Earnings Call Transcript - VALE Q3 2023

Operator, Operator

Good morning, ladies and gentlemen. Welcome to Vale's conference call to discuss the third quarter results of 2023. As a reminder, this conference is being recorded, and the recording will be available on the company's website at vale.com in the investor's area. The slide presentation that accompanies this call is being broadcast on the Internet and is also available in the investor's area of the company's website. There is a slight two-second delay between the audio and slide 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 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 report Vale filed with the U.S. Securities and Exchange Commission, SEC, the Brazilian Comissao de Valores Mobiliarios CVM, 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 De Salles Bartolomeo, Chief Executive Officer; Mr. Gustavo Pimenta, Executive Vice President of Finance and Investor Relations; Mr. Marcello Spinelli, Executive Vice President, Iron Ore Solutions; Mrs. Deshnee Naidoo, CEO Vale Base Metals; and Mr. Carlos Medeiros, Executive Vice President of Operations. Mr. Eduardo Bartolomeo will begin his presentation on Vale's third-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, CEO

Thank you. Good morning, everyone. I hope you are all doing well. We continue to make significant progress on our strategic business priorities. We delivered a solid production performance this quarter and throughout 2023. In Iron Ore Solutions, we delivered substantial output with increased average quality while also lowering our production to sales gap as expected. In Energy Transition Metals, Salobo III is successfully ramping up, contributing to our copper growth year-to-date with total production 10% higher in the quarter, supporting lower unit costs. In nickel, we remain on track to deliver our production guidance while reviewing our assets to unlock value potential. On our path to decarbonization, we are accelerating breakthrough iron ore solutions. We are commissioning our first briquetting plant in Tubarao and signed two strategic agreements to assess the development of Mega Hubs. We are advancing in circular mining initiatives. We created data to develop our sustainable sand operations, and we signed an agreement with BluestOne to foster waste-to-value transformation solutions in base metals. On safety, we continue to deliver on a new framework towards a safer Vale. We completed the decharacterization of our 13th upstream dam and reduced the emergency level of B3/B4 dam to the lowest. On top of that, we maintain our disciplined capital allocation approach. We just approved a $2 billion shareholder remuneration payment for December. With that, total dividends and interest on capital distributed since 2021 represents a 29% yield for our shareholders. We also launched our fourth share buyback program. Since 2021, Vale has repurchased over 16% of its share base, concentrating shareholders' future earnings by about 20%. As you can see, we are delivering on our commitments and reaping good results from our structural change. Let me go into more detail about our performance. Next slide, please. We had strong results this quarter, and we are starting Q4 at a robust pace, well-positioned to deliver on our guidance. In Iron Ore Solutions, we continue to operate S11D at a high rate while increasing pellet feed production from Brucutu, thanks to the Torto dam commissioning. We delivered 5 million tonnes above the 9 months output in 2022. We also improved our portfolio average quality and boosted pellet production by 11% this quarter. We faced one-off engineering issues at S11D and the effects of a power outage across Brazil. And despite those issues, we are on our way to deliver a solid Q4 output. Iron Ore fines and pellet sales increased by 6% this quarter, reducing our accumulated production to sales gap. Usually, in the third quarter, we have a high production to sales gap, but this quarter, we shortened that gap by around 50% compared to last year. In Q4, we expect to reduce this gap even further. In Energy Transition Metals, copper production grew 10% in the quarter and 22% on a 9-month basis, with an increase of 41 kilotonnes compared to last year. Thanks to the successful ramp-up of Salobo III, which is now operating at 80% of its capacity. In September, the Salobo complex reached its highest monthly production levels since 2019. Copper sales were exceptional for the period, growing about 5% quarter-on-quarter and 22% on a 9-month basis. Even though we have been delivering substantial output, we have decided to lower our production guidance by around 15 kilotonnes due to some changes to the North Atlantic mining method and additional maintenance. In nickel, we are performing as planned, which includes the continued transition of the Voisey's Bay mine to underground and the rebuild of the Onca Puma furnace #1 later this year. Our outlook for 2022 nickel production remains unchanged. Next slide, please. We are accelerating breakthrough iron ore solutions to deliver the high-quality required by a decarbonizing world. The first briquetting plant is under commissioning with the ramp-up expected by the end of this year. We expect to commission the second plant in early 2024, with the ramp-up at the beginning of the second quarter. The combined capacity will be 6 million tonnes per year. 2024 will be our first year with industrial level production and will be a year of operational fine-tuning for long-term reliability. On the Mega Hubs development front, we signed two strategic agreements to assess opportunities with Porto do Acu for a facility in Brazil for hot rigid iron production using our pellets, and with H2 Green Steel for concentration units in Brazil and the United States, directed towards products for the low carbon steel value chain, including HPI using our briquettes. Concentration solutions are critical to our decarbonization strategy, and we expect to build our first mega hub in 2024. Next slide, please. Fostering circular mining, we launched at Agera, a company dedicated to developing our sustainable sand business. Agera trades and distributes sand extracted from the tailings of our iron ore operations. This type of operation allows us to reduce the use of dams and optimize our iron ore operations, and we hope to scale up this business. In addition, given our value-based metals, we signed a long-term agreement with BluestOne to reuse tailings to produce fertilizers. At Onca Puma Mine, we will supply BluestOne with slag for the next 10 years. This initiative expands circular mining within our Energy Transition Metals business. Furthermore, we signed two other strategic partnerships to assess decarbonization opportunities. With H2 Green Steel, Vale is taking its first step into the green hydrogen market. H2 Green Steel's expertise will be critical for developing green hydrogen in the Mega Hubs in Brazil and the United States. With Petrobras, we will assess the acceleration of low-carbon solutions, taking advantage of the joint technical expertise and synergies of our two companies. Vale plays a leading role in the decarbonization journey by leveraging relevant actions to enable the energy transition. These agreements fit perfectly into this context. Next slide, please. Finally, we are building a safer Vale. We've completed the decharacterization of the 13th upstream dam. We are progressing on our upstream dam decharacterization program with the highest safety standards in place. In addition, after removing around 85% of tailings from B3/B4 dam, we reduced this emergency level to the lowest possible, with decharacterization to be completed in 2025. Since 2020, we have implemented several safety measures, upgrading over 40% of our structures at emergency levels to a safe status. We continue to systematically reduce risk and implement the best international practices in management while simultaneously developing solutions to minimize usage. Now for our financial results, I'll pass the floor to Gustavo. Thank you.

