Vale S.A. (NYSE:VALE) Q2 2023 Earnings Call Transcript

Vale S.A. (NYSE:VALE) Q2 2023 Earnings Call Transcript July 28, 2023

Operator: Good morning, ladies and gentlemen. Welcome to Vale’s Conference Call to discuss the 2023 Second Quarter Results. All participants are currently in a listen-only mode. At the end of the presentation, we will provide instructions on how to participate in the question-and-answer session. This call is being translated simultaneously to Portuguese. [Operator Instructions] As a reminder, this conference is being recorded, and the recording will be available on the company’s website at vale.com in the area for Investors. The slide presentation that accompanies this call is being broadcast on the Internet and is also available in the Investors’ area of the company’s website. There is a Slide 2 second delay between the audio and slight changes compared to the audio transmitted via phone.

Before proceeding, let me mention that forward-looking statements may be provided in this presentation including Vale’s expectations about future events or results, encompassing those matters listed in their 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’s files with the U.S. Securities and Exchange Commission, SEC, the Brazilian Comissão de Valores Mobiliários, CVM and in particular, the factor is discussed under forward-looking statements and Risk Factors in Vale’s annual report on Form 20-F. With us today are Mr. Eduardo De Salles Bartolomeo, Chief Executive Officer; Mr. Gustavo Pimenta, Executive Vice President of Finance and Investor Relations; Mrs.

Deshnee Naidoo, CEO, Vale Base Metals; Mr. Carlos Medeiros, Executive Vice President of Operations. Mr. Eduardo Bartolomeo will begin the presentation on Vale’s second quarter 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.

Eduardo De Salles Bartolomeo : Thank you very much. Good morning, everyone. I hope you are all well. Let me start with a very significant milestone that we delivered and announced last night. We signed a strategic partnership with world-class diversified investors for the energy transition metal business. This partnership attributed a very attractive valuation for our ETM business, which shows that our partners recognize the value generation potential of our assets and how uniquely positioned they are. This is an encouraging starting point for what we believe is a powerful platform for growth. I will give you more details during the presentation. Now, let me cover our operating results. We delivered a solid production performance for our business this quarter.

In Iron Solutions, we are growing quarterly output year-on-year while our all-in cost declined yearly and quarterly. We are so commissioning to Gelado dam, which will increase availability of pellet feed for Brucutu operations and improve the average quality of our portfolio. In Energy Transition Metals, Salobo III is ramping up ahead of schedule with a solid contribution to our copper growth year-to-date. In nickel, we are firmly marching towards our annual guidance. Moving on to the management. We reached the first deadline for implementing the global industry standard for tailing management, the GISTM with a positive outlook. All of our prioritized structures are in conformance with the standard with ongoing action plans to ensure that the best practices are in place.

This is part of our commitment to being a safer company for our employee’s, communities, and society. On top of that, our discipline in capital allocation remains pristine. We announced the distribution of $1.74 billion in shareholder remuneration with payment in September. Since 2021, the total amount distributed in dividends and interest on capital translated into a 27% yield to our shareholders. This shows Vale’s, solid track record in creating and sharing value. In addition, our third share buyback program is now 69% complete. Since launching our first share buyback program in 2021, Vale has repurchased about 16% of its share base, representing a concentration in shareholder future earnings of almost 20%. With that, we are walking the talk, delivering in our commitments.

So let me go now over some details of our performance. Next slide. We reached the end of the first half of 2023, with strong results and a positive outlook being well positioned to deliver the production guidance for 2023. In Iron Solutions, asset reliability initiatives have started to bear fruit this quarter and driving the solid performance across our three systems. We set a new production record for a second quarter at S11D, Itabira and Vargem Grande performed very well as well and our mix improved substantially. As I mentioned, talk to is finally commissioned, which should allow for more pellet production, improving our mix and average price premium. In Energy Transition Metals, copper production in the second quarter grew 41% year-on-year, mainly due to the section ramp-up of Salobo III and improved performance at Sossego, benefiting from the extended SAG mill maintenance done last year.

