Discussion with sell-side analysts

0
Discussion with
sell-side analysts
Rio de
Ri
d JJaneiro,
i July
J l 11th 2014
Luciano Siani, Vale CFO
1
OBJECTIVE OF THE DISCUSSION
The objective of this discussion is to clarify topics
that have created confusion in previous releases
and address outstanding questions from sell-side
analysts
2
DOCUMENT CONTENT
Iron ore prices and margins
Capex
Cash Flow
3
DOCUMENT CONTENT
Iron ore prices and margins
Capex
Cash Flow
4
TOPICS COVERED – IRON ORE PRICES AND MARGINS
Pricing systems
• The transition of the
benchmark to
alternative pricing
systems
• Vale's provisional
pricing mechanism
and its impact
p
on
prices
• Evolution of Vale's
pricing mix
Price realization
• The evolution of
Vale's price
realization vs. the
IODEX
• Overview of Vale's
iron ore price
realization
• The main drivers
impacting Vale's
price realization
EBITDA margins
• Vale's sales mix goals and
implications
• Sales products
impacting Vale's
EBITDA per ton
• Projections of
Vale’s future
margins
5
TOPICS COVERED – IRON ORE PRICES AND MARGINS
Pricing systems
• The transition of the
benchmark to
alternative pricing
systems
• Vale's provisional
pricing mechanism
and its impact
p
on
prices
• Evolution of Vale's
pricing mix
Price realization
• The evolution of
Vale's price
realization vs. the
IODEX
• Overview of Vale's
iron ore price
realization
• The main drivers
impacting Vale's
price realization
EBITDA margins
• Vale's sales mix goals and
implications
• Sales products
impacting Vale's
EBITDA per ton
• Projections of
Vale’s future
margins
Mining companies abandoned the benchmark pricing system, prevalent during periods of low price volatility, and gradually
adopted alternative pricing mechanisms better suitable to customer needs
HISTORIC EVOLUTION OF PRICING SYSTEMS
US$/t
240
MB 63% Fe FOB Brazil¹
Vale SF FOB Brazil to Asia²
Sharp spot price
increases lead to the
collapse of benchmark
pricing system
200
Sharp spot price decreases
reduced the importance of
the lagged-based pricing
system
160
120
80
40
0
Mar-05
Mar-06
Mar-07
Mar-08
Benchmark
Mar-09
Mar-10
Mar-11
Lagged
¹ Market index based on MB 63.5% CFR China
² Vale prices based on standard Sinter Feed Fines with Fe(%) adjusted to 63.5% for comparison with index
Mar-12
Mar-13
New Pricing
Mechanisms
Mar-14
6
With the fall of the benchmark system, alternative pricing systems were developed to better adapt to customer
needs, particularly the needs of Chinese steel mills
CURRENTLY PREVAILING PRICING SYSTEMS
Description
• Sales based on past prices
Lagged
• Prices calculated based on the average price of
the past three-months ending one month before
the current quarter, i.e., based on three month
period
i d starting
t ti 4 months
th b
before
f
th
the relevant
l
t
quarter
• Customers invoiced based on provisional prices
Provisional
Current
• Accounting provision in the end of the quarter
based on “best estimate” of prices on delivery
Trade-offs
• Provides price stability and
predictability
• Creates disconnection with the
short-term prices, specially in
volatile
l til pricing
i i environments
i
t
• Reflects market prices on
delivery, i.e., closer to iron ore
usage
• Final prices settled and adjustments made in the
subsequent
b
t quarter,
t upon delivery
d li
• Requires end of quarter pricing
adjustments between initial
invoice and delivery
• Sales completed and prices settled in the current
quarter
• Reflects average market prices of
the quarter of delivery
• Prices based on methodologies such as:
• Maintains price volatility
– Monthly averages
– Daily
a yp
prices
ces
– Provisional prices liquidated within the quarter
7
8