Gustavo Pimenta, CFO

Thanks, Eduardo, and good morning, everyone. Let me start with our EBITDA performance for the quarter. As you can see, we delivered an EBITDA of $4.5 billion in Q3, almost $0.5 billion higher than the same period last year. The increase is explained by higher realized prices, which increased 13% year-on-year for iron ore and 16% for copper. On volumes, iron ore fines and pellet sales increased 4.4 million tonnes year-on-year, taking advantage of favorable market conditions while reducing the usual production to sales gap in Q3. The impact of costs and expenses on EBITDA was $189 million year-on-year, partially explained by the $56 million effect from the consumption of iron ore inventories from the previous quarter at higher costs as well as higher maintenance carried out in our nickel businesses. I will go into more detail on costs later in my presentation. Finally, the exchange rate had a negative impact of $124 million in our EBITDA, while byproduct revenues from our operations in Canada were $103 million lower. Iron ore C1 cash cost ex third-party purchases came down $1.6 per tonne quarter-on-quarter. This was driven by lower demurrage costs as well as higher fixed cost dilution with more production volumes, especially from the northern system, where production costs are lower. We also continue to benefit from our rollout of our efficiency program, bringing sustainable cost savings of $0.3 per tonne in the quarter. We are on track to deliver our annual guidance of $21.5 to $22.5 per tonne, considering an expected further decrease in C1 cash cost in Q4. With regard to all-in costs, our EBITDA breakeven slightly increased to $55.7 per tonne in the quarter, driven essentially by external factors, which offset the solid C1 performance. Freight costs went up from $17.6 per tonne to $18.9 per tonne, mainly reflecting the increase in bunker oil prices in Q3. For sensitivity purposes, a $10 per barrel increase in brent oil prices translates into a $0.9 per tonne increase in our freight costs. Additionally, despite the positive effect of lower time chartering rates, our exposure to the spot market treatment increased in Q3 due to our seasonally higher production and shipments in the second half of the year. Finally, despite an improvement of 87 basis points in the average iron ore quality in the quarter, the lower weighted contribution of pellet businesses and the lower 65% FE market premiums negatively impacted our all-in costs. This is primarily driven by lower margins in the steel industry. We continue to believe in the strong fundamentals supporting demand for high-quality products, given secular trends such as the decarbonization of production processes, electrification of everything, the continuous urbanization of large emerging economies, and the reshoring of supply chains. These are just a few examples that support our thesis and validate Vale's unique position in offering high-quality products across all of our portfolio. Now moving to our Energy Transition Metals business. In copper, we continue to see gains from higher production at both Salobo and Sossego, which support the reduction of unit COGS by diluting fixed costs. All-in costs, excluding the Huayou project, were about $3,300 per tonne, a slight increase driven by lower byproduct revenues due to a decrease in gold prices. At our nickel operations, our COGS ex third-party feed increased to about $23,300 per tonne with higher maintenance costs in Sudbury. With the end of the maintenance period and increased production in our North Atlantic operations, we expect that unit COGS to materially reduce in Q4. In addition, our all-in costs were impacted by lower byproduct credits, mainly due to maintenances at Sudbury and changes in mining methods requiring additional ground support at the Coleman mine. Now moving to cash generation. As you can see, Q3 free cash flow from operations was about $1.1 billion, roughly $350 million higher than Q2. We had an increase in working capital this quarter due to greater accounts receivable given higher iron ore sales and prices. Income taxes also increased as a result of better performance. Free cash flow from operations was used to return value to our shareholders with the payment of $1.7 billion in dividends and $0.5 billion in share buybacks. This is part of our disciplined capital allocation strategy, which leads to my next slide. Yesterday, our Board of Directors approved a distribution of $2 billion in dividends and interest on capital to be paid on December 1. This results from better cash flow generation to date and the expected inflow from the Base Metals partnership. Looking at our dividend distribution since 2021 and including this latest announcement, we have generated robust dividend yields to our shareholders. On top of our dividend commitment, we continue to see share buyback as one of the most accretive ways to create long-term value for our shareholders. To that end, yesterday, our Board of Directors approved a new buyback program to repurchase up to 150 million shares in the next 18 months. Since we started our first program, we have repurchased a total of 830 million shares, representing 60% of our shares count. As a result, a shareholder who invested in Vale during this period has increased their participation of earnings per share by 19%. With that, I would like to now turn the call back to Eduardo for his closing remarks. Thank you.

