Earnings Call Transcript - VALE Q2 2024

Operator, Operator

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 their respective presentation. We caution you that forward-looking statements are not guarantees of future performance and involve risks and uncertainties. To obtain information and 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 Risk Factors in Vale's annual report on Form 20-F. With us today are Mr. Eduardo 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, CEO

Okay. Thank you, and good morning, everyone. Here we are at the halfway mark of 2024. So, let's take a look at the progress we've made on our key levers to unlock value at Vale. Starting with our Safety journey, we are very pleased to inform that we have eliminated the B3/B4 dam, and we were able to achieve this one year ahead of the original schedule. We are working on two additional structures to be eliminated in 2024. By the end of this year, we will have completed more than 50% of our decharacterization program, a significant milestone. On our second level, we continue to see progress on iron ore operational stability with consistent performance and the third consecutive quarter of year-over-year increase in production. Our C1 cost that was seasonally higher in the second quarter, is on track to reach our guidance of $21.5 to $23 per ton for the year, especially as our product mix and fixed cost dilution improves in the second half. On iron ore growth and quality, Vargem Grande is on its way to start in the next months, and the Capanema project is on track for the middle of next year for a combined capacity addition of 30 million tons. We approved the Sohar concentration plant, this will serve as a pilot project of our Mega Hubs strategy, which will redefine industry supply chains, foster additional demand for high-quality pellet feed and position Vale as the world's most competitive direct reduction concentrate supplier. In Energy Transition Metals, our Onça Puma, Sossego and Salobo plants have also resumed operations with no impact on our guidance for the year. We recently announced the new CEO of Vale Base Metals. Shaun Usmar brings his extensive mining experience and strategic vision to lead the Company throughout its value creation pathway. In our pursuit towards ESG Leadership in mining, we are reinforcing our commitment to transparent disclosure with the adoption of TNFD and ISS. On capital allocation, we recycle capital, increasing the maturity of our debt. And yesterday, we announced an interest on capital of $1.6 billion related to our first half of '24 performance according to our dividend policy. Now let's go into the details of these highlights. Next slide. On dam safety, we concluded the decharacterization of B3/B4 dam, one of the dams that was put at the highest emergency level in 2019. Dikes 1A and 1B are the other two structures to be eliminated this year, after which we will have completed 53% of our decharacterization program. This is a pioneer process, and we are gaining experience and expertise, which is helping us to advance well. We remain committed to the elimination of all upstream dams in Brazil in a safe and conservative manner. Next slide, please. On iron ore production, we delivered robust operational performance once again, the third consecutive quarter of year-over-year increase in production. This is a direct result of our efforts to improve the reliability and stability of our assets and processes as per our management model. S11D achieved a historical production record for a second quarter and the asset is a fundamental piece of our strategy for growing high-quality products in our portfolio. The S11D plus 20 million tons expansion project is scheduled to start in 2026 and will support production growth. Finally, I would like to highlight our sales, which grew 7% year-over-year, reflecting our strong performance. The result of the first semester reinforces our confidence and commitment to meet the top end of our 2024 guidance. This demonstrates that Vale now has a business with much greater predictability, providing a solid foundation for the future. Next slide. Our key iron ore projects are underway to increase capacity. In the next 12 months, we have two main projects coming online. The Vargem Grande project to start in the coming months will add 15 million tons per year of high-quality iron ore capacity with a very low CapEx investment. The Capanema project is progressing well, with the pre-commissioning activities initiated, and will also bring an additional 15 million tons per year of high-quality ore capacity after the first half of 2025. Next slide. Advancing on our long-term strategy, we signed an important agreement to develop the concentration plant in Sohar, a project presented during Vale Day in December. The Sohar concentration plant will significantly increase the availability of high-quality pellet feed by 12 million tons per year. This will enable us to produce feed for direct reduction agglomerates, enhancing our operational capabilities and product offerings. This asset-light business model has a low investment obligation from Vale and an internal rate of return exceeding 30%, making it a highly accretive investment. This partnership will serve as a model for future mega hubs in the region and pave the way for a more sustainable future, allowing the production of metallics through low CO2 emission routes. It marks the first significant step towards new developments to come. Next, please. Now moving to the Energy Transition Metals business. Looking at our Copper performance, despite the headwinds in the quarter, we had a 5% increase in production in our plants in Brazil. On Nickel, production reflected our planned maintenance strategy, and we are on track to deliver the production guidance for 2024. In Sudbury, improved mine performance resulted in reduced consumption of third-party feed and lower costs. We are confident that we're putting together a great team as seen on the appointment of Shaun as CEO and taking the right steps to transform the Energy Transition Metals business. Next slide. On our ESG strategy, we want to reduce our impacts generating positive outcomes for nature and people. For that, we have three main pillars to support our nature actions. First, keep the first that we have standing. At Vale, we protect 11 hectares for every one hectare affected by our activities. In 2019, we committed to increasing protected areas by 500,000 hectares, and we are already at 35% of this target. The second pillar is bioeconomy and create a business environment favorable to the conservation of native forests. And our third pillar is to fight extreme poverty, which will help avoid the legal exploitation of land. Our strategy led us to prioritize the adoption of TNFD and ISSB. We believe this will help our stakeholders to better understand and assess companies on their ESG progress. Before we move to our financial results, I would like to comment that we are delivering on our commitments. Our strong operational performance continues quarter after quarter and we are in a very good shape for the second half of 2024. Now, I'll pass the floor to Gustavo to comment on the financial performance, and I'll get back to you on the Q&A. Thank you.