Volumes subject to provisional pricing, as reported on Vale's results release, are the ones whose delivery and thus final
price settlement occur after the end of the current quarter
PRICE AT DELIVERY CONCEPT
Conceptual
Q1
0
15
30
45
~ 45 days
Shipments before 45 days to
the end of the quarter
Q2
60
75
90
105
120
135
150
Adjustment of provisional price to
reflect Vale’s best estimates on
prices at delivery
p
y
Final price settled
still in Q1
Classified
as current
Delivery within the quarter
Provisional pricing
in current quarter
(Q1)
~ 45 days
Shipments in the later 45
days of the quarter
Provisional pricing
in current quarter
(Q1)
165
Final prices settled and provision reversals
i
ti th
t (Q2) prices
i
impacting
the nextt quarter
Delivery after end of quarter
Classified
as
provisional
180
Price adjustments can be estimated based on the hypothetical realized prices in the first 45 days following the quarter
ended compared to the prices provisioned by the end of the quarter
HYPOTHETICAL IMPACT OF PROVISIONAL PRICING
Hypothetical 2Q14
Quarter
4Q13
Provisional
Pro
isional sales
1Q
Impact
US$t
+3.1
1Q14
(6.4)
2Q14
(2.0)
Volumes under
provisional
i i
l sales
l
(Mt)
Hypothetical
Adjustment
(US$Mi)
Hypothetical 2Q
price impact
(US$/t)
(2 0)
(2.0)
(%)
41%
X
23.7
Sales volumes
1Q, ex-pellets
(Mt)
57.8
X
(142)
÷
Realized less
provisioned price
Hypothetical 2Q
sales volume,
ex-pellets
(Mt)
70
(US$/t)
Hypothetical
H
th ti l
IODEX realized
prices¹
111
_
(6)
¹ Average of first 45 days of 2Q14
² Hypothetical price provisioned at the end of the quarter (1Q) estimated based on IODEX of last day of the quarter (1Q)
Hypothetical
provisioned²
prices
(US$/t)
117
9
10
Vale’s sales mix is mostly concentrated in current and provisional pricing mechanisms
EVOLUTION OF VALE’S PRICING MIX
Lagged
Current
Provisional
Benchmark
8%
15%
31%
73%
93%
• Provisional sales are
concentrated in the
Chinese market and
close to its sales
distribution limit
64%
92%
53%
27%
21%
16%
7%
2009
• Provisional pricing
has increased
gradually
2010
2011
2012
2013
• Mix may vary with
changes in the
geographical
distribution of sales
and the ramp-up
p p of
the distribution center
in Malaysia
11
Despite short term differences, over the medium term, the Platts 62% and its forward index net-off
COMPARISON PLATTS 62% AND THE 45-DAY FOWARD INDEX
US$/dmt
Pl 62
Platts
62
Platts
Average
Platts
62 todo o período
Média Platts
62 em
Platts62
62,
45asado
days em
forward
Platts
def
45 dias
160,00
Average
Platts
62,asado
45 days
Média
Platts
62 def
emforward
todo o período
150,00
140,00
Avg = 130.6
130,00
,
A = 129.0
Avg
129 0
120,00
110,00
100,00
4Q12
1Q13
2Q13
3Q13
4Q13
Quarter adjustments will net off over the long term despite short term volatility
1Q14
12
TOPICS COVERED – IRON ORE PRICES AND MARGINS
Pricing systems
• The transition of the
benchmark to
alternative pricing
systems
• Vale's provisional
pricing mechanism
and its impact
p
on
prices
• Evolution of Vale's
pricing mix
Price realization
• The evolution of
Vale's price
realization vs. the
IODEX
• Overview of Vale's
iron ore price
realization
• The main drivers
impacting Vale's
price realization
EBITDA margins
• Vale's sales mix goals and
implications
• Sales products
impacting Vale's
EBITDA per ton
• Projections of
Vale's future
margins
13
There has been fluctuations in the difference between the IODEX and Vale's realized prices, primarily because of price
volatility and the existing price mechanisms that do not correlate directly with the IODEX average
IODEX VS VALE REALIZED PRICES
Difference between the average IODEX¹ and
Vale's realized price
Vale realized prices vs. IODEX
US$/t
Average
Iron Ore Price (IODEX) US$/dmt
Realized Price US$/wmt
180
54
160
140
38
37
120
32
30
29
100
26
