Vale S.A. (NYSE:VALE) Q1 2024 Earnings Call Transcript

Vale S.A. (NYSE:VALE) Q1 2024 Earnings Call Transcript April 25, 2024

Vale S.A. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen. Welcome to Vale’s First Quarter 2024 Earnings Call. This conference is being recorded, and the replay will be available on our website vale.com. The presentation is available for download in English and Portuguese from our website. To listen to the call in Portuguese, please press the globe icon on the lower right side of your Zoom screen and then choose to enter the Portuguese room. Then select mute original audio, so that you won’t hear the English version in the background. We would like to inform that all participants are currently in a listen-only mode for the presentations. Further instructions will be provided before we begin the question-and-answer section of our call.

We would like to advise that forward-looking statements may be provided in this presentation, including Vale’s expectations about future events or results, encompassing those matters listed in the respective presentation. We caution you that forward-looking statements are not guarantees of future performance and involve risks and uncertainties. To obtain information on factors that may lead to results different from those forecast by Vale, please consult the reports Vale files with the U.S. Securities and Exchange Commission, the Brazilian Comissão de Valores Mobiliários, and in particular the factors discussed under forward-looking statements and risks factors in Vale’s annual report on Form 20-F. With us today are Mr. Eduardo De Salles Bartolomeo, CEO; Mr. Gustavo Pimenta, Executive Vice President of Finance and Investor Relations; Mr. Marcello Spinelli, Executive Vice President, Iron Ore Solutions; Mr. Carlos Medeiros, Executive Vice President of Operations; and Mr. Mark Cutifani, Chairman of Vale Base Metals.

Now, I will turn the conference over to Mr. Eduardo Bartolomeo. Sir, you may now begin.

Eduardo Bartolomeo: Thank you, and good morning, everyone. I’m very excited that we got off to a good start in 2024. Starting with our safety journey, technological enhancements and innovation towards safety improvements is showing encouraging results with 77% reduction in accidents in some critical activities. On dam safety the Peneirinha dam located in the Vargem Grande Complex was removed from the emergence level by the National Mining Agency and is now certified as safe and stable. On our second level, the stabilization of our iron ore operations we are taking Vale to an even higher level of performance. Iron ore production had the highest output for our first quarter since 2019 and sales were up 15% year-over-year. On our third level, one of Vale’s major competitive advantage is our potential to grow a high-quality portfolio with low capital intensity.

Our three key projects will add 50 million tons capacity by 2026. Vargem Grande, Capanema, and S11D plus 20. The first project to come online will be Vargem Grande which is almost 90% completed and on-track to start up in the fourth quarter of 2024. On our path to transform the Energy Transition Metal business, copper production grew 22% in the first quarter. Nickel production decreased by 4% year-on-year in-line with plan mainly reflecting maintenance overhaul at the Onça Puma furnace. Outside Brazil, we saw stronger performance in the Canadian and Indonesian operations. On the Energy Transition Metals partnership last week the Committee on Foreign Investment in the United States granted the final regulatory approval and we expect to close the transaction in the upcoming weeks.

And, in our pursuit towards ESG leadership in mining we reached a remarkable target, a 100% renewable energy consumption in Brazil two years ahead of schedule, reaching the target means that Vale has zeroed its indirect CO2 emissions in Brazil which corresponds to Scope 2 emissions. To support our decarbonization pathway Vale has announced an agreement to acquire the remaining 45% stake in Aliança Energia which is a first step towards creating an asset-light energy platform. Lastly, our discipline in capital allocation remains untouched. We are walking the talk and returning value to shareholders. In March, we paid $2.3 billion in dividends while completing 17% of the fourth buyback program launched since 2020. Now, let’s go over more details of our quarter performance.

