Earnings Call: Q1 2021

Apr 27, 2021

Good morning, ladies and gentlemen. Welcome to Vale's Conference Call to discuss the First Quarter 20 1 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 the time. As a reminder, this conference is being recorded and the recording will be available on the company's website atbali.com@investorslink. 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 change, has a few seconds delay in relation to the audio transmitted via phone. Before proceeding, let me mention the forward looking statements are being made under the Safe Harbor of the Securities Litigation Form Act of 1996. 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 Vice President, Finance and Investor Relations Mr. Marcelo Espinelli, Executive Vice President, Ariel Orr Mr. Mark Travers, Executive Vice President, Base Metals Mr. Carlos Medeiros, Executive Vice President, Safety and Operational Excellence and Mr. Alexandre D'Ambrosio, Executive Vice President, Legal and Tax. First, Mr. Eduardo Bartolomeo will proceed to the presentation on Vale's Q1 2020 performance. And after that, he will be available for questions and answers. It's now my pleasure to turn the call over to Mr. Eduardo Bertolomeu. Sir, you may now Ian? Thank you. Good morning, everyone. First of all, I hope you're all fine. In the Q1 of 2021, we kept our guards up in our operations as the COVID pandemic accelerated in Brazil. We have kept all safety measures and prevention procedures adopted in operations. And I want to reinforce The only essential professionals are allowed in our sites. In April, we completed 13 months since the start of restrictive measures against the pandemic, and over 25% of our workforce Still working remotely, safety, people and reparation. These three words have been our priority since 2019, and they continue to make more sense now in this very critical moment For all of us, well, a crisis of this dimension requires the urgency to do What's within our reach in the best way and as effective as possible? We have been collaborating with governments and communities since the beginning, and we continue to focus our efforts on the most critical items in this fight. For this reason, Vale and other companies have forced us to buy and donate 3,400,000 medicines for intubation. In contribution to the national immunization plan, Vale Allocated resources for the expansion of the vaccine production of the Butatransitut with an estimated production capacity of up to 100,000,000 doses per year and for the donation of 50,000,000 syringes to the Ministry of Health of Brazil. We are attentive so that our support is accurate and effective and that our help directly reach the people in need. This is part of our new practice society. As I have been saying at each of our meetings, Vale is determined To fully repair the damage caused by the Brumadinho strategy, a major step in that direction was the signing of the global settlement in February. The decision that ratified the agreement became final at the end of March, bringing another layer of legal certainty for the reparation. One of the fronts that progresses consistently is that of water security. We are working on the commissioning of the construction works For a new water pipeline to supply the metropolitan region of Belo Horizonte with around 6,000,000 people. At the same time, The reparation of individual damage is progressing. Since 2019, more than 10,000 people Have been part of civil or labor indemnity agreements with Vale, which sum up to almost BRL2.5 billion. We remain committed to a fair and prompt preparation for Brumadinho and the effective region. Talking about dam safety. After works to improve stability, we have already removed the emergency level of 4 structures this year. We hope to reduce or remove the emergence level of another 4 structures still in 2021. With stabilization works and actions and respecting the safety of the process, by the end of 2025, We hope to achieve satisfactory conditions for all 29 structures, which are at the merchant level today, as can be seen in the graph. We remain firm and progressing in the culture transformation towards a safer value. Last April 15, we launched our integrated report with the main information on Vale's economic, Environmental and social impacts. This is another delivery from Vale as a result of listening to our stakeholders. This document, in addition to presenting our ESG performance in detail, helps to demonstrate how strongly Our ESG strategy is connected to our business. Another important point is that it provides Detailed information about our risk management, including our assessment of emerging long term risks. With that, we closed 1 more ESG GAAP plan for 2021, totaling 39 gaps since 2019. As can be seen, our ambition is to transform Vale into a reference in ESG practice. Well, now talking about our operational results. We started 2021 with a performance as expected, With a good improvement compared to the Q1 of last year, our adjusted EBITDA was $8,500,000,000 The highest in our history for our Q1, which is seasonally weaker in volumes. In iron ore, we made progress Stabilizing production, resuming the rest of the capacity halted at the Timopeba site and at the Varenbrand pelletizing plant. Our beginning of the year was stronger than 2020. We produced in this Q1, which is seasonally weaker, the same as we produced In the Q2 of 2020, this gives us a lot of confidence in reaching our production guidance for this year. Spinelli will give more details on that later. In nickel, we also performed as planned with a stable operation in Osa Puma And in the North Atlantic refiners, with long harbor reaching record production levels in the Q1. In copper, however, We underperformed with a drop of 20% to 30% in volumes of Salobo and Susif. This is because we are reviewing Salobo's processes, Aiming to improve the safety of our operations at that site, therefore, impacting mine movements. In Soussevo, We had longer maintenance due to the difficulty of