Gustavo Pimenta, CFO

Thank you, Eduardo, and good morning, everyone. Let me start with our EBITDA performance in the quarter. As you can see, our pro forma EBITDA reached $4 billion in Q2, driven by strong operational performance across all commodities. This is a result of our continued focus on operational excellence and asset reliability, and the record iron ore production in Q2 since 2018 is a testament of that. As part of our asset integrity program, we had a concentration of maintenance activities in Q2, particularly in April, which, together with inventory turnover effect and higher freight rates more than offset higher iron ore sales in the quarter. The good news is that our C1 significantly declined by the end of Q2, while rising volumes in the North, coupled with reduced maintenance works in the second half provide us with a solid run rate to deliver a strong operational performance in the coming quarters. I will go into the details of our C1 dynamics in the next slides. On a sequential basis, our pro forma EBITDA increased 15%, driven by 25% higher shipments, partially offset by higher operating costs and lower realized iron ore prices. Now I would like to provide more color on our realized all-in premiums for the quarter. Vale has many sites and a broad product portfolio, ranging from high silica products that trade at discounts compared to the benchmark to direct reduction pellets with a 67% iron ore content. Typically, high silica products from the southern and southeastern systems are blended with Carajás to create our main product, BRBF. This is a premium product with low alumina and 5% silica content. As the average silica content naturally increases in the Southern and Southeastern systems, we have been using a higher proportion of Carajás in the blend, implying increased availability of high silica products to be sold directly in the market. This higher availability is even more pronounced in the first half of the year due to the production seasonality in the Northern System. On top of that, based on product availability, we evaluate commercial options cargo-by-cargo, aiming to maximize value, either by concentrating these products in China, selling them directly or holding the inventory. In Q2, with quality discounts below historical levels, direct sales were the most attractive option with an EBITDA per ton of around $20. As a consequence, our realized all-in was actually $0.1 per ton negative despite 7% of the portfolio being sold with premiums above the benchmark. In the second half of 2024, we anticipate a reduction in the share of high silica products in our mix due to the increased production in the north, supporting better premiums. More importantly, looking into the coming years, the share of high silica products in the sales mix should gradually decline with the start-up of growth projects like Vargem Grande, Capanema and particularly, the S11D expansion. In addition, the development of concentration plants like the one in Sohar will also contribute to structurally reduce our share of high silica products. Now let me turn to our cost performance. In iron ore, our C1 cash costs, excluding third-party purchases, was $24.9 per ton in the quarter, mainly impacted by an inventory turnover effect as expected for a second quarter. This is how the inventory effect works. Vale has an extensive supply chain and around 30% of our sales in the quarter are composed of inventories from the previous quarter. Also, we note that production costs in Q1 are usually the highest in the year given lower fixed cost dilution. As a result, in Q2, the difference in inventory cost impacted C1 by $1.8 per ton sequentially. In this quarter's financial report, we have started to disclose our production costs per ton in order to provide a better view on our C1 cash cost trends. We remain highly confident in achieving our guidance for 2024 of $21.5 to $23 per ton. Our production cost in June, excluding inventory effects was already significantly down, reaching $22 per ton. This is a solid indicator of our potential in the second half of the year with benefits from greater cost dilution, increased production in the Northern System and reduced maintenance activities during the dry season. Now