Next slide, please. We’re gradually becoming a safer company. Technology and innovation have been key pillars to our quest to deliver a sustainable safety performance. We want to turn Vale into a safety benchmark starting with zeroing our N2 injuries those that usually precede life changing or fatal events by the end of 2025. We are on the right track to fulfill this commitment. Our safety transformation program targets the critical activities with the highest N2 records, later developing preventive controls. Some of them technology-based like collision alerts and driver drowsiness detection. As a result we had a 77% reduction in any two events since 2019. Another key element of our safety strategy is our dam safety management. Since 2020, we increased safety conditions up to adequate levels for 16 dams.

All our structures are continuously checked by our 24/7 geotechnical monitoring centers. In a conservative approach, we removed a 100% of the people from risk areas and backup dams were constructed to reduce potential consequences in those areas. At the same time, Vale continues to progress on the dam de-characterization program with 43% of the structures eliminated to-date. We are already seeing a safer Vale built with operational discipline and a strong management model. Okay. Next slide, please. We delivered a robust operating performance on iron ore in Q1. Production was the highest for our first quarter since 2019 underpinned by increased asset and process reliability, especially at S11D. We have talked about our strong actions toward operational excellence and we are now consistently bearing the fruits of that strategy.

Our operational plan for the quarter was successful in dealing with a higher average rainfall. We delivered a 6% increase in total production and 15% higher sales year-on-year. Moreover, we continue to debottleneck our operations. At S11D, increased geological knowledge enables more accurate mining plans while the truckless system combined with a mobile mining fleet provides further operating flexibility. Our long-term ability to deal with jaspilite relies on the installation of the new crushers, as you know. But these surgical measures have allowed us to operate S11D with more efficiency with the highest production for our first quarter since 2020. The solid production performance in Q1 give us further confidence that we will deliver our guidance as planned.

Next slide, please. We are committed to accelerating solutions to support the steel industry’s decarbonization. Our briquette plant is ramping up in our Tubarao complex aiming to deliver around 1.5 million tons of briquettes in 2024. We continue to progress on agreements for the construction of mega hubs. We are also studying the feasibility of developing green industrial hubs in Spain together with Hydnum Steel. Finally, we are very proud to be selected under the Inflation Reduction Act funding to enter in negotiations to develop a briquette plant in the U.S. The selection by the U.S. Government Department of Energy represents a critical path for the validation of our proprietary technology and its potential to deliver a transformative solution to decarbonize the steel sector.

Iron ore briquettes will contribute to achieving Vale’s commitment to reduce 15% of its Scope 3 net emissions by 2,035. Next slide, please. In the Energy Transition Metals business we delivered remarkable output in copper an outstanding 22% increase quarter-on-quarter driven by the successful ramp-up of Salobo 3 and a stronger performance at Salobo 1 and 2 plants. On nickel, we are on-track to deliver the production guidance for 2024. As part of the asset review initiatives Sudbury mines had improved performance and the Clarabelle mill throughput was up 7% year-on-year. The improved mine performance resulted in reduced consumption of third-party feed and lower costs. We are confident that we are taking the right steps to transform the Energy Transition Metals business.

Next slide. On ESG, we continue to march towards becoming a more transparent and open company. We just released our 2023 integrated report where we announced that we reached the target of 100% renewable energy consumption in Brazil, two years ahead of schedule. Reaching the target means that Vale has zero scope to emissions in Brazil. To support our decarbonization pathway, Vale signed an agreement to acquire the remaining 45% stake in Alianca Energia. This is an important step towards creating an asset light energy platform. Upon the transaction conclusion, Vale will search for potential partners to better advance in our commitments to decarbonize our operations using renewable sources at competitive costs. Our big focus on becoming an ESG leader in mining is bearing fruit.

Our improvement in carbon emissions and safe practice led to renewal perception by Sustainalytics for instance with an important upgrade in our ESG risk rating in April. With that said, now I pass the floor to Gustavo, for our financial results, and I’ll get back to you in the Q&A. Thank you.

