Ladies and gentlemen, welcome to Vale's conference call to discuss 3Q20 results. At this time, all participants are in a listen-only mode. Later, we will conduct the question -and-answer session, and instructions will be given at the time. If you should require assistance during the call, please press star 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 it's transmitted via the internet as well. The broadcasting via internet, both the audio and the slide changes, has a few seconds' delay in relation to the audio transmitted via phone. Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the 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 de Salles Bartolomeo, Chief Executive Officer; Mr. Luciano Siani Pires, CFO; Mr. Marcello Spinelli, Executive Officer for Ferrous Minerals, Mr. Mark Travers, Executive Officer for Base Metals, Mr. Carlos Medeiros, Safety and Operational Excellence Executive Officer, Mr. Luiz Eduardo Osorio, Executive Officer for Sustainability and Institutional Relations; Mr. Alexandre Pereira, Executive Officer for Global Business Support; Mr. Paulo Couto, Director of Coal; Mr. Alexandre D'Ambrosio, General Counsel; and Mrs. Marina Quental, Director of People. First, Mr. Eduardo Bartolomeo will proceed to the presentation on Vale's 3Q 2020 performance, and 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.
Okay. Thank you. Good morning, everyone. First of all, I hope everybody's safe and sound. Well, it's been more than seven months since we've started managing Vale in a remote way, and one thing has not changed: the safety of our employees comes first. Vale continued to face the COVID-19 pandemic with discipline and a sense of urgency. We maintain our guards very high, and our priorities remain intact. Safety, people, and the reparation of Brumadinho. We have been learning a lot since Brumadinho and transforming our culture and practices for a better Vale. With that in mind, I'm pleased to share that our processes and results continue to improve together with our de-risking process. Please, the next one. Starting with the reparation, our commitment to Brumadinho remains steady. We already disbursed $2.6 billion on the reparation.
The indemnification process continues with about 8,200 people covered by agreements for moral and material damage. 600 people more since our last call. The works for infrastructure and environmental recovery are progressing as well. We completed the water main at Pará de Minas to ensure the supply of water to a city with a population close to 100,000 people. We have concluded the tailing containment structures at the Paraopeba River. Since May, the river has no longer received sediments. Most importantly, we continue to be open for dialogue and active listening throughout the reparation process. This quarter, we delivered the integral reparation plan for Brumadinho, which was built on the community's perspective and submitted in September to the municipality. We are certain that with this, we have a solid plan in our hands to repair the damage and support the development of Brumadinho.
We are having encouraging conversations with the state of Minas Gerais and other stakeholders to get a framework agreement for collective damage indemnification and compensation for the society and the environment. We continue to pursue our goal of reaching a stable agreement for reparation and compensation. Please, the next one. We continue to enhance our safety and dam management. The Engineer of Record is already implemented for 100% of our dams in the iron ore business with improved continuous monitoring. In risk management, our Risk Identification Program, RIP, continues now, including our dams. 59 operational units were assessed since 2019, 42 in 2020, and another 12 sites will be assessed until the end of this year. This program is being applied to our dams as well, with pilots underway in Sudbury and Long Harbour. The HIRA will be fully implemented by 2022 in Vale.
Our new tailing management system is under implementation, and we are doing that by also complying with the ICMM standard launched in August. Our initial assessment indicates close to 60% of adherence to the ICMM recommendations. We want to be fully compliant by 2020. Our ambition is clear: to be world-class and have effective standards and processes in place with a safety-driven culture. I can assure you that Vale is on a journey to become a safer and more reliable company. Next slide, please. Brumadinho required us to become better listeners. We are listening to the communities and society and building a strong and consistent relationship with all of our stakeholders. Based on their demands, we have mapped 52 ESG gaps, which have already closed 31 of them. In 2020, we already addressed five gaps, and five more must be closed by the end of this year.
Our ambition is to transform Vale into a benchmark in ESG practice. In this agenda, another important subject is the protection of the Amazon. Let me reinforce this. We have been operating in the Amazon for more than 30 years. During this time, we have helped to protect close to 800,000 hectares of rainforest, 5x the size of Greater London. In fact, we already protect about one million hectares of forest globally. With those actions, I believe that we will contribute to sustainable mining and act accordingly with our new pact with society. Next one, please. Well, talking about the operational performance of our business, we continued with our plan to stabilize our production. A path that was detailed in great length during our investor tour in September. I'm glad to share that the iron ore production results for this quarter were very strong.