moving to our Energy Transition Metals business. We were pleased to have another quarter of significant year-on-year reduction in our all-in cost in nickel, which were down 12% to $15,000 per ton. This is mostly due to lower third-party feed purchases as well as a reduction in expenses as we wrote down some high-cost inventories in Q2 '23. With Q1 and Q2 all-in cost averaging less than $15,000 per ton, we are well positioned to reach our 2024 all-in guidance of $14,500 to $16,000 per ton this year. In copper, all-in costs increased 18% year-on-year to about $3,600 per ton, driven by increased unit COGS due to maintenance at Salobo and Sossego. All-in costs average about $3,500 per ton in the first half of 2024, below our 2024 all-in guidance range of $4,000 to $4,500 per ton. Now moving on to cash generation. Free cash flow generation was $0.2 billion negative in Q2, impacted by a higher concentration of payments to suppliers, high execution of concession contract obligations and lower accounts receivable following the 4.3 million tons of iron ore sales accrued at the end of the quarter. We expect working capital to positively reverse in the second half. Still, our cash and cash equivalents increased by $3.1 billion in Q2. This increase was primarily driven by the $2.5 billion proceeds received following the Vale Base Metals partnership as well as by the issuance of $1 billion in bonds in June, mostly used for liability management in July. Our capital expenditures were flat quarter-on-quarter at $1.3 billion and we're on track to meet our CapEx guidance of around $6.5 billion for the year. Also yesterday, our Board of Directors approved a distribution of $1.6 billion in interest on capital to be paid in September this year, reinforcing our continued commitment to return value to our shareholders. Before moving on to the Q&A session, I would like to reinforce the key messages from today's call. Safety and their management continue to be a key priority for Vale, and we are encouraged by the progress in our decharacterization program, having fully decharacterized the B3/B4 dam. Our strong operational performance continues to be seen quarter after quarter, and we are on track to deliver our production and cost guidance for the year. In fact, on iron ore, we are now very confident on reaching the top end of the 310 million to 320 million tons production guidance range. On our strategic objective to be the supplier of choice for low carbon steel production, we are very pleased with the advancement of Sohar concentration partnership in Oman, which will serve as a pilot for the upcoming Mega Hub projects with very attractive returns. At VBM, our cost performance has been solid so far in the year, and we see room for continued improvement, particularly as the asset review plan is gradually executed. Lastly, we remain highly committed to disciplined capital allocation, controlling expanded net debt within our target, taking advantage of asset-light growth opportunities and rewarding shareholders with solid remuneration through dividends and buybacks. Now, I would like to open the call for questions. Thank you.

Daniel Sasson, Analyst

My first question is for Gustavo. Could you please give us an update on the ongoing negotiations with the government regarding the resell for Samarco? I'd like to know where we currently stand with the discussions and what the key points of this agreement are, as this could serve as a significant catalyst for stock price performance once resolved. My second question pertains to your portfolio mix. You indicated that you anticipate having 65% of high-quality products in your portfolio for the second half, compared to 59% in the first half, with high silica decreasing to 10% of sales. Specifically, regarding your strategy for the high silica segment, does the expected decline stem from reduced inventories of that product type, or do you foresee an increase in discounts for this portion? Essentially, is the decrease due to having lower high silica products available for sale compared to the beginning of the year, or does it reflect your outlook that high silica products will require deeper discounts in the second half of this year compared to the first half?

