sorry, I will repeat. Regarding Mozambique, we are facing a lot of problems this year and most of them related to maintenance. We have problems with maintenance of mine equipments. We have problems with maintenance in the beneficiation facilities. But we also have some problems related and they are consequence of the previous ones that availability of our run of mine, the yield that we are producing products in our beneficiation facilities, the ratio of coking coal and thermal coal, everything they are all connected. So we are I can't guarantee to you that the maintenance of the mine equipments is already done. We recovered very well. So currently, we are running at full capacity demand. We are reaching in the last 3 months almost P300,000,000 per annum written in the mining operations. The beneficiation facility, we are currently working very hard on planning and programming the maintenance we will do next year because we need this buy to buy spare parts and things like that, bring some mechanics and people for their work of maintenance. And that we start doing this in March next year. I think by the end of first half of twenty twenty, the beneficiation facility will be ready. We'll make some change in the flow sheet as well in order to improve the quality of the products. So we are quite sure that we can finish the ramp up of the operations by the end of 2020. And for sure in 2021, we will return to a positive EBITDA, right? I have no doubt about that. Regarding the review of portfolios related to Mozambique, we always take a look on these issues. And the company, after we finish this work, in other words, by the end of next year, we can discuss further the situation. Grant, on the hedge, we have hedged to the end of 2020. So each and every quarter, 30% approximately of our expected production. Our next question comes from Alex Hacking, Citi. Yes, thank you for the questions. I have two questions. First, very specifically on iron ore. Are you getting any indications from steel mills in India who are looking for iron ore next year? Obviously, a lot of news and headlines around the auctions of the concessions, and I'm wondering if the mills there are getting nervous. And then secondly, on nickel, Mark, thanks for the color on VMC. I guess, could you just give us an overview of the other major initiatives that are going on in base metals? I've lost track a little bit of that with Brumadinho and so on. Where are we in the turnaround process? I know you guys have kind of redesigned the Atlantic Basin flow sheet. You've taken quite a bit of production offline. I guess, what's next? Thank you. Alex, thank you for your questions. This is Spinelli. We are seeking for opportunities in, but we don't have any information about the process yet that they are under new concessions, but we don't have any further information yet. Mark, please. The base metals, we have a major initiative to turn around the base metals business. It's been underway for more than a year. I would say the primary focus through this year has been to really invest in our assets and make us a stable and predictable operator. We've really put a lot of effort and money into our asset integrity, rebuilding our maintenance programs and really making sure that our assets are there to perform on an ongoing basis. And maybe just to comment a little bit on how things are going. As Eduardo was telling us earlier, we saw strong Q3 production. We saw the refinery stabilize in North Atlantic. So the in Sudbury and the UK as well as we came out of planned maintenance in the Asia refinery. So a good Q3 performance in nickel and look very I would say look very good for Q4 with all the refineries going well. We've seen significant improvement and stabilization in the mines in Canada, which has been fantastic, leading to some improved copper production this year, which has been a real bonus for us. In terms of some of the other assets, I would say that Indonesia has really turned around nicely towards the second half of the year as we got through some major maintenance in the first half. Producing well costs have come down and EBITDA and cash flow have picked up quite nicely. So looking very positive. In On Sapuma, we're very happy with the court decision that allows us to continue. And after being down for 2 years in the mine, it's taking a little bit of time to get back up that we're going to see that coming back around November. And the processing plant is using stockpile ore, which is a lower grade. So once the mine comes together with the plant, we're going to see some better production and we'll really benefit from that next year. In Q4, we're expecting a little bit below 4,000 tonnes of ferronickel from the restart of Ansepuma. And in maybe a little bit of a comment on copper in Brazil. Salobo has performed extremely well in Q3 and expect strong performance through Q4. We had record production in July, great costs, record gold production as well. At Sasego, we've struggled a little bit with some asset availability issues, but we look to have that stabilized in Q4. And I've already commented on New Caledonia. Mark, if you allow me just a few additions to that. So with all this, the expected performance in the Q4, we expect at least a 20% about 20% increase in nickel production. So