An increase of 21 million tons versus the second quarter, a 31% growth. We had an all-time production record in Carajás. That indicates that we're making progress with our plans for production stability and initiatives for operational excellence. Spinelli will come shortly to explain the dynamics between production and sales for the quarter. In base metals, as anticipated last quarter, some maintenance postponement was strategic before the pandemic. We have normalized that routine and expect better results for the fourth quarter. In relation to VNC, we are taking steps to place it in care and maintenance in 2021. We also have a new group of potential investors interested in the asset. All possible solutions contemplate Vale's exit. In coal, this was also another challenging quarter, highly impacted by weak demand, which continued to weigh on our production.
On a positive note, we expect to finally start the plant revamp in the coming week. After that, we should reach a run rate of 15 million tons per year. Next one, please. Besides that, we are focused on recovering our production. We are also taking important actions to make our production capacity more flexible. The launching of the Serra Sul 120 project in Carajás is one of them. Besides creating an important buffer of production capacity and ensuring operational flexibility, we allow growth of 20 million tons in the longer term with the due logistics. We launched Project West Three to expand the Shulanghu port capacity to 20 million tons per year, bringing it to a total capacity of 40 million tons, securing strategic port capacity for Vale's BRBF in China.
In summary, we are taking the necessary actions to ensure the stability we need to operate with efficiency and the growth options required by the market. Please, the next one. Well, to finalize, we are de-risking Vale to build a better Vale. Let me walk you through the most important steps on this journey. First, we are repairing Brumadinho in a fast way and with quality, listening and engaging with the families and community. Second, we are becoming a safer company. With discipline, we continue to make solid progress with our tailing management system and our operational safety process as well. Third, we are resuming production under safer conditions. I'm sure that we will achieve the 400 million ton run rate during 2022. We have a clear understanding of what we must do, and we are fully capable of delivering it.
Finally, we are building the conditions for a long-term, stable business, keeping focus on capital discipline. With that in mind, we resumed our dividend policy and paid a solid dividend last September. Well, to conclude, we intend to continue creating and sharing value for all stakeholders. Most importantly, I assure you that we are doing everything we can to guarantee the safety of our employees in our operations and in our communities. Now I pass to Marcello Spinelli, who will give some details about our results in iron ore. Thank you very much for your attention, and we'll get back at the Q&A.
Thank you, Eduardo. Well, I have some information to share about iron ore production and sales. I think you have a lot of questions about sales. Let's start with the production. You can pass, please, the slide. Some weeks ago, we had a chance to detail, as Eduardo said, the roadmap to reach a run rate of 100 million tons in 2022. Today, I think we have a transparent checklist. We can have some deviation quarter by quarter, but definitely now we can follow together the evolution of the recovery of production. In Q3, the first information, as Eduardo said, was a huge production of ore, 57 million tons, a record. On track with production also all the projects around the North. In the South and the Southeast, so far so good. On track projects, production, and the initiative with the dams.
For Q4, the running rate is running the production around 1 million tons a day. It's good news. Far, so good. Our target is in the lower level of the guidance, around 310 million tons. It's very important to say that at this time of the year, we don't have any more capacity to offset some deviations if we face some problem. We must deliver exactly what we have in our plan. What kind of risk do you have ahead? I can say two. First one is related to the license of East Range, which is to wait for the license. We are in the last mile of that. No more information to the regulators; we need to receive this to start this operation, is we are waiting for that. We also, we've been hearing about the rumor of the La Niña effect.
Well, the La Niña effect in Brazil, just to understand, comes with more rainfalls in the North. We can anticipate this process in the North. And we have a dry season in the very south of Brazil without so much impact on our operations. We have to track this trend day by day. I'll let you know if we have any change in our guidance. Let's focus on the sales now; I think is the most important information to the end of the year. You can pass the slide, please. Well, I have a rationale here to share with you in three steps. I'll start with the number one. You know that we've been growing our production, our blending process in China. It's a very successful strategy, very over volume, bringing the high silica product from the south of Brazil.
Today, we have a discount of BRL 30 for that. We've mixed with the IOCJ, Carajás fines. You can see the growth in this slide 4, 94-145. We have a stable product growing the market. Our clients are very well satisfied. The second piece of information here is about our exposure to China. China in our sales is now reaching almost 70% of our sales. Why? This is due to COVID. Following that, China is in a V shape; the rest of the world is struggling to recover the production and the demand. What does it mean? We have 45 days of transit time, just transit time, the shipping part. After that, we have the discharge, the blending time, and also the retrieval period.