mobilizing contractors because of COVID-nineteen. On another front, in terms of addressing our cash trends, the sale of E and C operations was an important step And the commitment to transform our business. This commitment was made to our shareholders in the end of 2019 And delivered in a very responsible way with the creation of a local solution that meets the demand of all stakeholders. We also signed the agreement for the acquisition of Mitsui stake in the coal and logistics operations in Mozambique, An important step towards our divestment in that business, another commitment made to our shareholders. In this sense, Another relevant step was the conclusion of the revamp of the Muartis processing plants, which will allow us to achieve A production rate of 15,000,000 tons per year in the second half of twenty twenty one. In summary, We continue to take the necessary actions to stabilize our production, ensure growth options and allocate capital in a disciplined way. And speaking of disciplined capital allocation, We presented one more evidence of our commitment to returning value to our shareholders with the announcement of the share buyback program this month. We are confident of our ability to deliver our derisking and maximize value creation for our shareholders in the long term. We believe the buyback is one of the best investments for the company and one that does not compromise the continuity of dividends Higher than the minimum SAAT Bara policy. With that, to conclude, Summarizing for you. We are making progress with the reparation of Brumadinho quickly and fairly. We continue on the path to build a culture of safety above. We are working hard to make our operations more stable and predictable. Our ESG commitments and strategy are increasingly linked with our business. And finally, Our capital discipline remains unchanged. Most importantly, I assure you We are doing everything we can to ensure the safety of the people in our operations in our communities. I would like to thank Our 70,000 employees are contractors, suppliers and customers for their resilience in high regard during this critical moment through the COVID-nineteen pandemic. Now I pass the floor to Spinelli, who will give more details on the performance of iron ore. Thank you very much. Thank you, Eduardo. Good afternoon, all. But we've been updating about the resumption plan to reach 400,000,000 tonnes next year. I'm going to use the same slide To facilitate our explanation, and I'll start in my left hand side. So you see the bar Today, remember that the concept that we don't evolve from now, that's the capacity we have for the year. We came from a number, the 320,000,000 last quarter. Now we have the 327,000,000. We had an additional capacity in Cebo Pebas, 7,000,000 tons. Remember that we were running with 3 lines. We had this sort of other three lines, so we have in full capacity in Porquebo now, but should be 325. We have a minus 2 that we already updated the forecast of Itabira. In Tabita, the last call, we said that we'd reach a minus €9,000,000 We still have this minus €7,000,000 As a buffer for Abertabira, Abertabira, we have a temporary problem there with the lack of capacity for the disposal of The table, as we evolve during the year, we can update this minus 7, but we already put here the minus 2. So that's The number of capacity today. I want to highlight also in the right hand side, in the bottom, the information that Paragio Now we now have the startup of the tailing frutranche plant. We're not adding yet a capacity here. It will be important in the second half When I have the whole picture of Vazenbrand growing, but it's important milestone. That's the first plan of a sequence of plants coming from Brucutu and Itabira, and it's an important milestone to highlight. I want to emphasize that we are really committed to deliver the production guidance for this year. Our range From between 315,000,000 to 335,000,000 tonnes, what supports this formation? Well, Firstly, we started this year in a very better way compared to the Q1 last year. As Eduardo said, we added 8,000,000 tonnes this year compared to last year. Seasonally, the 2nd quarter It's better than the Q1. You know very well that due to the end of the rainy season in the south and the southeast of Brazil, Even in the north, we still have the rainy season there, but June is usually drier than the other month The rainy season, so we are counting on that to improve our production, and you can affirm that we have Our guidance in perspective. As Eduardo said and some other information, the last Q2 last year was the same one last year, so that's another information that we are growing to achieve the guidance. And also, we have many actions that I'll follow-up with you in the next slide and our road map To achieve the 400,000,000 tonnes. First information in the Southern System, Vazin Grenada next week, We are advancing our tests with the Quellaro Belt. This test is a vibration test. We must check The impact in our upstream dam in that site. Fabrica is already testing the wet Processing, we expect to have the final permit from A and M, the National Agency of Mining, To keep the operation, we expect to do this in the end of this quarter. And still in the southern system, in Vagin Grande, we are bringing Online, Maravilla 3 dam, this is a very important asset for second half. We have some civil works there To finish, and the important information, we already have all the permits to start up this asset, Only missing the declaration of stability that's only in the end of the construction we can get. I also want to drag your attention to the Southeastern system, and it's Important information, good news here in Itabira. We are anticipating a partial Operation of the filtration plant, this will allow us to offset That buffer, the risk capacity that we have in Itabiras, a minus 7% that I mentioned the first, we are keeping here. But we are trying to anticipate now already having our plan the anticipation to bring the to use the filtration and dry stack The tailings. And I want to update you also about Brucutu site, an important asset Then also coming online that is Torto Dam. We are during the middle of the construction, We expect to finalize this construction during this year, but differently from Baraviras 3, we don't have the final permit. You have to apply in the process of 1 month to 2 months. But both processes, construction and permit, We intend to have all completed this year. If you have any delay, it's important to say Yes. We have a backup position with the start up of the filtration in Grupo 2. Remember that we have filtration coming in Vazin Grandi, Itabir, and this is expected to start up in the Q1 of next I'll be here for further questions in the Q and A session. I'll pass to Luciano. 