because we're not going to have any major maintenance in the Q4. Also, you might have seen the news about our signing the heads of agreement with Indonesian government for divestiture in Indonesia, important step to renew our concession rights there. The resumption of the prior levels of production in nickel, especially in North Atlantic, it's contingent on the completion of Voisey's Bay mine extension because I don't know if you remember when we decided to do the project, we delayed by 1 year the decision. As a result, the current open pit mine is not producing at its full capacity in order not to have a gap in production because of that delay in the future. But we continue to have lots of options discussing also we mentioned last year on Validea a potential agreement with Glencore to bring in a new ore body with nickel and copper additional production. And we are very optimistic also on partnerships in Indonesia, whereby without any capital, Indonesia by itself will be able to finance expansion opportunities with partners. Our next question comes from Sergey Donskoye, Societe Generale. Yes. Thank you very much. I have two questions. One very short. Could you provide some update on what is your CapEx expectations budget for this year? And as we are approaching 2020, what do you think it will look like next year? And secondly, one thing going back to Obrumadinho expenses, one thing I don't quite understand. If I understand it correctly, you spent about $600,000,000 last quarter, of which roughly 60% was charged against provisions and the rest was charged against EBITDA. And you expect this level in the coming quarters. So it sounds like you have pretty good visibility. And then the question is, if you have such good level of visibility, why your provisions don't go higher? Why you don't add to those provisions the amount that is being charged to EBITDA now? Sorry, if it's a very basic question. Sergey, on capital expenditures, we should end 2019 with something around 3 point $6,000,000,000 The rhythm, the pace of execution was also jeopardized a little bit because of Brumadin, especially in the beginning of the year. And also, we had the depreciation of the Brazilian real that lowers capital expenditures. From 2020 onwards, we continue to expect capital expenditures to be a nonissue. We continue to obviously, we will update guidance in Vale Day, but we continue to see normalized levels of CapEx very similar to what we've announced before. There are some studies being done now to accelerate the filtration investments that might have some impact on CapEx, but we're talking just very few 100 of 1,000,000 of dollars. So some things we are considering as a result of what happened in Brumadin in order to increase dry stacking of tailings. But nevertheless, the picture is pretty much stable and boring. In terms of Brumadin expenditures, it's interesting because part of this the expenditures which are charged to EBITDA, for example, the wages of the reparation team, right? So from an accounting basis, I cannot charge provision for those wages. So these are Vale employees. A lot of expenditures, they relate to the water, the lack of water supply. So we are supplying water for the nearby communities. We are operating the water treatment stations. And for example, if all of a sudden we have a permission to resume sourcing water from the river, those things can change very quickly. So we are adopting a more conservative guidance, guiding you that this should remain stable over the coming quarters, but there are upsides. If things change, those expenditures could reduce all of a sudden. Other examples, people who are still in living in hotels and for them, which for which we're providing food, those situations also can change. So there's not a basis for identifying precisely a very well known liability to make a provision when it relates to those ongoing expenditures. So therefore, what I'm putting out for you is just a gut feeling of how we see things going and how they should translate on the income statement on this portion of expenditures. Our next question comes from Tyler Brodah, RBC. Great. Thanks very much. All my questions have been answered, but while I'm on, I guess, we've seen the freight prices start to pull back here. I guess, just would you be able to give us an update on sort of how you see the freight market developing through 2020 with IMO and just from your perspective? Hi, Tyler. This is Pinelli. Thank you for your question. Well, what we see well, the IMO is coming on January, the use of loss of our bunker. We have a difference today between both bankers about is about 2.50 dollars What we see next year, we have this impact, but at the same time, we have actions to go to make effort for that. So the first one is the scrubbers. We are in line with our the installation of the scrubbers in our fleet. And in the end of next year, we're going to have almost more than 70% of the vessels with the scrubbers. Also have the Valemaxes that are coming and also the Guayiba Max, so they will have an impact in freight and also there will be with the scrubbers already installed in the vessels. And we see the Perkin with these actions have the same level of freight. We expect something around $18 like we have in this year. Our next