Remember that in the last quarter, China suffered a lot of delays in the charter time with the congestion in the ports. The lead time to close the sales is not the same as you have in an FOB or a traditional CFR. When you are more exposed to China, you're selling more BRBF. We had some questions about this in the last call. It's very important to understand the difference between shipping, the FOB sales, the CFR sales, and the blending sales in China. We sometimes, in FOB, you can define the price in the right time you sell. When you have the CFR, you can sell during the shipping, but the price will be only when the product arrives to the client.
Also the BRBF, you spend more time to blend, to have the product to blend. Another piece of information here to understand the whole picture is that we have the inventories. You know that in the last year after Brumadinho, we had to reduce our inventories to keep the supply chain of our clients. We reached the minimum level at the end of last year. This quarter, the last quarter, we have the first chance to have a gap in our production, to increase our production. We need to have this time to put this product in China. We are not talking about speculating inventories that I heard some ideas about this. That it's about operational inventories. We need this to make it happen, and we are now more focused on China. The two main pieces of information here that I want to say to you for Q4.
First information: we don't have any intention; we don't have any planning for for the gap of inventories or the gap of production. You know Q4 and our forecast for Q4 in our production. We don't see any necessity to have another kind of gap like we had in this quarter. The second piece of information is that we don't see many deviations between the Q4 sales and the Q4 production and Q3 production. As we are moving our inventory to most part in Asia, mostly in China, we probably have numbers close to sales and inventories, as we are just moving this inventory to the sales after a lot of time that we need. If you have further questions, I can help you in the Q&A session. I pass to Luciano Siani.
Okay. A few selective remarks here, starting on iron ore. On the cost side, you saw we reduced costs from BRL 17.2 - BRL 14.9 per ton. We have guided for BRL 14.5 for the second half. We will not achieve that; the reason is because of the price increase on the third -party ore that we purchase. Although the volume is small, we have a C1 for third -party purchases of around BRL 50 per ton, the BRL 25 increase in the 62% index impacted those purchases to the point that we decided to include information in our release about what the C1 for Vale looks like without those third -party purchases. We have BRL 12.50 per ton for the quarter. We also showed the numbers for past quarters.
That's the best measure of Vale's competitiveness because it shows how the operations are performing, not the ore that we purchase from third parties. Something for you to track going forward. If we didn't have that price increase, we would have gotten to our 14.5 guidance, but we're not going to for a good reason, price increase. Q4 costs tend to trend down because we had some maintenance, especially in July in the northern system, that we will not repeat this fourth quarter. That's all assuming stable exchange rates, right? Because they've been fluctuating a lot, and they are a tailwind for us. For 2021, costs tend to stay flat compared to 2020. Counterintuitive, the reason is, although costs will be diluted by bringing more volumes, the volumes will come from the less competitive operations in the south and in the southeast.
The mix effect will offset the cost dilution effect. My remark on base metals goes to copper, an all-time record for copper EBITDA, and also on the by-product revenues. Just a reminder for you, in 2019, we have collected $1.25 billion on by-products other than nickel and copper. I'm talking about gold, palladium, platinum, cobalt, and rhodium. That amount will increase this year to approximately $1.4 billion. Something to track because these by-products, especially palladium , have been increasing in price, and there's a $150 million boost in our EBITDA compared to last year just for better by-product prices. Finally, the fourth quarter will be strong because we don't have any planned maintenance in our nickel operations, and we're going to have Onça Puma back on full steam.
Depending on prices, we expect Onça Puma to start generating between $40 million-$50 million every quarter in EBITDA. Going through the P&L, you saw financial expenditures, some one-offs. These were fundamentally why we missed the consensus on earnings per share. We had a $550 million expense on the debentures, the participation debentures. These debentures were issued at the privatization of Vale more than 20 years ago; they work like a royalty on iron ore sales, and they therefore are marked to market every time iron ore prices go up. They are marked to market. This is not a cash expense. They flow through our balance sheets. The news here is that the most important holders of these debentures are the National Treasury and the Brazilian Development Bank.
They announced the intention to sell those debentures. That poses an opportunity to Vale because those debentures are a royalty or a leakage to our shareholders. This year alone, we are paying $200 million on those royalties. We have the fiduciary duty to work, to look at this opportunity, and eventually, Vale, if we decide to repurchase those debentures, that would entail a tender offer for repurchase, and that would happen in the first quarter of 2021. Something that we are analyzing. We also had increases in the value of guarantees provided by Vale to some of its affiliate companies. That relates to the depreciation of the Brazilian real. All those debts are in US dollars. Therefore, the increase in value, when translated to Brazilian reais, flows through the balance sheet to the P&L. Another important thing: we updated the guidance for capital expenditures for this year.