Eduardo de Salles Bartolomeo, CEO

Thank you, Gustavo. So to summarize, here are the key messages from our presentation today. First, delivery on our commitment has led to a more robust operational performance across all businesses, and we have shown in the results. Implementing cost efficiency initiatives while growing production volumes have enabled a continued improvement in our unit costs. Third, the Energy Transition Metals asset review confirms the potential to unlock significant value. We designed a more fit-for-purpose organization, brought in top talent, and entered a partnership with world-class strategic investors. We have taken our assets to an optimal operating flow sheet for value creation. And finally, we remain 100% committed to disciplined capital allocation. The distribution of an additional $2 billion in dividends and the launch of our fourth buyback program are evidence of that. We are at the forefront of global decarbonization, leveraging relevant actions for the energy transition while driving local and regional development. We have completed changes in how Vale manages its dams and risks. We are changing the company culture with a focus on safety, always listening to our stakeholders in an open and transparent dialogue. We will continue to promote sustainable mining, foster low-carbon solutions, and remain disciplined, making Vale a reference in creating and sharing value. Finally, I would like to thank the management team, our employees, and partners for contributing to this quarter's results. Thank you. And now let's start our Q&A session.

Operator, Operator

Our first question comes from Carlos De Alba, Morgan Stanley.

Carlos De Alba, Analyst

My first question is about the nickel results. It seems you are making progress with production increases from quarter to quarter, and you've sold the stake in the company, established an independent board, and built a strong management team. However, the results are still showing rising costs, and you are maintaining your all-in guidance for 2023 as unchanged, which suggests a significant drop in the fourth quarter. So I would like to know if you foresee a time when we could see a more sustainable and improved performance regarding costs in that unit. Additionally, could you outline specific actions that will contribute to a notable reduction in all-in costs in the fourth quarter? My second question is about the strong cash flows you are generating; Iron Ore is making a substantial contribution, and the company is improving its operations. With the cash generated, you're able to pay a special dividend. How do you determine the balance between dividends and share buybacks? While there's a new share buyback program in place, the amount of shares to be repurchased is only 10 million, which is not particularly substantial. In contrast, the $2 billion special dividend is quite significant. Can you explain your decision-making process regarding dividends versus share buybacks?