1 results. Some highlights on the financial results, starting by cash flows. As you saw, they were very strong in the quarter. Working capital had a positive contribution of BRL 550,000,000. You may have been surprised, but Actually, the very strong sales of the Q4 of last year were collected this quarter, more than 1,400,000,000 in reduction in accounts receivable. And remember that prices spiked at the end of December, remained strong in January. So That was the reason why working capital evolved positively. Despite also the Q1 being very heavy on other payments like payment to suppliers, Inventory build, profit sharing with employees, but still working capital moved positively. Still on working capital, you may have noticed that the price realization didn't actually move In parallel with the Platts price and why was that? If you look at the Q4, the average Iron ore price 62 percent for the quarter was 134, whereas the provisional price at the end of the quarter was 158 Because of the increase in December, so there was a very strong recording of EBITDA in the 4th quarter on the back of the provisional sales. Whereas in the Q1, what happened was the opposite. The average price for the quarter was $167 and the provisional price at the end of the quarter was still $1.58 $1.59 actually. So the opposite, like the provisional prices dragged down the average price realization for the quarter, even more so compared to the Q4 in which they pulled up. And so something to notice is that those sales that were recorded at 159 This quarter, they will be repriced at today's prices once ships arrive at ports. So therefore, you could expect a carryover of EBITDA of maybe about USD300 1,000,000 1 results. From sales from the Q1 towards the Q2, cash and EBITDA. Talking about costs, C1 costs before 3rd party purchases, we need to look before 3rd party purchases because the prices have been going up sequentially. They were in line, dollars 14.8 per tonne compared to $15 per tonne in the same quarter of last year. However, despite the depreciated Brazilian real and we now can see that for the year 2021, the costs are going to stay, Like I said in the last call, slightly higher, about $1 higher than last year on average. And why is that? We have about $0.70 of impact From diesel prices, which increased substantially in dollar terms from last year, and there's another $0.30 That will come from a shift in the mix. Because of the very high prices that we are experiencing, we are doing some opportunistic Production in sales, especially from the Midwestern system, which is very high cost, has costs around $40, dollars 50 per tonne, We're increasing sales from there. And although by a small proportion, it does impact about $0.30 The mix as a whole and see 1 before 3rd party purchases. Also on our competitiveness, some words on freight. You saw the recent spike in freight rates towards spot freight rates toward $28 per tonne. Under this Backdrop, actually, the freight rates within Vale, they did not increase much from just to $15.7 per tonne. But if Things stayed this way. And as we use more spot freight in the second half because of our higher production, We should expect about $1.5 increase on average freight for Vale in the second half because of that spike In spot freight rates. Finally, a word on New Caledonia and Base Metals. Just a reminder, from now on, you will not Record under the base metals EBITDA the losses on New Caledonia, which were running at around $50,000,000 $60,000,000 per quarter. And remember, also about a year ago, you didn't have Onsapumma also operating. So today, as compared to 1 year ago, We have On Sapuma generating around $50,000,000 per quarter and New Caledonia out saving another $50,000,000 per quarter, so A net $100,000,000 per quarter improvement in results at the same conditions of price as compared to last year. So These things start to make a difference as time builds up. Finally, on capital allocation, this is no doubt the big Questioning, what are you going to do with the money with these higher prices? I want to call your attention. We have had a lot of consistency, And things are evolving quite quickly. Just a year ago, we were with the dividend policy We were in the middle of the first wave of COVID-nineteen, a lot of uncertainty, markets diving, the reparation of Brumadinho not consolidated. And then in the second half of last year, once the first wave ended and reparation advanced, we resumed the dividend policy, and we paid over $3,000,000,000 Then in November, prices started to actually early December, prices started to increase from The level of $120 towards higher prices, Still, but Primaginho agreement was still in discussions, so we didn't know what to expect. But finally, in February, once we reached the agreement In prices kind of situated at a higher level than $120 we decided to pay Another $4,000,000,000 in dividend despite the burden from the Brumadin agreement. But prices then were still fluctuating peaked at $170,000,000 then down to $145,000,000 But after they're stabilized at $160,000,000 in April, then we announced earlier this month The $5,000,000,000 buyback. And now here we are again running after prices which are now at