We have guided on Vale Day $5 billion for this year. The exchange rate depreciation would bring that number down to 4.5, but with COVID delays, we're now into 4.2 territory. Those COVID delays, they will necessarily impact capital expenditures for next year because the work needs to be done, and it just shifted from 2020 - 2021. Finally, on cash generation, you saw robust cash generation this quarter. Although working capital was still negative, the change in working capital was for two reasons. Spinelli talked about inventory buildup still. Secondly, because the sales that were marked to market at the end of the quarter were marked to a higher price than the sales marked at the end of the second quarter. That increased accounts receivable.
Again, those two effects should revert next quarter, and you're going to have a better conversion from EBITDA to cash in the fourth quarter. Financial net debt decreased despite the substantial dividend distribution, and expanded net debt also decreased. The expanded net debt is at BRL 14.5, which is still far from the target of $10 billion. Important here is that the $10 billion target for expanded net debt is a long-term goal. It is not something to be reached in the short term, and it will not prevent us from keeping on paying extraordinary dividends on the path, which is our goal. On to Q&A.
Thank you. Ladies and gentlemen, we will now begin the question -and-answer session. Our first question comes from Carlos de Alba, Morgan Stanley.
Yeah. Good morning, everyone. Thank you very much. Hope you are doing fine. My first question is regarding the potential agreement or the negotiation discussions that you are currently having with the authorities on the Brumadinho settlement. Could you explain to us maybe what the next steps are and a roadmap on this process to the extent that you have it? Second, on this same topic, it is my understanding that there are four big blocks of potential payments. One is the collective damages; two, the socioeconomical damages; three, individual socioeconomical damages; and four, environmental damages. Are all four of these, if I am correct, included in the ongoing discussions that you are having, or are only some of them part of the discussions?
Then if I may ask you just very briefly, maybe an update on Samarco, also given that Luciano spoke about a potential opportunity for Vale to buy back the shareholders' debentures, what about the potential sale of, or divestment of shares owned by the still, I guess, controlling shareholders that is expiring in November? There might be some revelation that I think prevents you or may prevent you from buying those shares in the market, but, or at least directly, you might be able to buy it in the market. If you could help us understand that situation, that'd be great. Thank you very much.
Okay, Carlos. We are fine. Thank you. The agreement, I'll give you a broader picture, and I'll ask Alex D'Ambrosio, our legal counsel, to detail. I think it's everybody's question, so I think it's better to tackle everything so we don't leave any room for doubts. I think, first of all, we've been discussing with you during the last calls and in the meetings that we have that we were having discussions with all stakeholders. When we mean stakeholders is the state, the prosecutors, the defendants, and even the AGU. It's a Brazilian entity at the federal level. What is different now? It's different that now we are making a process of mediation that was brought to the Court of Justice, and that improved, in a way, the convergency of the framework. One thing that we have been consistently saying is that we want a stable
With legal certainty that we can execute on the compensation and the reparation of the tragedy. The need is that now we are under a different environment, on a different approach. I think we'll come to your question about a roadmap. There are steps that have to be taken, and I think Alex can cover you. We'll explain to you with a little bit more detail on those kinds of steps that are necessary to achieve this framework agreement. Secondly, it's encompassed everything, but I think Alex can manage that as well. You know we have three civil actions that refer to those elements that you mentioned, and they, of course, will have to be covered in this more holistic or whole agreement. Can you help me with that, Alex?
Of course. Thank you, Eduardo. Hello, Carlos. Well, as Eduardo was saying, there's been a very positive evolution as of last week, since the conversations have now moved to the mediation chamber of the Court of Appeals of Minas Gerais. Okay? This is a formal mediation chamber. They call it the CEJUSC. As a result of this, the negotiations will now take place in a more structured environment with the support of mediators who are judges themselves of the Court of Appeals. Indeed, the president of the Court of Appeals himself is participating in this mediation process, since he wants to see this agreement succeed. Now, if we reach an agreement in this environment, we'll have much more legal certainty as it would be sanctioned by the Court of Appeals itself. That's why we think it's positive.
All the plaintiffs are invited to this mediation, and so it's a large group of people, and conversation is mediated by the judges, as I mentioned. The idea is that it would be encompassing for all the parties involved. Okay. Conversations are indeed evolving, and they're very constructive. As you can expect, there are many challenges to overcome, and the main one is to draft a document that would be acceptable for the many parties involved and that would offer legal certainty. We need legal certainty that's been stated from the outset. We need governance that ensures speed of reparation, and there's still no definition of values. Okay. This will be discussed after we have this framework. The second part of your question: what will this cover? Well, we have, as you said, four basic blocks.