Gustavo Pimenta, CFO

Gustavo Sasson here. I'll address the first question, and then Spinelli will handle the second. Luca, Mariana, we remain optimistic about our ability to finalize the agreement. All parties are actively involved. We believe that in the coming months, we will achieve a resolution regarding both the agreement's details and the key financial terms. This is crucial for the Company, and we are seeing positive progress from everyone involved to come together and finalize this. Therefore, we are hopeful that within the next couple of months, we can resolve this. Now, I will hand over the second question to Spinelli.

Marcello Spinelli, EVP Iron Ore Solutions

Thank you, Daniel. We have high silica in our portfolio, and after Brumadinho, there is an imbalance in our mix. As mentioned earlier, once we ramp up S11D, it will become the primary component of the BRBF IOCJ. This allows us to minimize the stand-alone presence of this product. You asked about the reasoning behind our actions. As pointed out in earlier statements, we don’t sell it directly, but there is a market for it. Until May, we were selling directly, but the gap between high grade and low grade was significant. Since the end of May, we started concentrating as much as possible. We have the capacity to produce 18 million to 20 million tons in China, and we still have high silica to manage, which is why we anticipate maintaining 10% in our portfolio this year and next year as well. This is dependent on market conditions; if there’s a better discount for high silicon, we can sell directly. So, for your model, you can consider this 10%. Gradually, by 2026 or 2027, we aim to reduce this to 0%.

Rodolfo Angele, Analyst

I have two questions. First, it's encouraging to see management's positive outlook on cost evolution and ensuring guidance is met. However, this has become a recurring topic in discussions with investors. Beyond the expected higher volume in the second half of the year, particularly the third quarter, what structural changes can be implemented? What measures are within your control to ensure costs decrease as anticipated, with the hope of further reductions into 2025 and beyond? My second question concerns our pricing strategy and the stabilization of the iron ore business. As mentioned in Spinelli's response, the commercial strategy will adapt to market conditions. We have seen efforts to mitigate seasonality, and since the first quarter, production reports have been strong as we approach a period of even higher volumes. However, with prices currently slightly below $100 per ton, how should we anticipate volumes? Does this pricing scenario alter your outlook, and what can we expect if prices remain soft for an extended period?

Gustavo Pimenta, CFO

So, Rodolfo, Gustavo here. So, I'll do the first one, again and Spinelli will go over the second one. So certainly, I think we've been the last, call it, two years looking structurally at our cost base. And implementing a series of initiatives being new technologies in the field, revisiting process, increasing the share of preventive maintenance as compared to corrective maintenance. All of that over time should make our costs more efficient. And so, we are seeing this already as we look into the numbers. Certainly, the dilution effect for Vale given the expanded fleet that we have, it's super helpful, right? The ability for us to bring volume with very limited capital helps a lot. But we are not just counting on that. We're also looking structurally in areas where we think we can extract more value from the business. And we are seeing results already as we look into the business. So, I'll pass the second question to Spinelli.