over $190 And naturally, it will create more options for cash flow allocation. So As you can see, the recent story has been of progress within Vale and of world surprises in the market. So what will be our response? There's nothing new in our response. As we have been doing, we will make decisions, and we will announce those decisions that will prioritize return to shareholders. The story remains the same. We're going to be consistent. It could be an acceleration of the buyback. We can finish the buyback earlier. It could be Another increase in dividends above the minimum. It could be both of them. So you should expect that we will continue to Follow this track record of returning consistently money to shareholders. The next question on the balance sheet, is it inefficient? A lot of people start to ask this. First, a note here. With low interest rates, so about 3% on a 10 year bond for Vale, The value of the tax shield, if you increase leverage, is relatively small. So for example, if you add $10,000,000,000 on debt At 3% rates, you're going to save approximately $90,000,000 per year in tax payments for $10,000,000,000 additional debt. So if you want a meaningful reposition on the balance sheet in order to really take advantage of tax yields, you should add $30,000,000,000 $40,000,000,000 in debt to the balance sheet, which obviously, in a cyclical industry, you wouldn't do that, right? So These tax savings, they should be weighted against the opportunities that the financial flexibility that today we have that may bring in the future, and that's the calculation we're making. However, I also note that this EUR 10,000,000,000 expanded net debt target, we established that 2, 3 years ago when prices were around about $80 per tonne. And with the expectation of stronger for longer prices, We obviously could increase leverage, and we are evaluating that. And most importantly, if we have the opportunity to deploy the additional capital in a smart way. So that's how we're thinking now about the balance sheet. And now let's hand over to Q and A. Our first question comes from Alex Hakan from Citi. Yes. Good morning, everyone, and thanks for the time. I guess I wanted to ask about the potential for a base metal spin off That's creating some headlines this morning. If you could just give us some color on where you are in your thought process there, What kind of transaction you would potential transaction you would be considering? What kind of assets you would be considering putting in it? And then what would be the sort of logic behind any potential transaction? Thank you very much. Okay. Thanks, Alex. Well, let me be clear here. Obviously, We are always analyzing these opportunities, okay? That's the main, How can I say it? Driver behind us, what is really pushing us to that situation, I think it's twofold. One is that we are in the midst of the foundation of recovering the business, and we believe we are on the right track. And secondly, we are undervalued, bothly on the value as a whole and on base metals story. So it's a clear way to unlock value just in the basis of the multiples. So what we said, and I would be clear now To give you where our minds are, it's in the exactly the conceptual phase of analyzing what does that mean. First of all, Find out a way to how we deal with that. That's one issue that we are that we have to deal with, how we organize ourselves inside. So There are several aspects within the, how could I say, the precondition to do the business that we are studying. That said, analyzing. What is important? And then I might because now we're in the English call, I can ask Marc to help me on that. We have, 1st of all, as I mentioned before, to work on the foundations and on the narrative. The foundations are very clear since the beginning. We need to get the North Atlantic operations productive And operating adequately, we need to replace capacity, so voices base, Alubo 3, Copper Cliff Mine and the sales of E and C. One of the things that triggers us as well, as you asked about our mines, where they are, It's the sale of VMC. It unleashes us to think differently about the business. But I'll ask Mark because he's head in the business and I was head in Beforehand as well, what is the narrative? I think Vale has a unique narrative here that we might be able to exploit. But not to be overly repetitive, we are on a phase of studying it, analyzing the possibility. Could you help me on that, Marc? Sure, Eduardo. And Alex, I think Eduardo set out very well like the path really is to Make sure that we get the optimal value for base metals and he spoke about the need to build the foundation. Maybe the narrative or maybe the strategic direction to I can spend a minute or 2 on it. So I think more and more we're focusing in on copper and nickel in our business as A key for our participation in decarbonization of the economy. We clearly have lots of opportunities, which we've 1 results. Described in previous calls and on Valley Day around copper, where we have a current pipeline of projects that should bring us to about 500,000 tons Copper per year in the next few years with Salobo III, Cristalino Alamo. We also have a number of Projects around the Carrijes area, which can optimize through synergies with the iron ore business and the current infrastructure in the area, Plus some other options, for example, Victoria project in Canada and Project 2Hook that can get us up to 900,000 tonnes. So clearly, even within The internal pipeline, we have significant opportunities for growth. On the nickel side, we spent a lot of time recently talking about The dynamic of electric vehicles and what it's bringing to the industry. And clearly, we are going down that path Of the electric vehicle penetration in the auto industry and the inclusion of nickel in the batteries for those vehicles. Our approach is that we have the products. We have the products that have diversity and quality and form To go into the electric vehicle battery and we have the ESG credentials