Eduardo de Salles Bartolomeo, CEO

Thanks, Carlos, this is Eduardo. I'll give the questions to Deshnee and then afterwards to Pimenta. But just to make it clear, right, the structure that we are implementing is actually being implemented. It's been implementing. So we believe the results are going to be ripped above operational improvements. I think Deshnee can even explore a little bit about that. But I'll pass the word for Deshnee to explain the nickel results and the nickel expectations.

Deshnee Naidoo, CEO Vale Base Metals

Thank you, Eduardo. And thank you, Carlos, for the question. So if I just look at the quarter specifically, we produced 42,000 tonnes of nickel but only sold 39,000 tonnes, and as Pimenta guided as well, we did sell fewer byproducts in the quarter. So that largely contributed to the overall higher unit cost in the quarter. In terms of performance when it comes to production numbers, I mean, year-on-year, some of the markers that I use in terms of how the actions are translating into the right results. We have year-on-year increased our overall development in North Atlantic by over 20%. And that's why you would see the mining production has actually increased year-on-year by over 16%. So that's an excellent way to say that the actions are resulting in the right numbers. If you ask what we are doing to structurally change the business to get to those lower cost numbers? So firstly, in quarter 4, we will sell some of the difference of what we didn't sell in quarter 3, and we mainly held that back in terms of inventories for maintenance, etc. So that together with a higher production number will result in a much higher production as well as sales, which is exactly what happened last year this time, where we sold close to last year, about 50,000 tonnes. This year, we will probably close to 47,000, 48,000 tonnes of nickel sales in quarter 4. So that, together with some of the copper that we know will now come back into the system because we are sitting with inventories ahead of the plant will result in much higher copper byproducts as well, which will then give us the lower unit cost in quarter 4 that will dilute the overall year-to-date results, and that is why we are still holding on to the nickel cost guidance. In terms of just the overall structural changes, VBME continues to ramp up. And those ramp-up tonnes will come at a more efficient rate, and that will result in the overall unit cost improvement that we will see from the third quarter of next year onwards. Some of the other initiatives on productivity, etc., in Sudbury would drive this forward. But as Eduardo mentioned in his opening comments on the asset reviews, in fact, Tony and the team are currently in Sudbury. A lot of the work there is whether we can reduce some of the cut-off grades, and what the team is initially coming up with is huge opportunities to relook at this kind of grade that will result in far higher tonnes that together with some of the technology initiatives that Tony wants to put on the table are telling us there's a lot more value potential to unlock within the asset base. I'll leave it there and hand over to Pimenta.

Gustavo Pimenta, CFO

Thanks, Deshnee, and thanks, Carlos, for your question. We've favored both dividends and share buybacks over the last couple of years because we believe they both have a significant role in our capital allocation, especially considering current stock prices. There are a few factors at play. We continue to generate strong cash flow, and market prices are favorable, which supports this strong cash flow. Additionally, there's a component of the VBM partnership that has a more one-off nature. This combination is what prompted us to prioritize the $2 billion dividend payment. However, we still believe that share buybacks are a valuable part of our capital allocation strategy, which is why we've chosen to extend the program for an additional 150 million shares.

Operator, Operator

Our next question is from Caio Ribeiro, Bank of America.

Caio Ribeiro, Analyst

Yes. So firstly, I just wanted to explore a bit how you see the company's breakeven EBITDA for iron ore evolving with some of the changes, right, that you're working at in the company, and also due to some changing industry dynamics ahead as well, right? So with this focus on developing steel mega hubs together with steelmakers, right? And given that under this structure, you will be supplying briquettes and other high-grade agglomerates to certain regions in the world, including the Middle East, possibly in the U.S. as well. Presumably, there will be some shift in your geographical breakdown of shipments, right? Today, it's largely directed towards China, right? But with this focus on energy transition and your strong positioning in delivering higher-grade ore, I imagine your regional shipment destination could change, right? And that could perhaps alter your average maritime freight. And higher maritime freight from Brazil to China has always been a disadvantage versus Australian peers. But with this potential change in the regional shipment destinations, do you see that potentially helping you gain an edge versus other peers, I don't know, from a breakeven EBITDA perspective? And then secondly, on the Base Metals division, right, it's clear that there's a lot going on there with the 13% stake stay underway, you brought some high-profile names to the Board and manager of the company. You're carrying an asset review. Yet the short-term results, they show the challenges still exist with maintenance at some assets, the transition to underground operations at Voisey's Bay. I just wanted to see if you could give us an indication as to what milestones you're looking to achieve here over the next two years, right? And what signs do you think we should be looking for as clear signals that this turnaround of the asset is being successful?