Gustavo Pimenta​: Thanks Eduardo, and good morning, everyone. Let me start with our EBITDA performance in the quarter. As you can see, we delivered a pro forma EBITDA of $3.5 billion in Q1. Before going to the main drivers, I would like to first explain a couple of reporting changes we implemented this quarter with the reorganization of our assets between Iron Ore Solutions and Energy Transition Metals, some items previously classified as others will now be allocated to their respective business segments. This change includes items such as SG&A and energy generation assets, and we will allow for more precise evaluation of each business segment’s performance. In addition, for better alignment with market peers, we are now including the proportional EBITDA of our associates and joint ventures into our EBITDA.

We note that before 2024, our EBITDA included the dividends coming from those entities, which were naturally more volatile during the year. Now, returning to the main drivers behind our EBITDA performance in the quarter. We are pleased to see a continued strong operational performance across the Board, which helped us offset a large portion of the impact from provisional prices given the decrease in the iron ore benchmark prices during the quarter. On volumes, iron ore sales increased almost 15% or 8.2 million tons year-on-year driven by better operational performance in all of our systems, highlighting S11D which achieved the highest output for our first quarter since 2020. Sales were also quite strong in Q1 this year, reflecting the initiatives undertaken in 2023 to improve operational performance and flexibility of our Ponta da Madeira port.

Corporate sales were another highlight in the quarter increasing by 22% or 14,000 tons year-on-year driven by the ramp-up of Salobo 3 and better operational performance in the Salobo 1 and 2 operations. On costs and expenses, I would like to highlight the ongoing effort that our teams have been making internally to improve productivity and efficiency. Excluding the external effects of higher freight costs in the iron ore business and the one-off effects in base metals like the Onça Puma furnace rebuild, our costs and expenses were roughly flat year-on-year. Again, this is being accomplished through a series of initiatives across the business and we are quite excited about the cost efficient opportunities we still see ahead of us. Now, moving on to price realization, iron ore fines realized price was $100.7 per ton in Q1, 7% lower year-on-year and 15% lower quarter-on-quarter.

Pricing mechanisms had a negative impact of $10 per ton on our realized price in the quarter, largely explained by the negative effect of provisional prices. At the end of Q1, 24% of our iron ore fines sales were booked at $102 per ton on average which compares to an average price of $124 per ton in the quarter. Also, about 30 million tons of sales from Q4 ‘23 were booked at an average price of $139 per ton and were later realized at lower prices in Q1. Our average iron ore fines premium came in negative at $1.6 per ton as we increase the share of high silica products in our sales mix given the lower discounts observed for these products during the quarter. This has allowed us to maintain an adequate balance of high-quality products through our supply chain for later value maximization.

For Q2, we continue to see similar market conditions and therefore expected to maintain a slightly higher share of high silica products in our mix compared to historical levels. Now, let me turn to our cost performance. In iron ore our C1 cash cost ex-third-party purchases was $23.5 per ton, is slightly lower versus last year despite the negative impact of the BRL appreciation. Excluding this effect, C1 would have been $22.8 per ton, almost a $1 per ton lower year-on-year. This was driven by lower demurrage costs due to improved shipping and port loading during the rainy season, higher fixed cost dilution as a result of higher production volumes and gains from our cost efficiency programs. Additionally, I would like to take a moment to comment on our strategy behind third-party purchases.

We acquire iron ore from smaller producers that operate near our operations. This product is sold directly to our customers or it is blended within our own production, generating a positive contribution margin. This helps dilute fixed costs, particularly as we have excess logistic capacity while capital intensity is very low which implies a very healthy return on invested capital. In 2023 our third-party volume was 24 million tons and it is expected to increase slightly in 2024. We are also evaluating to accelerate the development of some of our smaller deposits through leasing agreements with regional partners, transactions that can offer attractive returns for both sides. Moving on to our Energy Transition Metals business, we were pleased to deliver significant year-on-year reductions in all-in cost in both copper and nickel.

