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Vale S.A. (NYSE:VALE) Q4 2023 Earnings Call Transcript

Vale S.A. (NYSE:VALE) Q4 2023 Earnings Call Transcript February 23, 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 Fourth Quarter 2023 Earnings Call. This conference is being recorded and the replay will be available at the company's website, vale.com. The presentation is available for download in English and Portuguese. This call is also available in Portuguese. To listen to the presentation 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 on the 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.

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

Eduardo De Salles Bartolomeo: Thank you and good morning everyone. I hope you are all doing well. 2023 was a remarkable year for Vale. Our results translated the evolution of our safe-driven cultural transformation and our progress towards operational excellence. We have walked the talk and delivered in line with our guidances. I'm excited that we are now taking Vale to an even higher level of performance to the five key levers we outlined on the last Vale Day. Starting with our safety journey, which in 2023 showed encouraging improvements with the lowest injury frequency rate since 2008 and relevant accomplishments in dam management. Our second lever, the stabilization of our iron ore operations comes to secure our baseline production of 310 million to 320 million tons per year.

In that sense, our 2023 production at 321 million tons exceeded expectations and provided evidence of increased asset and process reliability. On our third lever, growing volumes in iron ore with quality, we gave an important step by starting up our first briquette plant. In addition, our partnership with Anglo America in a world-class operation will bring synergies and make available high-quality feeds for agglomerated products. Gustavo will share more information on that later. In our path to transform the Energy Transition Metals business, copper production had an impressive 50% growth in the fourth quarter. Nickel production was in line with guidance with results benefited by price realization 7% above LME prices in the quarter. In our quest towards ESG leadership in mining, 2023 saw a substantial progress in the reparations of Brumadinho and Mariana.

Finally, by announcing a $2.4 billion dividend distribution, we reinforced that our discipline in capital allocation and commitment to shareholder return remains unchanged. Let's see more details of our 2023 performance now. Please next slide. As you know, safety is the most important work front for me at Vale. We are committed to ensuring that each employee is safe during work shifts. We achieved solidly safe performance in the year with the lowest injury frequency rate in the company history and one of the lowest in our industry. The year was also remarkable for our dam management performance. We reached performance with the global industry standard for tailing management within the expected industry timeframe. Our upstream dam decharacterization program reached 43% completion rate.

B3 before, an upstream dam, which was at emergency level 3 back in 2019, had over 90% of its tailings removed, bringing forward the dam elimination in three years, from 2027 to 2024. We are already seeing a safer Vale, built with operational discipline in maturing management model. Next slide please. The fourth quarter was a very strong one, leading us to deliver an iron ore output that exceeded our guidance. Year-on-year, we increased our output in 11% and in December we had the highest monthly output since 2018. We are ensuring our asset reliability. Our meantime between failure, for example, improved considerably, almost doubling the performance in the S11D truckless systems case. In pellets, our strong output was supported by the start-up of the Torto dam in 2023 and therefore the higher pellet feed production at Brucutu.

In 2024, we are at a fast pace to deliver another strong performance. Next slide please. Vale's major competitive advantage is its potential to grow its high quality portfolio with low capital intensity. In that sense, we are targeting the development of three key projects combined with the development of Mega Hubs, concentration facilities at briquette plants. Our three key projects are being executed. The Vargem Grande Complex expansion, the Capanema project and the S11D plus 20 expansion. With those addings to our current production baseline, we expect to reach 340 million to 360 million tons productions by 2026. Next slide please. In 2023, we continue to mature our agreements for joint assessments on the construction of mega hubs with authorities in the United Arab Emirates, Saudi Arabia, and Oman and with partners in Brazil.

We are also assessing the feasibility of developing green steel hubs in Brazil and North America with H2 Green Steel, a Swedish partner. Finally, we are ramping up the first briquette plant in our Tubarão complex with the second plant expected to ramp up in the first half of 2024. With growing volumes, higher average iron content and cost efficient program in place, we are preparing Vale to be one of the most efficient mining companies in the world. Next slide please. In the Energy Transition Metals business, we delivered a remarkable output in copper, an outstanding 50% increase quarter-on-quarter driven by the successful ramp up of Salobo III and improved performance at Salobo I and II plants. In nickel, our production was in line with guidance which already factored the transition of Voisey's Bay mine extension.