27 27
25
80
27.8
22
20
22
19
60
40
8
20
0
3Q10
1Q11
3Q11
1Q12
3Q12
1Q13
3Q13
1Q14
3Q10
1Q11
3Q11
1Q12
3Q12
¹ Platts assessmet of daily transaction value for the seaborne iron ore imported and sold into China on a 62% Fe Content
1Q13
3Q13
1Q14
Vale’s iron ore price realization is impacted not only by key drivers such as freight, quality and pricing systems but also by
the sale of ROM - an intermediate product
PRICE REALIZATION – IRON ORE
US$/t
US$/t, 1Q14
29.9
120.4
9.8
Lower prices
on
intermediate
products
p
12.1
1.9
1.6
64
6.4
26
2.6
4.3
Average
Platts
1Q14
Humidity
Freight
Quality
Lagged
prices
Current
Pricing system
¹ Adjustment as a result of provisional prices booked in the previous quarter
Impact
prior
quarter¹
ROM
02
0.2
90 5
90.5
Other
Vale
price
1Q14
14
15
All drivers impacting price realization have improvement trends or will have no negative impact on future price realization
DRIVERS IMPACTING PRICE REALIZATION
Comments
Drivers
Quality
Impact
Trends and ongoing actions
• Fe content decreased as mines
got deeper
• Conclusion of the Itabiritos and the
S11D project will increase quality
• Quality premiums declined as a
result of lower coking coal prices
and lower productivity
requirements
q
• Closure of inefficient steel capacity
in China, fight against pollution and
gradual increase in coking coal
prices will increase quality premium
• Creation of the IOCJ 65% Index will
help capture the VIU of high quality
ores
Freight
Pricing
g system
y
ROM sales
Fonte: Vale
• Freight Brazil-China varied based
on supply-demand, having
reached very high levels prior to
2009
• Increase in the Valemax fleet and
long term shipping contracts will
further reduce and provide stability
to freight costs
• Pricing systems affected price
realization, particularly in times of
high volatility
• Evolution of sales mix reflecting
customer needs and Vale’s logistic
strategies
• Sales of ROM (Run of Mine)
products brought average
realized price down
• Maintenance of current sales
volumes of ROM as a result of its
positive contribution
The expected increase in Vale's product quality will bring additional value which will vary depending of the price premium
associated with the Fe content
EVOLUTION OF PRODUCT QUALITY
Production and quality evolution
Hypothetical EBITDA impact of increased Fe content¹
Delta Fe
(2014-2018)
Value, % Fe
2014
Production (Mt)
321
453
Fe
63.9
64.9
P
0.055
1-2
4.1
0.050
Hypothetical
Fe VIU Range
$ / %Fe.t
Production
volume 2018
Mt
¹ Based on 2018 production volumes
2-5
EBITDA
Impact
US$ Bi
5.8
10
1.0
2018
$/t
SiO2 + Al2O3
%
450
2-5
16
17
Vale expects to capture the real value of its high quality ores through the introduction of a transparent and liquid
index to price its 65% Fe ore from Carajás
THE NEW IOCJ PRICING INDEX
The value of Vale's high quality ores has not been
fully captured by the formula with the decrease in
value of the 1% Fe differential
As result, Vale decided to introduce the IOCJ 65%
index and develop a better reference to price its high
quality ores
65% Fe Index
1% Fe Value
6
65% Fe price (62% Index + US$/t of Fe spread)
150
5
138
$//dmt
4
$/dmt
126
3
114
2
1
Oct-10
Aug-11
Jun-12
Apr-13
Feb-14
102
Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14
• 1% Fe value decreased with coal oversupply
and steel overcapacity
• The IOCJ Index will allow for value to be captured
beyond the 1% Fe formula
• Increasing supply of low grade ore (58%) and
environmental pressures will drive premiums
for higher grade ore
• Vale expects to provide liquidity to the IOCJ 65%
index to generate credible and transparent price
references
18
Vale's freight strategy brought stability and predictability to freight costs, reducing volatility to Vale's realized prices