Copper sales were exceptional for the period, growing 43% year-on-year. Finish nickel production grew 8% year-on-year, given continued solid performance from our Sudbury mines and improved production sourced from Indonesia with planned maintenance in the quarter, Voisey’s Bay and long harbor operations had a lower output. Onça Puma furnace is currently operating at over rate in preparation for the furnace rebuild later this year. Despite that, our outlook for 2023 nickel production remains solid. Next slide. We are ramping up Salobo III ahead of schedule with strong production rates. We had an increment of 10 kilotons this quarter versus the first quarter with a total output of 16 kilotons in the first half of 2023 meaning 9% of our total copper output in the same period.

Once that peak capacity expected at the end of 2024, Salobo III will add 30,000 to 40,000 kilotons per year of copper to our total Salobo complex output. Next slide. In 2020, we committed to implement the GISTM, the global industry standard for tailing management within the industry time frame. I’m glad to inform that we have implemented the standard for all of our prioritized structures within the first deadline with ongoing action plans to ensure full performance. This is an important milestone in the evolution of our brand management towards the safety of our employees, neighboring communities and society. In addition, we are on track to full conforms for all are taking facilities, not in state of closure by 2025. We are consistently reducing risks associated with our dams and implementing the best international practices in their management, while developing alternative solutions to reduce them use.

So, we will continue to deliver on our ESG commitments so that Vale becomes a leader in sustainable mining and a benchmark in safety. Next slide. Finally, talking about our ETM business. As you all know, we have been working over the last 18 months on a series of initiatives to position our ETM business for success. We have completely redesigned our organization, reinfect the business into a single vehicle and a line structure and a dedicated governance. We attracted industry experts for the Board, top talents like Jerome Gian and Macusani, who needs no introduction. In addition, we define management incentive plans tailored to foster business development. All of that to establish a more fit-for-purpose organization, that will allow us to unlock the ETM business value over the next several years.

Today, I am very proud to announce the formation of a partnership with world-class strategic investors to ETM, which I’m confident we will create substantial long-term value to all of our shareholders. I am honored to partner with Manara Minerals Investment Company, a new venture between Madden and PIS, the public investment fund, that brings an experience and help us in accessing strategic geographies from, including the iron ore business with our megahertz. I am also honored to partner with engine number one, a reference in sustainability-focused investments with solid ESG creations. The future ahead of us is very promising. The need for a lower carbon economy is a generational challenge, but at the same time, it’s an enormous opportunity as this simply will not be achieved without a significant increase in the supply of critical minerals.

We see ETM uniquely positioned to play a relevant role in this process. not only because we have a tremendous mineral endowment, but also because we are building the leading ESG future-facing minerals platform in our space. The one that pursues long-term value creation to all stakeholders. We all share the same vision for long-term growth and value creation. And the terms of our partnership is a validation of that. I said we would close a deal only at the right value and with the right partners. That is exactly what we achieved today. So, now, I pass the floor to Gustavo, who will detail the transaction and our financial results, and I’ll get back to you on our Q&A at the end, and thank you for your attention.

Image by Bishnu Sarangi from Pixabay

Gustavo Pimenta: Thanks Eduardo, and good morning, everyone. As Eduardo explained it, this partnership is another important milestone in building a leading future-facing commodities platform with significant mineral endowment and resources, inclusive of reserves, amounting over 30 million tons for copper and 90 million tons for nickel. We see potential for ETM to invest $25 million to $30 million in highly accretive projects over the next decade, growing its copper production from approximately 350 kilotons per year to 900 kilotons per year and its nickel production turn around 175 kilotons per year to 300 kilotons per year. With this exciting outlook, I now turn to the transaction details in the next slide. Given the strong interest to partner with ETM and the high caliber of potential partners, we, together with our Board, decided to accommodate a greater share of investors and increased the equity capitalization to 13%.