question comes from Peter Guischenko, Barclays. Hi, good morning, good afternoon, gentlemen. Just wanted to follow-up on your comments related to Samarco. I was curious if you can provide any update on your recent thinking on the restart of actual production kind of time line that you have in mind. Also, do you expect the amended business plan to be materially different or somewhat different from prior plan? I mean, those are my questions. Peter, because of the sensitivity of the information, this will be known through a formal release to the markets once the restart licenses is granted, which should happen today with the answers, specific answers for all those questions. The only context that I can give you right now is the former business plan was made before Brumadinho and there were some Teles disposal solutions that Samaco explored and defined prior to them. After Brumadinho, there were some changes in the legislation, local legislation, and some structures started to be deemed to have dam characteristics. So for example, if you deposit tailings on an exhausted pit or if you stack tailings on a certain area, some of the characteristics of those areas change. So bottom line is Samarco had to redo all its tailings disposals plan. And that's the reason why the revised business plan is different from the previous one, but the details will come out through a press release this afternoon. Our next question comes from John Tumazos. John Tumazos is very independent. Thank you for taking my question and thank you for your service to the company. Could you explain some of the details of the Vargem Grande restarted dry processing? Is the dry processing a temporary measure until dams are rebuild and improved? Can it be improved with dry stacking or magnetic separation as technology improves? And how is the blending? Do you take maybe 7,500,000 tons of 65% Northern ore with 5,000,000 tons of say 55% ore or is it lower grade and you lose the quality premium, does it cost $5 to bring the northern stuff to the south? Does the blending cost $1.5 or some different amount per ton for handling? Excuse me, if you could just explain the dry processing and the restarts? Hi, John. Thank you for the question. This is Marcelo Spinelli speaking here. Well, let me give you some colors in the presumption of Virgin Gernje. Virgin Gernje is today, we are with Pico and Boburas mine, they're coming. This is a dry processing operation. The limitation here that we don't we cannot use the dams now for the production. We expect to have Maravillas 3, that's a dam that is under construction in the end of next year. So after that, we're going to have the wet processing. So regarding the magnetic process, we are installing the filters in this operation. In 2020, it will not be ready yet. So we'll be ready for the production of wood filtering. And also we are adding the magnetic separation for the process after the filtering. So what we can expect of the for the quality in this during the dry processes? That will be a high silica product. We are using the high silica to blend in China for BRBF. With the return of wet processing, we have the pellet feed that we will feed Vazin Grenji a pelletizing plant by the end of the next year. So that's a road map of Vazin Grandji. Today, we have a step by step resumption the permit of the mining agency, just a step by step process. So we're covering now the mine, but we need now we already made the task for the loading in the trains, and the last permit will be regarding the pellet plants. We have high silica product in the first the most of the year, next year. And then end of the year, we after Maravillas 3, we have the pellet feed and the full operation of Vazigeni pellet plant. The pellet plant, we will return with pellet feed from the market. We're buying from the market to guarantee the operation of the pellet plant. And that pellet plant is very important because it's the sole supplier of pellet feed for 1 of the steel mills in Brazil. And remember, I spoke in the beginning about additional logistics costs. And for example, the supply of this client, which is CSA, is being very costly for Vale right now. So the resumption of the pellet because it's been supplied through Tubarron with a very awkward logistics. For example, the restart of the Lopetta plant reduces significantly those extraordinary logistics expenses, so has other side benefits as well. This concludes today's question and answer session. Mr. Eduardo Bartolomeu, at this time, you may proceed with your closing statements. Okay. Thank you. Thanks, everyone, for the participation and for the questions. As we mentioned during the call, clearly, the Q2 was a transition one and this one is a clear stabilization moment for us both for iron ore and base metals. But I want to reinforce one thing very important. Our focus is extremely given to the reparation of Brumadinho and to the improvement in our safety governance. With that, I think our team here thinks that we will reduce uncertainties and make, as I mentioned, Vale a much stronger, safer and reliable company. Okay. Thanks for your participation and hope to see you in the next call. Thank you. That does conclude Vale's conference call for today. Thank you very much for your participation. You may now disconnect.