One that is not in this agreement is the individual indemnification. People are coming to discuss with Vale directly, and Eduardo mentioned 8,200 people as of this date have already been indemnified. What we expect is that the agreement would sanction the individual discussions with these people. That's already been agreed in concept that that would be part of it. There's environmental reparation that would be in this agreement, although environmental reparation it's an obligation that we would undertake to deliver. We don't have a value. We may have estimates, but that's not something that we will pay off. We would actually continue to pursue the reparation. There's a collective damages part that would be capped and that would be paid off, and there's what we call the social compensation part, which would also be capped and that would be paid off.
I think I covered the four, and that's what we are proposing. That's what we are discussing at this time. I hope I answered your question. Thank you.
Okay. Samarco continues to be on track for a restart in December. It will produce to the capacity of 8 million tons. There will be a ramp up in 2021, so probably by 2021, the production will be somehow smaller than 8 million, but it will definitely reach that production capacity somewhere in 2021. As regards the potential sale from shareholders after the end of the shareholders' agreement, obviously that is a decision that pertains to them. Should it happen, Vale can eventually, that would be a public offer, like a follow-on offer, a secondary offer in the capital markets. There will be a book -building process. Demand could be X times higher than the supply. Yes, Vale could theoretically put a bid on those shares.
However, according to Brazilian legislation, if demand is higher than the supply of shares from any selling shareholder, Vale would be the first one to be cut because it is considered a related party in this process. If Vale wants to buy shares in the market, the most obvious way would be to launch a buyback program rather than go into such a follow-on, because it is very unlikely that we will be able to buy those shares in such a process.
Thank you. Before we proceed, please restrict your questions to two at a time. Our next question comes from Timna Tanners, Bank of America.
Yeah, hi. Hope everyone is doing well. Wanted to ask a bit more about your market outlook on iron ore, if you could, some specific comments on the pellet premium outlook and premiums for higher iron ore grades. Along those lines, just asking, I guess, about the better demand outlook for Europe that would support higher pellet premiums. With the announcements recently of some additional supply coming on, how are you thinking about the outlook for supply and demand in the next year or two? Thanks.
Go ahead, Spinelli.
Okay. Hi, Timna. Thank you for the question. Well, let's start with the pellet premium. Well, what we see, as you know, we have, I think, two main markets here in this case. We have the direct reduction pellets. It's more related to the Middle East. In the U.S., we see a recovery in these markets. Obviously, all the problems with COVID can have further problems. We see these markets as more stable and recovering for next year. In case of direct reduction, we have one thing that we must track: that China is again opening the import of scraps. This can bother the scrap market, the seaborne scrap market that is around Turkey and the U.S. This can improve the price of the scrap and bring more margins to the Middle East market. Must reckon that.
We see that the trend for the short term is that we just see a stable price or stable premium, but we can have some gap between the blast furnace pellet and the direct reduction pellet for next year. One must track that. On the other hand, the blast furnace pellet is quite the same as what is happening in the markets of Europe or Japan. We are struggling with these new lockdowns in COVID. Our number for this year that we have, for the whole of ex-China, is a decrease of around 12%. In these most developed countries, we see 19%, but it depends on the new COVID outbreak. We see a recovery for next year around 9%. That's your outlook and what we see in the market. The supply-demand balance I see today during this quarter and the next quarter is more balanced.
We are returning around 60 million tons only in Vale. With the market, we see some new attractive producers that are coming to China, like India or other regions like Europe going to China. I think they probably will go back to their original markets. That's a tendency that we see in India. But we see a supply demand well-balanced. Our numbers are narrowing now the supply demand to 1% or 2%. That's our forecast for next year.
Our next question comes from Jonathan Brandt, HSBC.
Hi, good morning. Good afternoon. Thanks for taking my questions. Luciano, I first wanted to ask you about the C1 cash cost. I certainly appreciate the disclosure around your own C1 cash costs of BRL 12.50. If I'm not mistaken, the target and the guidance that you've historically talked about have been sort of total C1 cash costs, including third -party purchases. I'm wondering if you can give some more guidance or targets as they relate to your own C1 cash costs in the next three to four years as you ramp up production closer to that 400 million tons. How much further should we expect your own C1 cash costs to fall? My second question, I guess, is more related to nickel and the EV battery theme.