FREIGHT RATES AND IRON ORE PRICES
US$/dmt
240
IODEX 62%
Freight
200
160
120
80
40
0
2008
2009
2010
2011
New Freight Strategy
2012
2013
2014
19
In 2013, the sales of run of mine (ROM) reduced Vale's realized price by about US$6/t
IMPACT OF RUN OF MINE (ROM) SALES ON REALIZED PRICES
2013
Fines sales
(ex-ROM¹)
Reported price
2013
US$/t
÷
Total Volume
(Iron Ore+ROM)
Iron ore
Revenues
Mt
US$ bi
264.6
Total Revenues
(Iron Ore+ROM)
107.4
US$ Bi
28.4
Mt
X
28.2
FOB fines price
(ex-ROM)
US$
Product
Fines (ex-ROM)
113.5
Fines (with ROM)
107.4
ROM
ROM¹ Volume
Mt
6.1
¹ ROM sales includes volumes of tailing dams fines processed externally
15.2
X
US$ Mi
243 5
243.5
ROM Price
US$/t
Delta (ROM impact)
113.5
+
ROM Revenues
Price
US$/t
249.4
16.0
20
TOPICS COVERED – IRON ORE PRICES AND MARGINS
Pricing systems
• The transition of the
benchmark to
alternative pricing
systems
• Vale's provisional
pricing mechanism
and its impact
p
on
prices
• Evolution of Vale's
pricing mix
Price realization
• The evolution of
Vale's price
realization vs. the
IODEX
• Overview of Vale's
iron ore price
realization
• The main drivers
impacting Vale's
price realization
EBITDA margins
• Vale's sales mix goals and
implications
• Sales products
impacting Vale's
EBITDA per ton
• Projections of
Vale's future
margins
The additional production increases total cash generation by leveraging non-utilized installed capacity despite negatively
impacting unit margins
VALE'S SALES MIX – GOALS AND IMPLICATIONS
Current Situation
Goal
Vale currently has
some opportunistic
Optimize total
sales of lower
cash generation
margin
i products,
d t
by leveraging
leveraging its non-
p
y
installed capacity
utilized logistics in
the Southern and
Southeastern
y
Systems
Implications
• Increase total
EBITDA
• Deliver lower unit
margins
i (EBITDA/t)
• Blur margins of
standard operations
operations,
making it difficult to
forecast future
results
21
22
Vale has some opportunistic operations which have a positive EBITDA contribution but bring unit margins
(EBITDA/t) down
VALE'S EBITDA AND EBITDA MARGINS
US$ bi, 1Q14
EBITDA US$/t
• Third party ore
• ROM
• Corumbá operation
• High Silica
• Miniminas operation
• Tailing dam fines
1.3
0.3
2.8
Lower margin
operations
Iron ore
EBITDA¹
EBITDA
4.1
2.5
Iron ore adjusted
EBITDA (ex-lower
(ex lower
margin operations)
55.7
¹ Considers 57.8 Mt of iron ore Volume
² Includes Ferroalloys, Coal, Base Metals, Fertilizer and Pellets
48.8
Other Vale
businesses²
businesses
EBITDA
23
Vale's price realization will increase with some ongoing initiatives
CONSIDERATIONS FOR PROJECTING FUTURE MARGINS
Not Exhaustive
• Low margin operations are in most cases opportunistic and will not be expanded
• Future expansions will be low cost
– S11D expansion at US$15/t
• Production increase will be of higher quality products
products, improving price realization
– S11D, Itabiritos and other potential new mines will increase product quality
– Additional
Additi
l environmental
i
t l lilicenses will
ill supportt quality
lit iincreases
– Pollution trends may increase Fe content premiums
• Malaysia distribution center will allow for additional optionality in price realization
24
DOCUMENT CONTENT
Iron ore prices and margins
Capex
Cash Flow
25
Vale's CAPEX will reduce with the conclusion of ongoing projects
CAPEX PROFILE
US$ bi
Project execution
Sustaining capex
16.3
16.2
Approved projects only
14.2
4.6
13 8
13.8
4.6
12.5
4.6
4.5
4.5
9.5
8.1
4.5
5.8
11.7
11.6
4.9
9.6
9.3
8.0
5.1
5.0
3.2
0.7
2011
2012
2013
2014
2015
2016
2017
2018
26
Sustaining capex has been rationalized and will only increase marginally driven by the completion of new projects