and we continue to try and build those And those credentials relate to the low carbon intensity of our product coming from well regulated respected regimes such as Canada. So really what we're going to really focus in on is seeing that narrative or opportunity To build in this area, currently just by just to give a little bit of an update, we have buyers who are very Interested in the products that we produce right now in the electric vehicle space. We recently signed a significant multiyear contract With an OEM, it will it represents about 5% of our Class 1 nickel. And we see further 1 results. To grow the sale of our Class 1 nickel into this space, we have some other opportunities there in terms of Moving our products around, we have some opportunities with maybe some relatively smaller investments to repurpose Some of our production lines to get a little bit more out and then we have other opportunities for growth which we look at. And we have a lot of government interest Talking to us to try and tease some of this out. So in the end, we're looking to build up to about 30% to 40% of our Class 1 nickel going into the EV space. So Eduardo, I think that's probably the narrative that I would give in terms of how we increase value within the base metals business. Yes. And Alex, just to conclude, it's a process that, as you asked, there are several questions that have to be answered. Are in the initial phase of going back to that view that we had in 2014, but in a much different way. Now we think we have a better foundation. We have still work to do in the foundation. We have a better narrative now. And of course, there are several questions that has to be answered, as you ask How would be the potential transaction? We didn't get to that yet. We're just in the beginning phase of analyzing the 1 results. I hope I have answered your question. Our next question comes from Tina Tuners with Bank of America. Yes. Hey, good afternoon and thanks for the color. Wanted to get your perspective on the situation in China. It's been interesting to watch iron ore prices rise Even as China talks about cutting production and yet very little production actually cut as you point out in your release in the Q1. So that we should think about or prepare for with regard to the Samarco bankruptcy filing. Thanks, guys. Go ahead, Mr. China Spinelli. Timna, thank you for the question. Well, China, we As you said, we are we have 2 points, 2 main questions actually. We have a solid demand Based on the stimulus and based on trade war problem that started some time ago, China It's going really well. All the indicators you can see coming from properties, 7.8 Growth rate considering the year's manufacturing and infrastructure, a lot of new starts last year. They are under construction this year. So we have the scenario of a fantastic demand Kevin, the point the question that we have opened here, for how long we're going to have this stimulus, in our perspective, We don't see a huge process To stop this, we see a smooth process coming on the second half. We don't see this in this half. We are going to face Stronger demand in the next quarter. But for the rest of the year, we can see something going on in a smoother way. On the other hand, the steel supply, as you said, China, just after the 2 sessions With the party meeting, they came to the world As a country that definitely are going after the capitalization, they are really Being really strong about this, with Sautern Xian, as you see, The second question is how will be the rollout of this cuts. We see our market intelligence we can see that they are Coming really seriously at this time, we can see Ciza try to control this process with their 3 actions that they see, 3 don't do. They say that if you want to cut, The guys that didn't their homework in the swap production or they didn't Follow the permit to cut something in 2 years, 3 years ago? Or they are not Compliant to the ultra emissions, low emissions that they should comply And although they say that if you are compliant to the ultra emission, part of the production are going really well in this area, You should allow. So again, what we can see, the inventories declining, Blast Furnace in the very high utilization. So the scenario, Timna, for instance, is to have High prices, you can decline in the second half and mostly high premiums. You can see a support for the premiums for the whole year. If you consider that the utilization of blast furnace will be high, price up still be high, margins high. So The scenario for our forecast is to have the premiums in this level for the whole year. I'll pass to Luciano for Samarco. Timna, while it's going to be And BHP as well, we're going to be expectators in the Samarco JR bankruptcy filing. So the company has started to operate. The creditors have got some sentences in their favor. Let the company know alternative but to file for JR. The process will take at least 2 40 days by law, likely more. The company is generating operational cash flows. Those cash flows will be available for distribution to the creditors. This is going to be done through an organized process in court. And we don't have any expectation to have residual equity value from Samarco. And also, there's no expectation whatsoever of any additional Capital injections to support operations at Samarco given that the debt is non recourse to Vale and BHP. So We're going to be at the stands watching what's going on. Our next question comes from Mr. David Cagliano with BMO. Hi, thanks for taking my questions. I just wanted to drill down a little bit more on the capital allocation questions and issues. Yes. First of all, has Vale bought back any of the 270,000,000 shares associated with the buyback that was announced in April? Okay, David. Yes, we have. You're going to see the Monthly reports, we're required to file with the securities regulator in Brazil, so it's going to be available for everyone. However, just noticed that we had blackout period because of these results