Our copper all-in costs decreased by 26% year-on-year driven by continued successful ramp-up of Salobo 3 and improved operational performance at Salobo 1 and 2. The higher proportion of Salobo 3 volumes in the product mix has also contributed to an increase in unit by product revenues with higher gold sales. Nickel all-in costs were down 14% year-on-year supported by higher unit by product revenues. The unit COGS increase was expected and largely related to the furnace rebuild at Onça Puma. I would like to also mention that Mark Cutifani and the VBM team continue to make significant progress on the asset review. The Vale unlock opportunities are being assessed and designed for implementation over the next two to three years with some benefits already being captured in the shorter term.

As we pointed out last quarter, we’ll present the key findings and action plan of the asset review in our webinar to be scheduled for June this year. Now moving on to cash generation, our EBITDA to cash conversion was 57% in Q1 with free cash flow reaching $2 billion roughly $0.5 billion lower than Q4 2023, despite the $3.4 billion sequential drop in EBITDA driven mostly by seasonally lower shipments quarter-on-quarter and lower iron ore prices. This was achieved primarily due to the positive impact of a strong cash collection from Q4 sales as we had anticipated last quarter and seasonally lower CapEx disbursements. Most of the free cash flow generation was used to pay dividends and execute our buyback program for a total shareholder remuneration of $2.6 billion in Q1.

So, before we move on to the Q&A session, I would like to reinforce the key messages from today’s call. Safety continues to be our key priority, and we remain highly focused on creating the conditions for an accident-free workplace environment. Our continued strong operational performance across all commodities only reinforces we are in the right direction to consistently deliver on our short-term and long-term commitments. On ESG, we are making significant progress on several fronts as demonstrated by our recent achievement of 100% renewable sourcing in Brazil for Scope 2 and the continued investments to deliver a sustainable future for our businesses. On the medium term strategic objectives we laid out at Vale Day, we are quite pleased to see the development of our key projects such as Vargem Grande, which we expected to reach start up later this year.

These investments will position Vale as the leader in high-quality offerings which are critical for steel making decarbonization. Last, we remain highly committed to a disciplined capital allocation process as evidenced by our $2.6 billion cash return to shareholders year-to-date through dividends and share buybacks. Now, I would like to open the call for questions. Thank you.

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Q&A Session

Operator: We are going to start the question-and-answer section of the call. [Operator Instructions] Our first question comes from Rafael Barcellos with Bradesco BBI.

Rafael Barcellos: Hello. Good morning, and thanks for taking my questions. So firstly, I would say that the main news in the sector was the potential merger between BHP and Anglo American. So, maybe if you could discuss a bit on how this movement could change Vale’s strategy going forward, it could be interesting for us, or even how could it change your recently announced partnership at Anglo’s Minas-Rio assets? And, my second question here is maybe to just understand there your views on iron ore markets and price premiums in the coming quarters. And, of course, how do you see the possibility of further, extraordinary dividends, now with our enough prices back to the $120 per ton level? And, thanks.

Eduardo Bartolomeo: Thanks, Rafael. It’s Eduardo here. Okay? As you’ve noticed, it’s truly an unfolding, so we are still digesting what is going on. We specifically answering your question. We don’t see any impacts on the on Minas-Rio deal. It’s be undertaken with the Anglo is going to be respected by whoever comes later if it comes later. So, that’s the first reaction. Second is, we’ve been speaking with you since we decided to do carve out, right. We believe that Vale has a unique, position in the industry, right. We do have a growth platform in iron ore, as Gustavo mentioned during his presentation. We are going to add 50 million tons of high-quality with low cost. So, there’s no other asset in the world that could be attractive to us on that sense.

And, when you look at base metals, we still have, as well, the best endowment in Canada, in Brazil, in Carajás province and Indonesia. We’re off obviously, we’re always looking at of opportunities, eventually, but it doesn’t change our strategic focus on executing the asset review, the transformation in base metals. There’s a tremendous amount of value to be extracted there. And iron ore, we are the only iron ore growth with quality in the sector. So, we will follow-up closely the development of this deal, but it doesn’t impact our strategy or change anything in our mindset. And, I’ll pass the second question to, Spinelli.