CAPEX PROFILE – SUSTAINING CAPEX
US$ bi
Iron ore
Base metals
Coal
Fertilizers
4.9
4.5
4.5
4.5
2014
2015
2016
2017
5.1
2018
27
S11D investments will peak in 2015, reducing sharply by 2018
CAPEX PROFILE – PROJECT EXECUTION
US$ bi
Carajas expansion ex S11D
S11D
Moatize II/ Nacala
Itabiritos
Salobo II
Others
9.3
80
8.0
5.0
32
3.2
07
0.7
2014
2015
2016
2017
2018
28
The capex post-2018 is expected to be in the range of US$ 8 to 10 billion
PERSPECTIVE ON VALE'S FUTURE CAPEX (POST-2018)
US$ bi
1.5 - 3.0
8.0 - 10.0
Discretionary
Total
1.5 - 2.0
5.0
Sustaining
Replacement
Projects
29
Other Itabiritos projects are under study
OVERVIEW OF VALE'S ITABIRITOS PROJECTS UNDER STUDY
Itabiritos projects under study
Projects
Status
Capacity
Mtpy
Fáb i
Fábrica
FEL 2
26
Jangada
FEL 2
15
Mariana
FEL 2
27
ITM S Pico
FEL 3
27
30
DOCUMENT CONTENT
Iron ore prices and margins
Capex
Cash Flow
There has been common mistakes, some conservative projections and other opportunities not considered
in most analyst reports
ASSESSMENT OF VALE'S CASH FLOWS
Topics
• Divestitures
Comments
• Disregard of R$ 1.5 billion received in April 2014
– R$ 709 million from sales proceeds and R$ 803 million
from the settlement of an intercompany loan with VLI
Common
mistakes
• Additional R$ 2 bi yet to be received
Conservative
projections
Opportunities
• Fiscal credits
• O
Outstanding tax credits close to US$
S$ 1.5 billion ffrom the
REFIS settlement by the end of 1Q14
• Capex
• No material decrease in capex in the years following the
completion of ongoing projects
• Costs
• Unit costs not trending significantly down with the
completion and start-up of S11D
• Volume
• Conservative projection of volumes for the coming years
• Working
W ki capital
it l
• Potential
P t ti l ffor reductions
d ti
iin working
ki capital
it l nott considered
id d
• Trapped Inventory
• Ability to haul about 10Mt of iron ore stranded in the
Southeastern System with the conclusion of the PicoFabrica road
• Further Divestitures
• Potential cash generation with additional divestments
31
32
33
IO PRICE INDEXES
62% Fe INDEXES
2014
$/dmt
LAST
YTD
Q3
JUL
Q2
JUN
MAY
APR
Q1
MAR
FEB
JAN
PLATTS 62% Fe IODEX
96,00
110,75
95,58
95,58
102,60
92,67
100,80
114,24
120,38
111,79
121,24
128,15
TSI 62% Fe
96,50
110,81
95,72
95,72
102,66
92,74
100,56
114,58
120,43
111,83
121,37
128,12
TSI 62% Fe LOW ALUMINA
97,20
111,83
96,62
96,62
103,71
93,78
101,64
115,60
121,42
112,73
122,42
129,14
METAL BULLETIN
96,51
111,04
95,55
95,55
103,02
92,98
101,09
114,90
120,55
111,55
121,41
128,73
ARGUS 62% ICX
95,25
109,31
77,44
77,44
101,36
91,46
99,45
113,08
118,72
110,00
119,71
126,50
65% FE INDEXES - ALL ORES
$/dmt
2014
LAST
YTD
Q3
JUL
Q2
JUN
MAY
APR
Q1
MAR
FEB
JAN
PLATTS 65%
105,25
119,75
104,79
104,79
110,04
100,73
107,53
121,74
130,91
119,61
132,38
140,81
TSI 65%
104,40
120,47
103,68
103,68
111,96
100,78
109,89
125,10
130,60
122,10
131,61
138,14
ARGUS 65%
103,80
119,46
102,73
102,73
109,22
99,39
107,19
120,99
131,32
118,15
134,35
141,60
65% FE INDEXES - IOCJ ONLY
$/dmt
2014
LAST
YTD
Q3
JUL
Q2
JUN
MAY
APR
Q1
MAR
FEB
JAN
M t l Bulletin
Metal
B ll ti 65% index¹
i d ¹
105 51
105,51
120 72
120,72
104 39
104,39
104 39
104,39
111 02
111,02
101 08
101,08
107 89
107,89
123 94
123,94
131 57
131,57
120 46
120,46
133 63
133,63
141 69
141,69
FORMULA²
101,10
116,82
100,68
100,68
108,19
97,88
106,28
120,31
127,02
118,31
127,84
134,94
¹ Metal Bulletin: 62% Fe MBIO Index + 65% Fe IOCJ premium
² 62% Fe INDEX + Fe spread (IOCJ Fe-62) x 1% Fe value for the indicated period
Sources:
From Platts: Steel Markets Daily and Metal Alerts
From TSI: The Steel Index Daily Report
From MB: MBIO daily index
Bloomberg

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