Gustavo Pimenta, CFO

Caio, Gustavo here. So I'll get started with the all-in question for iron ore and maybe Deshnee can help us out with the base metals here. So in iron ore, there are a couple of things that will benefit our breakeven over the next couple of years, right? One is the simple fact that we should be resuming capacity, right? So there is a plan as we laid out in Vale Day, and we'll provide more color now in December in terms of ramping up capacity, but also ramping up capacity of higher-quality products, which will help on the premiums and therefore the all-in. Certainly, the ability for us to sell to markets that are closer to our operations helps additionally to that case. So overall, I think we are moving in that direction of being, over time, even more competitive from an all-in standpoint. So you're right on your assessment, and that's the way we also see it. So I'll just hand it back to Deshnee if you can talk a word about base metals.

Marcello Spinelli, Executive Vice President, Iron Ore Solutions

Thank you, Caio. That's exactly the strategy that we have, right? It's based on decarbonization, segmentation, and as we need to decarbonize, we have the direct reduction route and we go after competitive energy. So the Middle East is a target. The U.S. is a target and also Brazil. So exactly the consequence of that is to reduce our exposure to China. And we're going to have the benefit, as Pimenta said, of the premiums and the breakeven of EBITDA, and also the freight and keep our competitiveness with big vessels. We have the capacity to discharge in Oman with the Valemaxes. We also have the capacity to discharge in Europe. So you're going to keep all the advantages that we've been developing in China in a closer and stable territory.

Deshnee Naidoo, CEO Vale Base Metals

Thank you, Caio and Gustavo. I appreciate your question, Caio. I want to highlight some of the progress we've made. This year, we've seen three consecutive quarters of growth in copper production. In the third quarter compared to the first quarter, there was a 22% rise. In South Atlantic, copper production increased by 47% during the first three quarters of this year. In September and continuing into October, we achieved the highest copper production levels in South Atlantic since 2019. Looking at the Ontario mines, despite some understandable issues in Coleman mine, four out of five mines in Ontario are performing above 96% of their budget targets. While we are seeing improvements and ramp-up, it may not be at the desired speed. A key milestone we've reached is the ramp-up of Salobo III, which is nearing 80% throughput, equivalent to an annual run rate of about 10 million tonnes, achieved within nine months despite some delays in the second line startup. For Salobo I and II, we previously mentioned our recovery program aimed at addressing backlog maintenance. I'm pleased to report that most of that work has been completed, and plant availability for both is now at 90%, reflecting over a 5% increase year-on-year. In Coleman, while we cannot pursue some of the riskier pillars, our ground support initiatives have positioned us for a stronger fourth quarter. In terms of maintenance, we've surpassed the backlog we had by the end of last year. We are now focusing on seasonal aspects, especially concerning the nickel business, which involves taking our smelters offline for maintenance in the middle of the year. Some assets will undergo two months of maintenance next year, so we need to better guide expectations for nickel, as it will likely vary from quarter to quarter. Regarding asset reviews, we are working on optimizing cut-off grades and developing a roadmap that will outline how we can unlock value. As Mark has already pointed out, these deep transformation programs could take two to three years to fully implement, and we will provide updates on our plans at Vale Day. I want to emphasize that our initiatives to address backlog maintenance are underway, leading to consistent improvements in production quarter-by-quarter.

Operator, Operator

Our next question is from Daniel Sasson, Itaú BBA.

Daniel Sasson, Analyst

My first question is about costs. You've shown an improvement in your C1, but your breakeven delivery in China increased compared to the second quarter. This seems to be linked to higher expenses and royalties, based on the data you've shared. I'm curious if there were any one-off or extraordinary items affecting that figure, or if you could provide more insight into your expectations for the remaining components that influence your breakeven point in China. That information would be helpful for our forecasting. My second question is about the premiums for higher quality products in China. Recently, we've noticed that Chinese steelmakers' margins have not been strong, leading them to prefer lower quality products, which negatively impacts the premiums for higher quality ones. Could you share your thoughts on how this situation might evolve in the future?