In 2023, we successfully established Vale Base Metals, a new company with separate governance overseeing Vale's Energy Transition Metals business. Delivering on our commitments, we brought in important partners to the business as a mean to accelerate VBM’s growth, while ensuring greater operational efficiency in the short term. The upcoming years will be crucial for transitioning the Energy Transition Metals to a new phase. The asset review is underway and we will provide more color on that process along 2024. Next slide please. We are consistently delivering and positioning Vale as an ESG leader. We are increasingly focusing on people with solid results so far and with encouraging improvements to come. We are a more diverse, equitable and inclusive company since we set our long-term goals back in 2019.

For instance, our female workforce increased by 85% in this period. On the social front, we continue to foster resilient communities. We are striving to be a nature-positive company uniquely positioned to leverage decarbonization efforts. Improving our transparency on our ESG performance we also became early adopters of the Task Force on Nature-related Financial Disclosures, the TNFD. Most importantly, we are delivering on our reparation processes. In Brumadinho 68% of the full reparation settlement were fulfilled, R$6.3 billion cash outflow in 2023. We expect to end 2026 with 90% of the obligations completed. In Mariana, the reparation has been accelerated by the Renova Foundation, with over 460,000 people compensated and over 85% of housing solutions provided, a total disbursement of R$34.7 billion since 2015.

On that front, we continue to negotiate a definitive reparation settlement with the Brazilian authorities. Our approach towards ESG has started to be acknowledged by ESG ratings providers and we are confident that our progress will be fully recognized in the near future. We are on our way to lead a sustainable mining, an industry able to create and share value with all of its stakeholders. Since 2019, we have made profound changes in Vale’s way of operating and are now reaping the benefits of that work. The executive team continues to be highly focused on our strategy and commitments. We are delivering on our safety and ESG commitments, always listening to our stakeholders. We are delivering more robust operational and cost performance across all businesses.

Aerial view of a giant iron ore mine, showcasing the mineral deposits of the company's Ferrous Minerals segment.
Aerial view of a giant iron ore mine, showcasing the mineral deposits of the company's Ferrous Minerals segment.

We are advancing our iron ore strategy towards growth with quality. We are positioning Vale for leadership in global de-carbonization, while driving local and regional development. Finally, we remain fully committed to disciplined capital allocation. To conclude, I would like to thank the management team, our employees, our partners, for contributing to the 2023 results. Now for our financial results, I pass the floor to Gustavo. Thank you.

Gustavo Pimenta: Thanks, Eduardo. And good morning everyone. Before going to our financial performance, I would like to spend some time talking about the strategic rationale and the associated financial aspects of our recently announced partnership with Anglo American in Brazil. As you probably saw in both companies' releases, we have agreed to buy 15% of Minas-Rio existing business in exchange for a cash payment of $157 million, subject to net debt and working capital adjustments and the contribution of our world-class iron ore deposit of Serra da Serpentina in Minas Gerais. This combination is highly accretive for both companies as it allows us to leverage and maximize each other’s infrastructure, while securing access to additional high quality iron ore to support growing demand for low carbon and steel making.

Minas-Rio today has a nameplate capacity to produce up to 26.5 million tons per year of high quality pellet feed and the development of Serpentina will enable the total complex to reach over 50 million tons per year in the next decade. As per the agreed terms, Vale will have an option to buy another 15% stake of Minas-Rio at market terms once the Serpentina deposit obtains its preliminary license. This should allows us to have access to up to 15 million tonnes per year of pellet feed once Serpentina is fully developed. Vale have proportional off-take rights and we plan on using these volumes to feed our pellet facilities and later our briquetting plants, including the ones under the Mega Hub initiatives. Finally, we have also agreed on certain earn-out rights on both sides over the next four years with predefined caps as detailed in our market communication.

We are very excited to initiate this partnership with Anglo American in Brazil and expect this will unlock significant value to all of our stakeholders. As we mentioned, the supply of high quality iron ore is a key component of our strategy as we look to help our clients transition to a lower carbon footprint. Now let me turn back to our financial performance starting on the next slide. As you can see, our pro forma EBITDA was $6.7 billion in Q4, $2.7 billion higher year-on-year. The increase is explained by a combination of higher realized iron ore prices, which increased 24% versus a year ago, as well as by lower operating expenses, as we start to harvest the benefits of our efficiency and productivity programs. On prices the iron ore fines realized price was $128 per tonne in Q4 $23 per tonne higher year-on-year, driven by higher reference prices and the positive effect of provisional prices.