issued yesterday. And therefore, in the 15 days prior to the issue of the results, we were not able to buy back any shares by regulation. Okay. And then just going forward, obviously, You mentioned it obviously after regular dividends, total CapEx, Bermuda payments, there's still a lot of cash here. And The question in terms of a little more detail in terms of how you how we should expect From a cadence, from a timing perspective, and in what form should we expect these incremental shareholder returns Over and above the regular dividends. Is this something we should be expecting before, say for example, the next regular dividend payment? We haven't discussed that. So as you said, the regular payments occurred just in March September. So the more obvious way to allocate return cash to shareholders in between is through an acceleration of the buyback, but this could be discussed with the upcoming board, which will be elected if we should or not Do something, Henry. Luciano, just to add on that. I think the word key word here, David, is consistency, right? We don't want to be stuck to the September, March dates. But of course, we need always to gauge the market that we are in, sometimes overly optimistic, sometimes under Over pessimistic like last year in March. So we did the buyback in between because it was clear that we had to do it. But normally, we would be willing to do consistently. But as Luciano mentioned, we have to talk to the Board. And you should expect, of course, dividends above minimum payment. Our next question comes from Mr. Carlos Diabra with Morgan Stanley. Thank you very much. Good afternoon. I guess on the same topic, Eduardo Luciano, are there any I mean clearly, The company generates a lot of cash flows. It was surprisingly strong quarter on that regard. As you mentioned, prices are higher. Are there any Caps or limits to the amount of dividends, special dividends that you would propose the company or the Board for the company to pay? I guess the regular dividends are very clearly defined by a formula. And we can probably look at the Growth CapEx or growth potential growth projects on base metals. But other than that, is there any cap or limit the amount of dividends that the company would consider paying back to shareholders? And my second question, if I may, is on the Moaty's divestiture process. How can we what are the expectations in terms of timing or next steps that we should expect from that process? And also Luciano, maybe you can walk us through how the process of incorporation Of Motis Nakala in Tubal's books would look like? I guess you will have to increase your debt and your interest payment in the coming quarters? Thank you. Okay. And Luciano, just let me get the first one. I think there is no cap. There's always a balance, of course. And again, we need to assess market conditions, That's structure, capital structure. And again, as I think you pointed out very correctly, our CapEx is pretty well behaved. It's All around platforms are growth, so you don't you shouldn't expect extreme CapEx. So there's nothing in our radar like that? And secondly, a question that a lot of people make, so I'll take the opportunity To make it clear, there is no transformation in M and A in our radar as well. So with that said, and Luciano mentioned in the beginning, I'm just Paraphrasing, Luciano, the return is going to go to the shareholders, right, Luciano? Yes. On mortgages, So we just finalized the revamp. We started to ramp up. We hope it will be quick. We hope by the beginning of the second half, we'll be already producing at 15,000,000 tonnes. By the end of the year, we should receive equipment On-site in order to upgrade the production to 18,000,000 tonnes, if you consider Today's thermal coal prices and met coal prices are a little higher than that, maybe 1.30, 1.40, The business can turn EBITDA positive quite soon and be cash flow positive at the beginning of next year without the burden of the project finance, and that goes Your following question. The burden of the project finance was always felt within Vale's financial results Through the EBITDA of coal. So coal EBITDA is penalized today because the mine pays a tariff For the corridor, which is punitive because it needs to be so in order to repay the project finance. So when you watch Less $150,000,000 for example, EBITDA for coal, about $100,000,000 negative is Just a service of the project financed funded through the tariff. Once you purchase Mitsui, what's going to happen is that Everything is going to be consolidated and therefore the project finance will become Vale's debt and those BRL400 1,000,000 a year or BRL300 1,000,000, BRL400 1,000,000, They will be seen at the financial statements, part of it as interest and part of it as just debt Repayment. But on the other hand, the coal EBITDA will immediately improve by the same amount. So that's why I'm saying that you don't need much in order to turn coal EBITDA as a business positive. You just need to produce And price is slightly better than what you're seeing today. So and that leads us to the next A stage which will be given that I do have a project finance which bears Mozambican risk and higher interest Rates, there's obviously the opportunity to refinance at much lower value at corporate rates and save money with that. That's what we're going to do. In terms of timing for the divestiture, we already have over 20 NDAs Signed with interested parties. Obviously, there's a way to go between people wanting to look at the asset and Offering a firm intention to bid, we hope that we're start to going to have those intentions again by beginning of the second half. Obviously, people were going to do a lot of diligence on that. And if we succeed, hopefully, the target would be to Try to sign a deal before year end. Some variables put some risk on that. So obviously, There's this dispute between China and Australia, which is waiting on met coal prices. Now you have All the COVID-nineteen situation in India, which is