Gustavo Pimenta, CFO

Thanks, Daniel. This is Gustavo. So I'll do the first one, and then I'll ask Spinelli to talk about the second one. So yes, C1 performance came better. I think we were expecting the performance to improve since Q1, and we've said that. So it's good to see C1 coming down, especially versus Q2. And we should continue to see that performance improving in Q4. On the all-in, it's mostly driven by external factors, frankly, because what you're referring to in terms of royalties, it was actually up more as a one-off in Q2 than Q3. So there is no impact in Q3 associated with any potential one-off on royalties. In fact, if you look at the big picture here, it's more the external factors which have impacted us in the quarter, especially bunker, which is almost an $8 per tonne increase versus what we had in Q2 and also premiums, especially market premiums, which came down in the quarter, which is about $0.7 per tonne. So that is primarily what has driven the all-in to come up. But again, we should continue to see improvements as we continue to bring volumes plus our efficiency initiatives continue to deliver. So with that, I'll ask Spinelli to talk about premiums in China.

Marcello Spinelli, Executive Vice President, Iron Ore Solutions

Thank you, Daniel, for the questions. Firstly, I want to reiterate that we maintain our long-term perspective on premiums. Capitalization is a trend worth noting, and energy efficiency is essential. We require high-grade ores to minimize CO2 emissions in blast furnaces, and these ores need to be in an agglomerated form to support the direct reduction process. This forms the core of our long-term strategy, and we are confident in it. In the short term, we can categorize this into three points. First, pellets are performing exceptionally well, yielding high premiums due to the rise of direct reduction activities in the Middle East and the U.S. Second, we are leveraging a trend related to low alumina. While our competitors are increasing alumina levels, we are benefiting from our low alumina products. Regarding Carajas, we typically see premiums when energy savings are needed, although this is not the case currently since coke prices are low. However, better efficiency is required to boost production using optimal routes for the market. Today in China, we are observing a strong market in a transition phase, with cost minimization being a priority. We are capitalizing on this by utilizing our flexible supply chain to sell some high silica products at lower discounts. We're also adjusting our supply chain to blend and maintain the low aluminum premium. We recognize this transitional phase as one marked by low margins, akin to what we experienced in 2015. While we don’t expect a similar supply-side reform in China today, we do believe there is strong governmental support for GDP and GDP per capita goals. The recent announcement of a $1 trillion infrastructure stimulus reinforces this idea. This supportive environment is anticipated to enhance pricing, ultimately leading to better margins and improved premiums for our high-grade ore from Carajas.

Operator, Operator

Our next question is from Rafael Barcellos, Santander.

Rafael Barcellos, Analyst

My first question is about briquettes. So Vale has already started the commissioning task of the first two iron ore briquette plants in Tubarão, right? So I just would like to understand how these operations are evolving? And when do you expect to reach the combined run rate production of 6 million tonnes? And the second question is about the Brucutu complex. I mean after the return of the Torto dam, how are operations evolving in terms of the mix of products and volumes? And also, could you confirm when you'll be able to capture the full benefit of the Torto dam? If it will be in the fourth quarter or more towards early next year?

Carlos Medeiros, Executive Vice President of Operations

Thank you for your questions. Regarding the briquettes, we are currently commissioning the first line and addressing technical issues. So far, everything is progressing as anticipated, and we expect to begin start-up in early November. From there, we will gradually increase production on this line. As for the second line, we plan to start commissioning it in the second quarter of next year, followed by ramp-up, with full capacity anticipated in the second half of next year. Concerning the Brucutu line, we have three lines operational at our processing plants following the Torto dam incident. We will continue operating until we secure the necessary licenses for our waste piles, which will allow us to increase from three to five lines. This expansion is not expected to occur before 2026.

Operator, Operator

Our next question is from Myles Allsop, UBS London.

Myles Allsop, Analyst

Great. So two questions. First of all, on CapEx. Could you give us obviously a bit more sense around how CapEx is going to trend this year and over the next few years? Obviously, this year, you're tracking well below the $6 billion. As we look forward, with all kind of Mega Hubs and the investments in Indonesia, how should we think about CapEx moving forward? Or how capital-intensive from a Vale perspective will these Mega Hubs be and when will we start seeing spend on those? And then the second question is just around Samarco. Could you just give us a quick update? Obviously, there are headlines earlier in the week. Could you give us a sense of how negotiations are progressing or not and what we should be thinking about in terms of liabilities?