Considering an enterprise value of $26 million, the implied pre-money equity value from Vale was $25.1 billion. The total net proceeds are expected to reach $3.4 billion, out of which $1 billion will stay with VBM and the balance will be returned to the parent company for future use as per our capital allocation framework. Now, moving to our financial performance in the second quarter. Let’s start with our EBITDA. As you can see, we delivered an EBITDA of $4.1 billion, $1.4 billion below the same period in 2022. This decrease is explained by $15 per ton lower iron ore fines realized price and by the $3,000 per ton lower nickel realized prices, following the decline in the reference prices since second quarter 2022. The impact of cost and expenses on EBITDA was relatively small at $96 million, mainly from transitory effects in the nickel business related to the maintenance and higher third-party nickel feed purchases.

In iron ore and copper, despite the year-on-year inflationary pressure, costs and expenses improved EBITDA by $218 million. I will go into more details on costs later in my presentation. Sales volumes and by-products helped increase our EBITDA by $154 million as a result of initiatives to improve asset reliability, and we expect to continue seeing these positive results in the second half of 2023. Now on to iron ore costs. Our C1 cash cost ex-third-party purchases came down slightly to $23.50 per ton quarter-on-quarter, even considering a $0.70 per ton negative effect from the Brazilian currency appreciation. Given the significant appreciation of the Brazilian real and now considering an average exchange rate of 4.95% for the year versus our previous assumption of BRL5.20 per dollar, we have adjusted our C1 guidance for the year to $21.5 to $22.5 per ton.

This means an expected C1 below $22 per ton in the second half of this year, driven by more Northern System production in the mix and the continuous rollout of our productivity program with gains in asset reliability and procurement initiatives. With regards to all-in costs, our EBITDA breakeven reached $53 per ton, roughly flat year-on-year and $5.2 per ton lower quarter-on-quarter. This can be attributed to the improved product portfolio mix with more northern system ore and lower high silica product sales in addition to greater volumes. We also adjusted our iron ore all-in cost guidance to $52 to $54 per ton for the year. This change is essentially the result of external factors such as the lower all-in premiums due to market conditions and the adjustments in C1 due to the Brazilian real appreciation.

Just to give a sensitivity, a $0.10 appreciation of the Brazilian real converts into a $0.30 per ton increase in C1 cash costs, extra party purchases and a $0.50 per ton increase in all-in costs in 2023. In copper, we continue to see gains from higher production at both Salobo and Sossego, which supports the dilution of fixed costs at our operations, higher gold prices and the one-off effect on tax credits contributed to reducing our total costs in the quarter. As a result, our all-in cost was just over $3,000 per ton, approximately $1,800 per ton lower than in the first quarter, which is in line with our expectations with the continued ramp-up of Salobo III. At our nickel operations, our COGS ex-third-party feed increased about 5,000 year-on-year due to lower availability of our own feed, which we were already expecting with the ongoing transition in Voisey’s Bay mine and the relatively longer planned maintenance period at Long Harbour.

Also in connection with Voisey’s Bay, transition and Long Harbour maintenance. This quarter, we have recognized a one-off decrease in the recoverable value of inventories, which were produced at higher costs. As a result, our all-in costs increased year-on-year, but stayed essentially flat quarter-on-quarter at just over 17,000 per ton. The all-in cost guidance for nickel in 2023 has been adjusted to $15,500 to $16,000 per ton, mostly reflecting lower than expected by-product prices and volumes, which we expected to continue throughout the second half of 2023. For the second half, we expect all-in cost to decline, as production increases and no other one-off event materialized. Now moving to cash generation. As you can see, Q2 free cash flow was negatively impacted by working capital, as we had 7 million tons higher accrual sales volumes in iron ore.