Marcello Spinelli, EVP Iron Ore Solutions

Thank you for your question, Rodolfo. Currently, we do not anticipate a significant drop in the cost curve. We are experiencing inflationary pressures, freight costs, and now we are starting to feel the effects related to environmental considerations. Our long-term pricing remains stable at about 90%. This addresses your initial question. However, it’s important to note that the market appears balanced right now. A specific concern frequently raised relates to the inventory levels of iron ore at the ports. I want to share some relevant information on this. Vale, along with our competitors, is changing our business practices to enhance our production of BRBF. We are managing non-operational or non-for-sale inventory, and our competitors are refining their products to improve blending. Our focus is on increasing concentration in the second half of the year. Compared to the previous year, this year's iron ore volume is about 160 million tons, down from 145 million tons last year. Additionally, much of the increase has come from low-grade ores, consistent with our strategy of prioritizing margins over volume. It's worth noting that the gap between low-grade and high-grade ores is increasing, with the premium for Carajás being higher now. Overall, we believe the market is currently balanced. It is essential to recognize that port inventory does not directly correlate to demand at this time, and we need to monitor fluctuations, particularly in relation to China. While we remain optimistic, there is a new normal in China supported by manufacturing exports, which raises some concerns. We're not yet seeing countries take action against certain products, but this is part of a developing geopolitical landscape. For this year, everything seems to be on track. We anticipate that China will maintain consistent production levels next year, and we expect stable demand. However, we need more data to alleviate our concerns about potential declines in property values in China. For 2024 and 2025, things are looking positive in a balanced market.

Myles Allsop, Analyst

So, a couple of things. First of all, on M&A. Obviously, there are some assets available, nickel assets available in Brazil. Just wondering how you're thinking about M&A, is this the right point to be sort of the right point in the cycle to be picking up assets in that commodity. And then secondly, could you just talk a bit more about value over volume? So, if China is softer than you expect from a demand perspective, what price point do you expect the majors, including yourself to start curtailing production to support pricing?

Gustavo Pimenta, CFO

Myles, Gustavo here. So, for that particular question on nickel in Brazil, we are not looking at those. And I think the way we always articulate and this is the way we think about M&As, as you know, we have a very large endowment at Vale. So, our preference has been to develop our own endowment in the commodities that we like and the ones that we operate well, and looking at opportunities that are win-win type opportunities. You've seen us doing a deal last year buying 15% of Minas-Rio, with the possibility to go to 30%. So those are the things we like. It's highly accretive and it's right there at what we want to do long term in terms of a strategic position. But for those particular assets that we just mentioned, we are not looking at that. So, I'll turn to Spinelli for the second question.

Marcello Spinelli, EVP Iron Ore Solutions

Thank you for the question, Myles. There are two aspects to consider. First, regarding the cost curve, if prices drop from $100 to $90, we expect to see 100 million tons removed from the market, indicating a level of support, but we don’t anticipate any support below that price. On the demand side, specifically concerning China, we view the situation positively as we consider the resilience of the Chinese economy. This new normal hinges on manufacturing and exports, and infrastructure development is playing a significant role in offsetting declines in the property sector. We are particularly attentive to two main concerns: the level of steel exports, which is currently at nearly 100 million tons and viewed as a temporary situation; and the changing geopolitical landscape that has introduced new major players to support demand from China. It’s important to note that outside of China, other markets are growing at around 4%, with emerging markets like Southeast Asia, India, and the Middle East seeing substantial growth. We need to monitor inflation and how these countries are responding to new Chinese products, and so far, the response has been positive. While the domestic market is experiencing declines due to the property sector, the overall mix is contributing to strong demand for this year and potentially next year in our forecast.

Carlos De Alba, Analyst

I have a couple of questions. First, Gustavo, do you have any updates on the railway concession agreement? This is an important driver and potential catalyst for the stock to move higher, so any information would be appreciated. Also, you mentioned in your prepared remarks that the iron ore cash cost declined significantly or improved in June or towards the end of the quarter. Can you tell us what the cash costs were in June? This would help us understand the trend for the second half of the year.

Gustavo Pimenta, CFO

Carlos, I'll take the second point, and then Spinelli will discuss the concession renewal talks. In June, the cost was $22 per ton. In April, we experienced increased maintenance costs that affected our overall performance for the quarter. However, by June, performance improved significantly, and the cost decreased to $20 from $22. This gives us strong confidence in our ability to meet our guidance range of $21.5 to $23 and perform well in the second half of the year.

Marcello Spinelli, EVP Iron Ore Solutions

Hi, Carlos, thank you for your understanding.