a big importer of thermal coal and also good weight on international thermal coal prices. So let's see, if we're a little lucky, I believe we can sign a deal still by the end of the year. Our next question comes from Mr. Alfonso Salazar with Scotiabank. And the update, and good morning, everyone. I want to ask about the outlook of the pellet market and if you can provide some guidance regarding Production for the rest of the year and in the coming years, if you can give us some color on that. Okay, Alfonso, it's Pernade here. Thank you for your question. Well, pellet market, let's Talk about the demand side. It's you split this in blast furnace pellet And direct reduction pellet. The dust furnace pellet is quite the same as iron ore. We are not in China. China is going really well. It's related to the problem of necessity to improve the use of the blast furnaces there. But the same pattern you see in ex China, that's our market. Very good prices, steel prices, margins and necessity to improve the production. So from this perspective, You can see a room for sales and premiums. The supply side, on the other hand, is a limitation. There's a limitation today, and Vale is the key A producer and the key opportunity today. We expect the production this year Slightly better than the year before. The limitation is the pellet feed production. We have Temporary restrictions to dispose of our tailings in the main sites, so Brucutu Editabira. So we don't expect to produce more than this this year, but we are targeting to Go back to the 60,000,000 tons capacity for next year. I'm not saying that we're going to do 60,000,000 tons, But we want to be ready to do that. It depends on the demand perspective, the market perspective To define that. So as a conclusion, we see a market that the premiums We doubled the premiums in the Q1 compared to the last quarter last year. This current quarter, we again have another Increase in the premiums. And we expect there is room for some another increase in the premiums As you have, the demand is really tight, supply demand is tight. Just an update about the direct reduction market. That's Quite the same that I mentioned for blast furnace. We have some 2 more ingredients here. The USA coming really fast in their economy and all the stimulus that are coming, they are They produce they use a lot of scrap, but they need pellets to improve their production, direct reduction. And the Middle East is our main market because of the U. S, the increase of the use of scraps. The price of scrap in Turkey is really high. That make our clients They can charge higher price to have good margins now. And that definitely, there is room again To improve the margins, improve the premiums in this market. So the outlook for this year, The supply is limited, and we can see good premiums Because of the demand that is strong in place. Our next question comes from Mr. Christian Georges with Societe Generale. Thank you very much and well done with your medical assistance In Brazil, it looks very good indeed. I had two questions for you. One of them is, You just said no transformative M and A even in a scenario of higher prices for longer and large cash flow. Does that exclude also some small M and A on copper? Because in your statement, you seem to be Very positive near term and long term on copper outlook. So is this an area where you make some consider putting some cash in a large Cash availability scenario. And on the side of that, would you consider any investment in Hydrogen In the context of your customers in steel sector, trying to move to green steel, decarbonize, can you be part of that? Or is that something which you're Just looking at from a distance. And the second question is on nickel. You're out of nickel, you're still obviously in Indonesia. Was the situation with Cast 2 nickel out there moving to being able to do sulfate and serve the battery Market, is it something you're still looking at down there? Or is it something you're looking at only doing from Canada and Brazil? Hey, Christian. First of all, thank you for the acknowledgment of the Medical Institute. Thanks very much with our team. Yes. So you're right. There's no transformative M and A. We are always looking for copper. It's very hard, as you might understand, but We couldn't we shouldn't stop. So that obviously is one area of interest. Another area of interest is energy. And You have a we have a very bold goal to eliminate our clean energy to not eliminate substitute All of them are matrixed for clean, so might happen to have some very small acquisition on that environment. And hydrogen specifically, it brings us to another subject that is very dear to our heart because we just announced the scope 3 targets, 1 of the few that did that, by the way. And we are following up some players that are doing that, but necessarily, I think, more on a watching, How can I say that? Seat. We are actually working very close to our customers. Ned, you could go, but I think because of time constraints, we wouldn't go there that far. But we are looking to help our clients with high quality Iron ore and high quality metallics that will be needed if hydrogen and we believe hydrogen is the best together with carbon capture, Best alternatives for the steel industry. But we are watching closely what the hydrogen is happening, but no investments on that, okay? And I think for Nico, I think it's better to Marc to answer. He'll be more short and more objective. Okay. Sure. Christian, In terms of class sorry, the sulfate, you're right, the primary area of focus would be the Canadian nickel. But there are opportunities in Indonesia. The most prominent of which is the Pomala HPAL project That is being studied and being discussed with Sumitomo Metals. That would be a clear that product would clearly go into the sulfate market. So that one's right in front of us. The other ones are, I would say, aspirational or early. By others in Indonesia and there are parties that are interested in our limonite, for example, but there's nothing significant at this point in time. Our next question comes from Mr. Andreas with UBS. Thank you very much for taking my question. I hope you're all safe and well. Well, 2 questions, A volume question and then a freight question. The volume question is kind of 2 parts, and you talked about A little bit already, but Vale obviously has a number of licenses that are kind of required to reach your production goal of 1 results. 