Is this something that you're potentially looking to move further upstream in the battery supply chain given your exposure to nickel and cobalt? Especially considering the government of Indonesia's ambitions to become an EV sort of battery destination and your relationship with the government. Could we see sort of more investments further upstream here? Thank you.
Okay, Jonathan, I'll give you the full numbers, okay? Including the third -party purchases. The best quarter we had was $12.8, the fourth quarter of 2018, when we were producing at a rate of 385 million tons. That gives you an idea of where we can get. With the adjustment for the new FX rate, that $12.8 would be perhaps between $10 and $11 per ton
Yes, we have had some depletion, which means transportation distances have increased. If we have the licenses, for example, and we then open up new mines at the rate that we would like to, then we could reasonably get, when we get to 400 million tons, BRL 10-BRL 11 per ton at existing FX rates. Mark.
Yeah, no, I want to answer this question first. John, thanks for the question because I still have my foot on the base metal. First of all, there's a lot of interest in OEMs and the kinds to talk about BASF. A lot of players are coming to talk to us. We have no intention whatsoever to go upstream. We would focus on using our assets and our mining assets. That's a very important point as well. There are initiatives that are looking at different mining assets that would require that kind of approach that you mentioned around governments and helping; like specifically in Canada, we are having these kinds of discussions, but we will stick where we know and where we are good at, which is at the mine site. Mark, you're still in the line?
Yes
Please comment.
Oh yeah, that's absolutely the case. I would say that we already have some options for some participation. For example, we do have the Pomalaa project in Indonesia, where the product would be suitable and would be directed towards the electric vehicle batteries. Those kinds of things are there. Also, some of our products, for example, are coming out of Sudbury and in the U.K. refineries are suitable for electric vehicles. As Eduardo said, if we see the kind of growth that we're anticipating in the electric vehicle market, the supply chain is going to look for some tremendous amount of supply. The typical source people are talking about is HPAL technologies out of Indonesia. We would think that we're going to need more mines developed in the coming years to meet that supply.
Obviously that's our interest, trying to find the right ways to get those mines up and running to support the electric vehicle industry and meet the returns that we need to see.
Our next question comes from Andreas Bokkenheuser, UBS.
Thank you very much. Hope you are all well. Just a quick question on freight. How has it been kind of so far over the past year in terms of your freight, especially to China? Has that mostly been on Valemax and VLOCs? Equally as important as you kind of progress towards 2022 and aim to get close to 400 million tons of production back, what is your vessel capacity there? Do you still have new vessels coming in the shape of that Valemax and VLOCs, or are you going to be more dependent on the third-party vessels, possibly in the spot market, in that scenario? Thank you very much.
Thank you, Andreas. It's Spinelli here. Thank you for your question. Regarding freight, let's talk about the fleet firstly. We are improving our Valemax fleet. The strategy to have big vessels is on track. Our trend in one year, two years is to reach our level, what we consider the optimal level, to 400 million tons. That's the track it's going on. In the short term, we have some exposure in the spot markets, not so high. We have some reflections in the freight this quarter, and we'll have some next quarter. Probably all the fluctuation in the bunker price; there'll be some offset in this trend. We'll see a stable freight for the next short -term period. There's a lot of information about the scrubbers and the freight. You know that we have the scrubber installations almost on track.
Today the gap between the high sulfur and low sulfur is lower than before. Now it's 60, but most of our freight will be used this year , and the view count on that, on next year's, is higher than 90%. That's the trend. Keep the strategy to grow the fleet, but at the level that we can manage the spot and the flexibility, the spot in our own vessels.
Our next question comes from Chris Terry, Deutsche Bank.
Hi Eduardo, Luciano, Marcello, and team. Two questions from me. Just on the sales versus production. If I understand it correctly, you're saying sales should be close to production in full quarter. As we focus on 2021 and 2022, as you ramp up to 400 million tons, can you just give some color on what you expect the inventory build to be as you add additional blending sites over that period? My second question is on coal. After you do the three -month revamp, how long will it take you to get to the 15 million ton run rate? Thank you.
Thank you, Chris, for the questions. Spinelli. It's important to understand the fluctuations are related most of the time. We should not compare the production in the quarter and the sales in the quarter. I think the best comparison is between the, in this case, Q4 sales and Q3 production. If you consider all the time of transit , the lead time is the best comparison today. We can have some gaps in inventory in case of a gap in production like we had. As you build, we've been building for a long time. We lost the inventory last year. Now we're going to return this inventory building because it is the quantity we need to make the blend. We see few gaps, probably in one or two years, every time you have a difference between production in one quarter.