Gustavo Pimenta, CFO

I'm going to take here because I think he lost his mic. So, Carlos, we continue to evolve. We don't have yet the final resolution to it. The conversations are, as we've mentioned in some of our market communications, highly advanced. There are certain regulatory procedures that needs to be followed. And so, we are waiting for those to be able to sell. We appreciate it's an important topic for our shareholders. And similar to Mariana, we think it's going to get resolved within the next couple of months.

Leonardo Correa, Analyst

Yes, I have a couple of questions regarding volumes. There has been significant progress in iron ore production over the past few quarters, and it looks promising for 2024, as Eduardo noted in his introduction with guidance on the upper range. Looking ahead to 2025, I know you can't provide specific guidance just yet, and we will need to wait for Vale Day. However, with Vargem Grande progressing well and expected to add 15 million tons of additional capacity, as well as Capanema, which will contribute another 15 million tons, I’m interested in your thoughts on how production might shape up for 2025. This information is crucial since the overall narrative largely depends on the evolution of production and its significant impact on fixed cost dilution. Understanding the direction of volume is essential. Additionally, Gustavo, I want to touch on the cash return topic. We haven't discussed this theme as extensively as in the past. It was a pleasant surprise to see the reduction in net debt levels this quarter due to proceeds from base metals, bringing us under $15 billion in expanded net debt. Given your previous comments about being uncomfortable around the $20 billion mark and how Vale's net debt to EBITDA ratio deviated from the industry average, you are now closer to the lower end of your range. My question is, what needs to happen for Vale to consider paying extraordinary dividends again? What indicators do you need to see? Should we expect a rebound in iron ore prices, or might you look to increase leverage to a middle point? Is Samarco still a factor in your decision-making process regarding extraordinary dividends?

Gustavo Pimenta, CFO

Thanks, Leo. I'll address both points. It's fair to say that we are seeing an upward trend. We are bringing our projects online, which we've discussed at Vale Day, totaling nearly 50 million tons when combined. They are on track according to our timeline. You can expect us to continue moving positively toward our long-term goal of reaching between 340 million and 360 million by 2026. This is a reasonable expectation. We'll provide further details, as usual, at Vale Day. Additionally, our own operations have been performing well, indicating positive news. Regarding dividends and capital allocation, we consistently seek ways to reward our shareholders within a disciplined framework. However, we want to see a few things first. One is the performance of the second half in terms of prices, which is crucial for understanding where we'll end up by year-end. We also need to assess how Mariana progresses. We want clarity on these points before making any further commitments, as they are key considerations in our overall capital allocation strategy.

Caio Ribeiro, Analyst

So, my first question, and I'm going back to your production guidance for the year, right? Second quarter numbers were quite strong. As you mentioned earlier in the call, your concern of attaining the upper end of the guidance. But it even seems feasible that you could surpass, right, that upper end of the guidance, right? So, my question is, could you revise that guidance of eventually this year? And what are you looking for in terms of factors or things that would give you that confidence to do so? And are these factors, events more market related or operational in nature? And is there a particular timing that you would see as more likely to take this decision or not? And then my second question is a follow-up on the ongoing railroad concession renewal negotiations. The concession renewal process generally involves an upfront payment followed by some commitments to deliver investments in the railroad over time. So, I just wanted to see whether you can provide any color. Once this agreement is struck, if that initial payment would be a single installment or several installments, right, followed by a CapEx commitment on the railroads over time or how we should think about this?

Gustavo Pimenta, CFO

So Caio, thanks for your question, Gustavo here. Yes, I mean, if you look at year-to-date, we are performing well and better than last year. In fact, but we want to see how the next couple of months evolve. And then if there is an opportunity for us to do better, we'll do and we'll certainly up the market as we feel comfortable to update those numbers. But for now, the team is highly focused on delivering what we committed. And given everything we've seen performance is super strong. Certainly, top end of the guidance is highly achievable for us. And if there's an opportunity to revisit, we will do in its due course. I think in terms of the details of the concession, I think it's early to say. Those are confidential conversations. We want to keep it within those dialogues. But certainly, we are looking at how any settlement fits into our cash flow projections and having the ability to honor those commitments, right? So that's super important in our conversations, but it is something we are still keeping within the negotiation team.