Given market conditions in Q4 with lower discount for high silica iron ore, we decided to increase this product's share in the sales mix, while rebalancing premium iron ore inventories, especially Carajás. This proactive strategy not only maximizes our product portfolio value but also position us to better monetize our production going forward. Looking into the first quarter, market conditions remain favorable for high silica products and therefore, we should continue to manage our product portfolio accordingly. In order to provide greater clarity about our product portfolio mix, we have started to disclose the breakdown of each specific product in our quarterly report, which should facilitate the calculation in your understanding of our realized premiums and prices.

Regarding costs, our iron ore EBITDA breakeven declined 4% in Q4, reaching $53.3 per tonne in the quarter and $54.8 per tonne in 2023 below our most recent guidance. Our C1 cost performance in Q4 was solid as we move it closer to the $20 per tonne level supported by our efficiency program initiatives, a positive exchange rate impact and an inventory carryover effect. In 2023, C1 costs averaged $22.3 per tonne within our guidance range. As we presented at Vale Day, we expect costs in 2024 to be in line with 2023 with a C1 guidance of $21.5 to $23 per tonne. Moving to our energy transition metals business, our nickel all-in costs sharply declined in Q4, driven by the mine maintenance conclusion in Q3 and by 7% higher production volumes in the quarter, which also supported byproduct revenues.

In our corporate operations, higher byproduct volumes and prices led to a $300 per tonne increase in byproduct revenues. This was partially offset by higher maintenance costs at Sossego, despite higher production volumes in both operations. In C1 base metals, I'd like to share that we are making significant progress on our asset review under the leadership of Mark and have identified a series of opportunities to improve productivity and reduce unit operating costs. The plan has been primarily focused on asset integrity and mine development along with the flow sheet optimization. These 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.

We plan on presenting the key action items of the asset review with the associated benefits by midyear. Now moving on to cash generation as you can see, Q4 free cash flow from operations was about $2.5 billion, roughly $1.4 billion higher than Q3, driven by higher EBITDA. Working capital increased in the quarter, driven by higher accounts receivable due to higher iron ore prices and sales. These invoices will be collected in Q1 this year, and we expect the effect on working capital to reverse in the following quarters. In addition, CapEx seasonally increased in Q4 as planned in our investment plan. With our full year CapEx at $5.9 billion, is slightly below our guidance. Most of the free cash flow was used to anticipate a $2 billion extraordinary dividend and interest on capital payment in December.

Also yesterday, our Board of Directors approved a distribution of $2.4 billion of dividends to be paid in March 2024, reinforcing our continued focus on returning value to shareholders. Now let me turn to our expanded net debt evolution in the next slide. We ended 2023 with an expanded net debt of $16.2 billion, compared to $15.5 billion in Q3. As you can see, this quarter we recognize an extra provision of $1.2 billion related to Samarco's obligation and a potential global agreement with Brazilian authorities. The new provision, although still subject to uncertainty is our best estimate today of the amount required from Vale to fulfill those obligations, and it considers Samarco will continue to have the ability to pay for a portion of the required payments as per their approved business plan.

Since 2015, more than R$35 billion have been disbursed in 42 agreed programs, with almost 500,000 people compensated. We continue to be highly focused on a settlement that works for all parties involved within a framework that provides legal certainty and leads to an effective execution of their greed compensation. Regarding our optimal leverage target, we are maintaining the $10 billion to $20 billion range under the same expended net debt concept. This range provide us with greater flexibility and optimized capital costs. In the next quarters, we expected our expended net debt to benefit from our solid operational performance, enabling health value generation to our shareholders. So before moving on to the Q&A session, I would like to reinforce the key messages from today’s call.

We continue to make substantial progress in our safety and ESG commitments, as example by record low injury rates in our operations and continued advancements on upstream dam decharacterization. In iron ore, we are very encouraged with the recent operational performance from our assets and very confident on our ability to deliver on the targets for the year. On growth, we are seeing a very steady progress on our key projects to add 50 million tonnes per year of high quality iron ore with limited capital intensity by 2026. And I encouraged with the findings and initial implementation of the asset review in base metals. 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.

With that, I would like to open the call for questions. Thank you.

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