As we have the inventory in China, we have more flexibility. We don't have a significant difference between sales and production during the period. This was the first time we had this gap after the decrease of inventory, but that's not what we think in the short or long term. We're going to increase this inventory gradually, and we have some differences, but not significant ones.
Paulo, can you go ahead?
Yeah. Thanks for the question. After the maintenance program, we'll have a small run period, and we expect to reach the 15 million tons per year run rate starting from the second half of the year of 2021.
Excuse me, are you ready for the next question?
Yes, go ahead. I think he answered the question from Chris.
Yeah.
Our next question comes from Alfonso Salazar, Scotiabank. Please proceed.
Thank you. Thank you for taking my questions. I have two. The first one is regarding iron ore and the implications of the Chinese restrictions of met coal imports on your iron ore operations. I don't know if you can explain if you expect the use of different coals to change the needs of blending or adjust the marketing strategy of your products. The second question is regarding your base metal division and, in particular , copper. There is a lot of interest in good-performing copper assets. Apparently the ones that you own look buried in your iron ore and nickel portfolio. Just wondering if you can share thoughts on how to unlock the value of those assets, in particular copper assets and the expansion projects that you have on copper, and if it's possible to unlock that copper value before nickel.
Those are the two questions I have.
Thank you, Alfonso. Spinelli here. Well, if I understand your question. Our product is now the very stable quality, the BRBF in China. As we can have some demand regarding the problems now, they are increasing the cost of coke. If they have a better margin, they can save some costs on energy. They can improve to better quality. We can support them with iron ore, IOCJ or the Carajás mines, or our BRBF. Every time we discuss quality, they can adjust this, but we've been working on a very stable operation for BRBF. It's very important for the choice that the steelmaker can take when they want to change the blast furnace product. We must take the quality the stable way.
Okay. Alfonso, if I got your question clear, I agree with you that we have to unlock value on copper. There's a good discussion undergoing Vale now around exploring our Carajás province. We have a tremendous province there. There are some synergies with iron ore that we are unlocking. We're talking about Alemão. We're talking about even Salobo before, if we can revise reserves. We can talk about Paulo Afonso, a series of assets that we have there. I think there's a thing we call here a "copper dream." Everybody wants copper. It's obvious. It's the commodity. I think iron ore and copper are the no-brainers. We do have exceptional assets in Carajás that need to be developed.
While you talk about unlocking value, I think it's a more complex question because since the beginning, we started the turnaround of the whole base metals business, and we believe it's undergoing pretty well, as nickel has been proven. We need to fix the house as well. There, I think, is a double, I would say, phase story here. One is to fix the assets that you have, and the second is to grow the assets that you have on the ground. We're extremely optimistic that we can, and we're going to show that on Vale Day, by the way, on our expectations about copper. We are very upbeat on that. If we come back to the famous 30% of relevance of base metals inside Vale, we could unlock that rate when people start to perceive value in the base metals business besides iron ore.
Iron ore is too big, still, in relation to base metals. We won't have time to discuss in the call what kind of options we have, but one for sure is to do the right things with the right assets and have something that the market, how could I say, values . I'd like to ask Mark as well, because Mark is very passionate about this team as well.
Eduardo, you're right. I am very passionate about the copper business and base metals. It's an excellent business that generates a tremendous amount of free cash flow, and it's got tremendous opportunities going forward. We spent a lot of time stabilizing the business. We're seeing some good stability coming this year. Salobo is performing very well. Sossego has performed extremely well this year and is staying on budget. I think we're moving more into of a productivity -type agenda to increase the returns of the base that we have right now. As Eduardo mentioned, the growth opportunities are there, not only the ones we've talked about in terms of Cristalino and Alemão, which are on our agenda, but also unleashing synergies with iron ore and the railroad system that are there can bring us even further.
Finally, I will note that we have a very good world-class project in Project Hu'u in Indonesia. We've been releasing drill results. This is a world-class copper project in the making as well. Very excited about the copper business as well as the nickel business. Thank you.
Our next question comes from Sylvain Brunet, Exane BNP Paribas. Please proceed.
Good afternoon, gentlemen. Two questions. The first one on iron ore, just to maybe get some sense of the demurrage costs you would guide us to for Q4, if we should assume some continued decline there. My second question is on VNC: should we assume zero production in Q4 as you're ramping down? What is the value left on your books after the several impairments, please? Thank you.