Marcio Farid, Analyst

I have a quick follow-up here. Firstly, Spinelli discussed the current situation in China regarding premiums and discounts, but I was trying to understand how we should evaluate this in the long term. Is there a clear upward trend in demand for high-grade products and agglomerates? Vale is certainly going to focus on this direction as well, correct? I'm looking for your perspective on this, especially considering that we have significant high-grade volumes coming online potentially in '27 or '28. Additionally, there is a push for Australian producers to develop their own agglomerates with their fines. How should we anticipate the balance of premiums in the long term in light of increasing demand? On the base metal side, nickel has shown improvement from a cost perspective, whereas copper has not performed as well. What is your outlook on this? It has been quite volatile for us regarding sourcing and the extent of third-party usage, particularly in Canada. With Sossego and Salobo potentially coming back online, how should we evaluate the cost momentum for base metals?

Marcello Spinelli, EVP Iron Ore Solutions

Thank you, Marcio, for your question. Our long-term strategy remains unchanged. We strongly believe that the market is beginning to segment, particularly with high-grade ores and agglomerated products. Currently, pellet feed for high-grade ore, or direct reduction, is becoming a crucial material globally. It's not only about copper; high-grade ore is quite scarce. We anticipate a continued gap between demand and production in the coming years. Our competitors lack the ore that can be concentrated to obtain these high-quality products. Direct reduction and natural gas are emerging trends. Therefore, we are committed to our Mega Hubs strategy going forward. The announcement about the mega hub in Sohar represents our first fully operational mega hub. We are now focused on building the capacity to concentrate, and we have the necessary port facilities to manage products and produce agglomerates. In the U.S., progress is accelerating following the grant we received in the first half. Other regions, such as Oman, Abu Dhabi, and Saudi Arabia, are also advancing rapidly. In fact, we will soon host the Saudi Minister of Industry and Mining to discuss this further. We are very optimistic about this trend and remain committed to our strategy.

Mark Cutifani, Chairman of Vale Base Metals

Yes. You got me now. So, thanks for the question. On nickel, the trend should continue to improve with summary mine volumes continuing to improve. In fact, we're up near 20% increase as we tracked into June. So good news in Sudbury is we've got a lot more mine fleet. So that's a real positive. Just come back from Voisey's Bay, the trends there are very good. We should continue to improve with Onça Puma, getting the second furnace up. So, I think the trends are all positive on the nickel front. We've got to keep working hard at Manitoba, getting the place settled and looking at what we can do to reduce the services that we can probably do from other places. So we're working on all of those fronts. On the copper side, Salobo is the key. It is impacted by grades. If we can open the pit up a bit more and continue to improve our pit productivities, we can probably do a little bit more on the grade front, but that will take a little bit of time. It will depend on our in-pit productivity during the year. And Sossego is about settling post the restart and making sure that we've got the feed mix right during the course of the next 18 months. Thanks.

Yuri Pereira, Analyst

Could you talk about depletion, not only for Vale, but also for the industry. I mean, how many tons do you think are out of the market per year only from depletion?

Marcello Spinelli, EVP Iron Ore Solutions

Thank you, Yuri, for your questions. It's a tough question because this is the business. So, but I can give you color that globally, we have a decrease of quality. And mainly in our competitors, they are facing the increase of alumina. That's a huge impact that will come to the market. In Brazil, I can say from Vale, the depletion is something that we had to overcome after Brumadinho. So, we had to improve our capacity not only to support this decline of the mines, that's a natural thing. But even grow the capacity to establish our level. So globally, if I can give you a number, it's 300 million tons to 400 million tons until 2030. And again, the difficulties to bring back quality puts Vale on a very good level to compete in this new world of green energy.