Marcello Spinelli: Thank you, Rafael. Regarding the market, so we see China, as you mentioned, we remain the same the same view about China. That’s the main market. We’re calling this moment as the China resiliency. Despite the problem and the proper markets that all of us track, we see since ‘21 a very strong market in the manufacturing growing really constantly, with the energy transition industry or shipbuilding, so we have an offset for that, and we’ll be consider the exports as something that is sometimes bothering the markets, but, by the end of the day, it’s a trade-off between protection in the market and inflation. So, all the micron conditions in China are going well. So, still inventory now is slower than last year, and the margins are getting better.

So, as a whole we see the market really similar compared to last year. And, you asked us about the premiums. Premiums by product, we see a stable moment. We’ve been stable for some month, so some quarters actually. So, we see Carajás and also the BRBF in a stable gap. And, we can have a small upside risk if we have some spike in the coke and coal market that can increase the necessity for efficiency.

Operator: Next question from Caio Ribeiro with Bank of America.

Caio Ribeiro: Yes. Thank you very much. Good morning. Thanks for the opportunity. So first of all, I just wanted to see if you could share some updates with us on the latest, involving the Onça Puma and Sossego operations. And, any color that you can share on expected operational financial impacts there would be helpful? And, then my second question is, related to the renegotiation of the railroad concessions rate. Can you give us some color there as well on, your latest expectations around those negotiations and on timing as well to conclude them? Thank you.

Eduardo Bartolomeo: I think Mark is in the call, right? Mark, could you answer the first one?

Mark Cutifani: Yes. Thanks, Eduardo. Can you hear me okay?

Caio Ribeiro: Yes.

Mark Cutifani: Okay. Good. Well, thanks for the question. On both operations, we’re working through with the authorities as we speak. In the case of Sossego, what has been outlined to us is that, there were some complaints on noise and dust and complaints around reduced social programs through COVID. We have already submitted our reports for those issues, which was subject to the first complaint. And now that, it’s clear that we’ve input the reports, we’re now working through detail that’s contained in those reports both with the authorities and with the local political leaderships as well. And, we’ve got about three to four weeks ore on the ground to process. So, we’re in good shape in terms of our ore stuff because it’s the mines that are actually impacted.

So, processes are still going forward. On Onça Puma fairly similar story, in terms of complaints, a little bit different in terms of some of the mining work more environmental related, but also connected to social programs and a similar story. We’re working through with the authorities. We’re also talking to other leaders in the community, very sensitive to making sure that people aren’t impacted. And, I think everybody’s keen to make sure we get things up and running very quickly. In, the Onça Puma case, we’ve got about four months of work because we’ve now finished the furnace rebuild and we’re on heat up at the moment, still going through those processes. But, again, at this stage, we’re not anticipating, problems over the course of the year.

We should be able to make up the production through the course of the year. May, might be impacted on the furnace issue, but that’s more an operating, ramp-up to full capacity issue than anything connected to the current mining shutdown because we’ve got lots of ores. So, that’s where we are. I would expect during the course of next week, we’ll have both issues pretty well in view, and we’ll let everybody know where we’re up to.

Eduardo Bartolomeo: Caio, thank you for your question. So first of all, we have a very solid contract. We’ve spent more than four years to reach a deal of the renewal, with all the approvals in all the levels, federal levels, and it’s important to say we are complying with our obligations. But nevertheless, we’ve been talking to the transportation ministry. We see room to optimize some, specific parts of the contract and also, adjust some obligations that can bring value for the company, and we see that we can balance this value with new obligations to pay. So, you may expect a balanced negotiation. We are finalizing the discussion and we expect the final terms soon.

Operator: Next question from Carlos De Alba with Morgan Stanley.