Okay. Yes, Sylvain, the iron ore costs will continue to come down on the fourth quarter because we don't have any major maintenance, and we're going to spend less and dilute through the production. On the books, VNC has zero value. We just wrote down the rest of the value that it had this quarter. Mark.
Luciano, just in terms of production at VNC, the way the care and maintenance process works is we do need to prepare for a consultation with the workers' council; we continue to operate at a sort of a stabilized rate while we go through that. You will see production of the nickel hydroxide in Q4, let's say roughly what you would have seen in Q3.
Our next question comes from Christian Georges, Societe Generale.
Yes, thank you very much. Luciano, can you just go through again your cash costs for Vale iron ore operations? You mentioned $10 - $11 was your best performance 4Q 2018. That was at the FX rate of today, I understand. You're saying that you can achieve again $10 - $11 in the future. Is that also just for Vale, or does that include purchased ore? That's my first question. The second question is on those ventures that you may be considering purchasing or bidding for into the new year: what kind of order of value magnitude should we take into consideration? Thank you.
Okay. Yes, the $12.8 of the fourth quarter of 2018 at today's exchange rate would be between $10 and $11. Yes, we may get to there. Also, you should normalize by the price of iron ore. If the price of iron ore was the same as the price of the fourth quarter of 2018, the third -party purchases cost would be lower. The overall aggregate C1 of today, as we speak, would be perhaps another $2 below what it is. Instead of $14.9, it would already be at $12.9. We would be targeting a $10 - $11. Those are important. I think on the last question, I had mistaken my answer. The question was about demurrage costs. There's no meaningful decline of demurrage costs from the third-fourth quarter. I think the next question is for Marcello Spinelli, right?
Volumes for purchase: we don't have a lot of sources of purchasing in Brazil, so it must be a stable number compared to this year.
Thank you. Our next question comes from Tyler Broda, RBC.
Great. Thanks very much for the presentation. My questions have been answered. I just have two quick follow-up ones. I guess, with Project West, if all goes to plan, when should we expect that inventory to start building for that extra 20 million tons? Secondly, I guess just on VNC, I see you have bidders back at the table. If nothing is able to be agreed upon, what should we look at in terms of the shape of the closure costs?
Thank you, Tyler. Spinelli here. Well, the West product, we have this partner in China, this Shulanghu port. We already operate there. It's in the delta of the Yellow River, Yangtze River, sorry. It's a very important position for our blending and our distribution in China. When you're improving that, we're not saying that we're going to increase this inventory considering the whole picture of us. That's our main market in that area, so we want to evolve there, and sometimes we can offset with other ports. We're expecting to run this new operation in two and a half years. It will give more flexibility rather than improve or increase our inventories.
Hey, Tyler, just on New Caledonia. As you mentioned, there are some bidders that are looking at the asset. There's one group that is, I would say, put forward a rather fulsome offer. That's an offer by management working together with employees and supported by Trafigura. We'll know in the coming week or so how that's panning out. We haven't stopped on the planning for care and maintenance. Just in terms of estimates, what we're planning for is care and maintenance rather than full closure. Just in terms of how that looks, it is quite a detailed process that's underway, and we're preparing for it, and it does require us to sit down with the workers' council and talk about what that looks like. At this point, we don't have an estimate we can release.
What we can say is that if you look at the requirements to fund New Caledonia, if we were to operate for the full year next year, we would estimate that the care and maintenance funding requirements would be roughly the same next year. Then the care and maintenance funding requirements for the following year would be a fraction of those operating costs. Primarily next year, so roughly equal to what we would require to fund the operations.
This concludes today's question -and-answer session. Mr. Eduardo Bartolomeo, at this time, you may proceed with your closing statements.
Okay. Thank you. Thank you again for your questions, attention, and the opportunity to share with you our story. I think, as you perceived, the quarter was a really positive one and encourages us that we are on the right track, but I'm being repetitive on this. We are not in a sprint. We are in a marathon. I think we've been making strides in Brumadinho. I think we're repairing, as I mentioned before, with quality, with empathy. Safety is a priority we've been improving. We are very happy with the results in Carajás this quarter because it shows us the potential that we have in that province in iron ore, and we are on track to recover production. As everybody that knows Vale, we are extremely conservative on capital. We are going to return the capital to the shareholders and to all stakeholders in place.
We'll be extremely disciplined. I think what we want to convey to you that we are striving to de-risk the company, but that will make us a better company. Again, thanks a lot for your attention, and let's see you in the next call. Have a good day, and stay safe.
That does conclude Vale's conference call for today. Thank you very much for your participation.