400,000,000 tons down the line. Is there any kind of comfort or clarity that you can give us on these licenses? I mean, are they merely a Formality, you obviously expect to get them, but is there any kind of visibility you can get that they're not going to be significantly delayed at this point in time, either conversations With the state of federal governments on this, that's the first part of the first question. And within that, you obviously have always Pat, a focus on value over volume as has your Australian peers. And one of the things I'm thinking about there is your additional capacity as it Materializes out of the Northern System in particular, but Vale's consolidated capacity could be 450,000,000 tons. We're sitting at almost $200 ton on iron ore and if ever there was a time to kind of monetize that additional capacity, I would think it would be now And basically add additional volumes beyond the 400,000,000 tons with iron ore 200. So how do you think about that strategy value over volume given where prices Soren, given that you could have additional capacity throughout Vale's system going forward. So that's kind of the first, sorry, slightly long volume question. And then the second question is on freight. Luciano, you talked about a bit of freight inflation obviously and how it impacts your second half of the year. How does that we look beyond the second half of the year and if we look into 2022, 2023, Vale is obviously going to be putting more volume into the market. That could keep freight rates high. Like if we're still sitting at $28 a ton by the end of next year, is there additional freight inflation that kind of flows So those are my two questions. Sorry if they were a little bit long. No problem, Andreas. Spinelli speaking. Thank you for the question. Regarding the risk to achieve the volumes, obviously, licensees or authorizations Always in our track, and we try to plan with some extra delay To keep the our planning okay. So what you see, if you split The challenges in 3, the North, we need to keep the license as a rolling process. We just Got the license of Pete in Serra Chou in S11D. So it's business as usual is going well. We don't see any delay. In the Southeastern system, we are Really close to bridge the gap of the lack of capacity, dams capacity To install the filtration, so it's in our hands actually. We have final license. Yes, we have, but we don't see any big deal. And I explained about the Torto dam that we still have to do But if you have delay, we have a fallback position for that. We I'm emphasizing that we are trying Bringing our planning process buffers contingencies to be reliable in the end of the day. Jumping to your second part of the second part of your question, value for volume is a mantra. So We are ready to bring back 400,000,000 tonnes, and we are building the extra 50,000,000 tonnes. This is 450,000,000 tonnes. Why? We want to be okay with Forget we want to be reliable with our target of 400,000,000 tons. And we can use an extra 50,000,000 tons if the market Demands that. So that's our mantra. We're going to decide this as we evolve In the market. So again, but definitely, we need to be ready for an extra capacity. And about the freight, Luciano, I think I can start, you can finalize. The freight side, we I can You can see that we are less exposed to this quarter, this first half. Luciano said, the second half, it's Seasonally more exposure to the spot freight. But don't you must have in mind that we are bringing An additional 18 Gueva MAXs for this year that will match for the demand of 400,000,000 tons And an extra 6 Newcastle MAXs for our fleet. We are talking about 170 Vessels in our fleet today. So we are growing this natural hedge for the spot market freight. And definitely, we consider the inflation today. And the last problem was really related to small vessels, to Panamaxes that Just came the soybean seasons that make this happen and contaminated the vessels So again, we need to live this. We're not forecasting any big inflation for the spot Market and we are working hard to have our own fleet to offset any problem in the market. And an additional point is Total fleet today, we have installed all the scrubbers. That's another point that we're not Being affected to the gap between the high sulfur and low sulfur also. So the shipping business for us is very important to be stable. This concludes today's question and answer session. Mr. Eduardo Bartolomeo, at this time, you may proceed with your closing statements. Okay. Thank you very much for your attention and questions and interest to talk to us. I think we've been repetitive in that way from day 1. It's a marathon that we're going through. I think in the valid day, we I said de risking, reshaping and rerating. Derisking is advancing pretty well, still a lot of milestones to achieve. Example, be better on safety, be more assertive on production, but we did strides very good on Brumadinho. Capital discipline, there's zero doubt that we are on that. Reshaping D and C, it's a tremendous good example of how to do it With respect with communities, Mozambique is going to be another one. And rerating is going to be our final mark. So we're going to be a more reliable, more safe And a more human organization that will be priced correctly. So thanks a lot. Thanks a lot for your questions because that moves us to the right direction. And hope to see you in the next call. That does conclude Vale's conference call for today. Thank you very much for your participation. You may now disconnect your line.