Gustavo Pimenta, CFO

Myles, Gustavo Pimenta here. So maybe starting with the second question. Look, we continue to work on trying to find a resolution that works for everybody, right? So that's, I think, our belief that this is the ideal outcome here. We continue to be hopeful that, if not this year, in the first half of next year, we'll be able to find a resolution. That should resolve some of the open disputes that we continue to see coming through, right? That is, from our perspective, the best outcome for Samarco, and we'll continue to look and work very hard for that. Regardless, we continue to perform very well on the obligations we have under the existing agreements. So 80% of the housing solutions have been resolved. We have indemnified more than 430,000 people, spending to date BRL 33 billion. So things are moving, and we'll continue to do so. On CapEx, yes, we are tracking well around the $6 billion. We'll provide more color on Vale Day in terms of what is our long-term expectation there, but you shouldn't expect us to deviate much from it because especially you've mentioned the Mega Hubs, some of that investment will be done in partnership with our clients. So we will do part of it, and our clients will do part of it. We should be able to accommodate this substantially within the existing figures that we've been working on. We'll provide more color on Vale Day, but that's the direction you should expect from us.

Operator, Operator

Next question is from Tyler Broda, RBC.

Tyler Broda, Analyst

Great. I have two questions. The first one is about iron ore. Eduardo mentioned that the production to sales gap would tighten a bit in the fourth quarter for iron ore. Can you provide some insight on that? Are we seeing a reversal? Do you typically expect a destocking in the fourth quarter, especially after the inventory buildup over the past year? My second question is about nickel. It's encouraging to see the operations improving. Deshnee, could you share your outlook on the nickel price? You have reported negative free cash flow for the last four quarters; how is that impacting your investment plans? What are your thoughts on the current price levels?

Marcello Spinelli, Executive Vice President, Iron Ore Solutions

Tyler, thank you for your question. Yes, you can expect sales to be higher than production in the fourth quarter, following our typical seasonal pattern. Sales will be slightly higher than in the third quarter, reflecting the same trend we usually see. However, I want to emphasize an important point: our inventories are healthy. We are not in a position of rebuilding inventory beyond what is necessary for our operations. I've heard some discussions regarding this. We have flexibility in our supply chain and are currently focused on blending. Sometimes we need to pause projects to facilitate blending, which is what we are doing now. We are drying Carajas and preparing for Q1 blending. We anticipate higher silica products to address the concentration issues in China and expect those sales in Q4 this year. This is a dynamic situation, and we should view it as operational inventory. It’s also important to note that we are increasing pellet production, but this results in a reduction in mass due to moisture loss during the process. When comparing this year to last year, there is a reduction in the total mass of the company when looking at production versus sales. Moisture is already factored into your models. Additionally, we have been enhancing our production concentration in China, but we experience some loss in total volume as a result. Keep these numbers in mind when analyzing inventory buildup; it is important to note that we are losing mass in the process.

Deshnee Naidoo, CEO Vale Base Metals

Tyler, thank you so much for the question. I think on nickel, the question was more around what am I thinking about the outlook in terms of how that price is going to match what's happening inside the business? Just in terms of inside the business, the nickel business is in transition. The Voisey's Bay project, in which we are taking or building two underground mines to replace the open-pit Ovoid mine, will only start to deliver those ramped-up tonnes from the third quarter of next year. Until that period, the kind of the spiky costs that we see will remain within the business, but I'm very confident after that you'll start to see a lot more cash come back into the business. In terms of current prices, Tyler, we do not speculate on the nickel price. But all I can say from the data that we are looking at is that the EV demand still continues to be strong despite some of the softening that we are seeing today. And if I look at the current forecast for EV sales today, it's still trending just under 14 million. Although the world was looking at 14.6 million at the start of the year against the 11 million next year. Despite what we're seeing in LFP, it's still the game in China. We're still seeing the right amount of EV battery chemistry demand in the rest of the sector. So I'm going to leave it there. It's all about the business that's in transition projects that we have to do so that Voisey Bay does not create the drag that we currently have in the cost and that the EV sector is still what we are anticipating medium term to be the fastest-growing nickel demand sector.

Operator, Operator

Our next question is from Leonardo Correa, BTG Pactual.

Leonardo Correa, Analyst

Can you hear me?

Eduardo de Salles Bartolomeo, CEO

Yes.