Ricardo Monegaglia, Analyst

I have a couple of quick questions. First, regarding the lawsuits in the U.K. and Netherlands, are there any discussions to include them in the final agreement from Mariana? Is that a possibility? The second question is how much Vargem Grande could produce in 2024 and how those grades in that operation compare with your most recent figures on content quality. Additionally, could Mark provide a brief outlook or his latest thoughts on the nickel and copper markets?

Gustavo Pimenta, CFO

Ricardo, Gustavo here. So, I'll do the first two and then Carlos will cover the second and then we can have Mark complementing. So, look, on the lawsuit, they are different, right? So those are different jurisdictions and the U.K. and the Netherlands as compared to Brazil. We continue to believe that the right jurisdiction for this decision to be handled, settled and resolved, this is Brazil, and we are working towards that outcome. As I mentioned in my first answer today, we continue to be optimistic that we'll be able to resolve those conversations and discussions here in Brazil.

Carlos Medeiros, EVP Operations

On Vargem Grande, we expect to produce 1 million tons in the remainder part of the year, and should be a normal concentrated product, 62% iron.

Mark Cutifani, Chairman of Vale Base Metals

Well, good. Look, I think the world, as we know, is short copper demand still looks pretty strong. A little bit of a slowing of EV demand, but I don't think that's significant in the scheme of things. I think all other markets are pretty strong. So, we believe copper will continue to play strongly. And I think the activity we're seeing across the industry in terms of interest in copper assets is really confirming how strong, I think the producers are. We're the same. We've got some opportunities to improve. North Atlantic should also do a little bit better on copper next year, but I think pretty positive. And I think the risk is to the upside.

Amos Fletcher, Analyst

My first question was just on working capital. I was just wanting to ask about how big of a release we can potentially expect in terms of working capital in H2, as Gustavo was mentioning. And then the second question was on nickel production in the guidance. The bottom end of the guidance implies 40% higher production in H2 versus H1. Just wanted to ask what are the main drivers for delivering that big recovery that we should be expecting.

Gustavo Pimenta, CFO

So, Amos, this is Gustavo. Look, on working capital, I think there is a possibility to revert, if not all of it, but most of it, as we highlighted in that chart. So, I think we are looking for a stronger Q3. I think that's what you should be seeing.

Mark Cutifani, Chairman of Vale Base Metals

On nickel production, the positive news is that Sudbury has a significant amount of ore ready for processing, which we haven't seen in a while. This is beneficial as we exit maintenance, with an expected increase in production of about 10,000 to 15,000 tons. Thompson is expected to perform better with some production held back during Long Harbour maintenance, likely contributing around three. Voisey's Bay will also be affected by Long Harbour maintenance, probably adding three to four tons. Additionally, we have a bit more volume to handle through third parties due to other maintenance activities at the smelters. Overall, it's looking quite strong, and Onça Puma is set to be a notable contributor, potentially adding at least 10 tons thanks to the furnace rebuild. The only downside might be the deconsolidation of PTVI, which is expected to decrease production by about two tons. So, overall, we anticipate moving from approximately 67 to a gain of around 30 tons in the second half. That's our current assumption, and we're feeling pretty confident about it.

Eduardo Bartolomeo, CEO

Thank you. As I mentioned earlier, the first half of the year is behind us, and I believe the best is yet to come. We are confident in fulfilling our strategic guidance. Safety is one of our greatest accomplishments, and we are performing exceptionally well in that area. Regarding iron ore costs, they will align as Gustavo mentioned, and production is within our control. The developments in direct reduction, as highlighted by Gustavo, are becoming a reality, particularly with the announcement of the Oman concentration plant. I am particularly pleased with the appointment of our new CEO at Base Metals, Shaun, who I believe will do an excellent job supporting Mark in the necessary transformation. As Gustavo noted in his closing remarks, we are committed to creating value. I have never been more optimistic, and this optimism stems from our progress in meeting our commitments to the market, which brings us satisfaction. I would also like to express my gratitude to our employees and our team, as well as to you for your interest and engagement. Until next time.

Operator, Operator

Vale's conference is now concluded. We thank you for your participation and wish you a nice day.