In addition to higher Brumadinho-related commitments. Also in the second quarter, Vale raised $1.5 billion from bond issuance, whose proceeds were mostly used to repurchase $500 million of higher cost debt and to repurchase $1.4 billion of shares as part of our buyback program. Looking specifically at our capital allocation strategy, yesterday, our Board of Directors approved a distribution of $1.7 billion in interest on capital to be paid in September based on financial results from the first half of the year. Since 2021, Vale generated 27% of dividend yield. Additionally, we continue to see the repurchase of our shares as one of the best ways to create long-term value for our shareholders. Since the beginning of our share buyback program, Vale has repurchased 16% of our share base, representing a concentration in shareholder future earnings of almost 20%.

So before we move on to the Q&A session, I’d like to reinforce the key messages from today’s call. We continue to make substantial progress in our operational performance and are extremely confident in delivering our production targets for the year. At our Energy Transition Metals Business, we are thrilled with today’s announcement and believe the actions we have taken over the last 18 months will position the business to be a winner in the global energy transition. At the same time, we have been taking immediate and consistent actions to improve then safety, being now adherent to the GISTM for all critical structures. And finally, we remain highly committed to a disciplined capital allocation process, as evidenced by today’s dividend announcement and the continuous execution of our highly accretive buyback program.

Now I would like to open the call for questions. Thank you.

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Q&A Session

Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Daniel Sasson, Itaú BBA.

Daniel Sasson: Hi, guys, good morning. Thanks for the presentation. My first question is on the cost front. If you could give us more details on the cost difference between your Northern and Northern Systems that would be helpful and help us understand the evolution of your cost going forward, given the increase of participation of the Northern System, our total mix and our total sales mix in the second half? And if you could remind us of the — your exposure, what percentage of your Q1 is actually denominated in reas that would be great. And my second question, congrats on the transaction for the base metals division. If you could give us more color on your expectations on the potential contributions from Maaden and the PIF from a strategic standpoint to the development and stabilization of operations in your Base Metals division, that would be great, right?

I’m trying to understand that in addition from the interest evaluation that you were able to reap, what is — what your partners could bring to the table and help us with those with unlocking value in those operations? Thanks a lot.

Eduardo De Salles Bartolomeo: First in the cost, and we’re going to detail a little bit more the partnership later.

Gustavo Pimenta: Thanks, Eduardo. Thanks, Daniel, for your question. So on the Northern system, C1 is on the mid-teens. So you can do the math, you see there is certainly a contribution as we bring more volume from the North to our overall mix, right? We’ve seen some improvement in Q2, and you will continue to see in the second half of the year. Regarding your FX question, I think the best way to look into that is to assess the sensitivity that I’ve talked about in my prepared remarks. So every $0.10 of BRL appreciation is about $0.30 of increase in our C1. I think that’s the best way to look into the overall exposure that we have and $0.50 at the holding. So I’ll pass the third question to Eduardo.

Eduardo De Salles Bartolomeo: Thanks, Gustavo. I think, Daniel, thanks for the question. When we discuss the unlocking value for base metals, we always said it’s a conjunction of factors, right? It wasn’t only the participation. The participation would come, as I mentioned, at the right value with the right partner, one that would see the opportunity down the road and the ability of ourselves to execute it. We are obviously, as Gustavo mentioned, there were several interests in Manara to Maaden together with PIF and then to number one as well. They came up exactly on these two fundamental elements that we believe we will lock value. First of all, they validate the PIF, they are long-term investors. They’re not here for spring.

They’re coming here for the long-term. They bring a sector experience Maaden has partnerships with other several miners. So they will help us as well. And PIF, as I mentioned already, is a long-term value investor. And engine number one, bring ESG credentials, that is key as we are in a business of energy transition. So I believe the validation, the strength in the governance that will happen with them, their help in the sector. And there is a collateral that, of course, is a benefit from us is that we have interest in the Middle East as well with the Mega Hubs, as you know. So there were several elements that added to bring the right partner, people that share the same view, share the same values, they have ESG credentials. So I think they will be very helpful on strengthening the governance because as we’ve been saying repeatedly, it’s all about execution and growth.