Leonardo Correa, Analyst

I wanted to start my first question by discussing the iron ore market. We have been observing very strong trends in this sector, particularly indicated by low inventories both at the steel mills and at the ports. China is producing more than 1 billion tonnes annually and its steel exports remain high, reaching their peak levels recently. A few months ago, the main concern was whether China would impose production cuts in steel, but so far, we haven't seen that happen. Recently, the sentiment in China seems to favor continuity in steel production rather than restrictions. Additionally, we are entering a season characterized by limited supply due to the rainy season in Brazil and Australia, while there is also ongoing stimulus from the Chinese government. Given all of this, the outlook for iron ore has surpassed expectations. I would appreciate your insights on whether you perceive a greater upside risk compared to downside risk at this point. My second question pertains to base metals. I apologize if this was covered while I was joining the call. I would like to know more about capital allocation in base metals. We do not yet have clarity on the future investment plans. From your previous comments, I understand that you may lean towards investing more in Brazil, particularly focusing on copper. Could you provide any updates or indicate if we should expect an announcement at Vale Day regarding specific investments in base metals?

Eduardo de Salles Bartolomeo, CEO

Okay. Well, I'll ask Spinelli to answer the market and Gustavo on the base metals, but upside risk.

Marcello Spinelli, Executive Vice President, Iron Ore Solutions

Well, Leo, thank you for your question. First of all, you point out many pieces of information that support our strong view about what Eduardo just said. We have a more optimistic view about China in the market. And we can say that China's resilience is really clear; the government now is supporting and giving all the signs that they want to keep their goal for GDP and GDP per capita that is already established. Many of us are always tracking the properties as they decrease, and we have some numbers of a minus 7% decrease, and we have a more optimistic or a less bearish view about this when you consider some other information rather than NBS like who that we have a slighter decrease of minus 2%. This is the common sense that we can disagree on. But I want to draw your attention to the bright side of what's going on in China. The first thing, there is a reinventing of the manufacturing in China. We can see what the government said about quality development. They are leading the green industry; turbines, all the equipment to support decarbonization in the world are being produced in China to support their domestic demand and also the export. They are in production of double digits for small appliances. EVs, they are flooding the world with their cars, and we see this in Brazil. There is a new platform of manufacturing going on in China, and they need more high-quality steel to support that. Infrastructure, they announced RMB 1 trillion, as we saw, which will support next year the increase in more infrastructure. They are already exporting, as you said, 8 million tonnes; they will probably balance that export next year when the infrastructure will play a more important role. This is the main figure. Another point that we should pay attention to is we always track the CSP, the crude steel production in China. But pay attention to PIP, the pig iron production in China. There is a decline in the production of flat and rebar. So when you need flat, you need a better quality production, and we need to use the best furnace route, so you need more iron ore. CSP is increasing 1.7%, PIP is at 2.8%. That is supporting also the iron ore production in China. And you have a lack of scrap to support a route. So there's another important piece of information to show that we have a strong demand, not only for the short term but also for mid- and long term. Again, in the supply side, let's talk about the supply side balance. We don't see a strong any strong support from any region to increase the supply of iron ore in the seaborne market, actually, there is a decrease. India now is decreasing probably for next year. They are blooming there. And that's important information. I'm not just taking information from the market; we are selling to India. We just signed a 5 million-tonne contract with India to support them in this very high-speed growth. So we see a tight market, a very balanced market in the supply and demand sides that can support this upside risk that Eduardo just mentioned.

Gustavo Pimenta, CFO

Now just quickly on base metals. We'll bring more information. We are running out of time here, but we bring more information at Vale Day as a result of the asset review. Remember, one of the reasons why we did the carve-out is exactly to position base metals for growth. There are a series of projects. You probably saw in our release yesterday, the project we announced in Indonesia, Pomala. It's a large project there. So there are a lot of copper projects in Brazil that we are looking to accelerate. We'll bring this in a more structured way at Vale Day, but certainly, we want to accelerate growth at base metals.

Operator, Operator

This concludes today's question-and-answer session. Mr. Eduardo Bartolomeo, at this time you may proceed with your closing statements.

Eduardo de Salles Bartolomeo, CEO

Okay. Thank you. Well, I have never been so optimistic about the future of this company. After we did the reshape that we sold nine businesses, we're going to be focused on our two unique assets in iron ore and base metals. What we're seeing is all leading operational KPIs and safety indicators in iron ore are substantially better since 2019. As Spinelli mentioned, we have a very resilient market ahead of us, even in nickel with the softening that is happening now, but we see a bright future for nickel and copper is needless to explain. And of course, the aftermath of the carve-out is showing us in fixing the operational issues; we have even more value to extract from those assets. As I have been saying, it's not a sprint; it's a marathon. But as I said, I have never been so optimistic. Thank you for your attention, and let's see you in the next call.

Operator, Operator

Vale's conference call for today is now concluded. Thank you very much for your participation. You may now disconnect.