Vale SA

BOVESPA:VALE3

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, ladies and gentlemen. Welcome to Vale's conference call to discuss the first quarter of 2018 Results. [Operator Instructions] As a reminder, this conference is being recorded, and the recording will be available on the company's website at vale.com at the Investors link. This conference call and the slide presentation are being transmitted via Internet as well also through the company's website.

Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Actual performance could differ materially from that anticipated in any forward-looking comment. As a result of microeconomic conditions, market risks and other factors. With us today are Mr. Fabio Schvartsman, President and CEO; Mr. Luciano Siani Pires, CFO; Mr. Peter Poppinga, Executive Director, Ferrous Minerals and Coal; Mr. Eduardo Bartolomeo, Executive Director, Base Metals; Mr. Luiz Eduardo Osorio, Executive Director, Sustainability and Institutional Relations; Mr. Alexandre Pereira, Executive Director, Business Support; Mr. Juarez Saliba, Director of Strategy, Exploration, New Business and Technology and Ms. Marina Quental, Director of People. First, Mr. Fabio Schvartsman will proceed to the presentation and after that, we will open for questions and answers. It's now my pleasure to turn the call over to Mr. Fabio Schvartsman. Sir, you may now begin.

[Fabio Schvartsman, executive]

Good morning to everybody. It is a pleasure to have all of you connecting in this call. And so, I would start making a brief remark on the performance of Vale in the last quarter and then I will, I will pass to Luciano and afterwards we're going to take your questions. First, I would like to mention that this quarter was a special one for the company. We had worked hard as a team in order to face the difficulties of this quarter. We had to face lower production in iron ore in comparison to last quarter. We had to face an unexpected shut down of our Coleman Mine in Sudbury, Canada and we have to face a tremendous rainy season in all of the country in Brazil [ with ] consequences for everything that we do. Then we consequently, we had to use our flexibility in order to overcome these difficulties. As for example, we use the inventories that we built outside Brazil. In order to be able to increase sales even with lower production and we are improving quality of our products and therefore, we are getting a very meaningful premium. This quarter, the premium was $5.2 per ton, thus obviously a very important premium in comparison to price. This quarter, we [ evolved ] meaningfully regarding deleveraging. We reduced our debt, our net debt below $15 million that was one of the targets that we had, and we are moving forward in the direction of getting to the $10 billion that we are aiming to the end of this year . And we have announced a new dividend policy. This is very important for you to understand how this dividend policy works. We already have regarding first quarter of 2018 $1 billion of dividend that will be paid in the second half of the year.

In other words, it means that for instance, if we have the same kind of EBITDA and investments that we had in the first quarter, in the next quarters, we would have $1 billion every quarter of dividends and therefore, regarding the year of 2018, it would represent a payment for $4 billion in dividends. In other words represents a 5.5% yields regarding the stock price as of yesterday.

Consequently, we think that the company is really moving for to a very aggressive dividend policy . Let's remember that 5.5% is so important that if you compare, if where the interest levels are worldwide, you see that 5.5% is something that is not usual, not in this business, not in any business. So for conclusion, I would like to give you a quick idea of what's going to happen in next quarter. The markets remain sound. It's true that the iron ore price went down in this -- today -- the ore price is more or less $8 below the $5 that we had in the first quarter, that means that we have to use all of our capacity in order to overcome that. And even in this situation and now having the benefit that in Base Metals we are going to have, we already had a [ return ] of the Coleman Mine into operation in the end of April, of course, the impact will be much lower than it was in the first quarter.If you put all together, we are expecting to deliver more or less the same kind of EBITDA that we made in the first quarter of this year. So it seems that, in this, we are moving forward with the idea of keeping the company as predictable as possible and delivering a very constant results growth even in a very negative scenario. It is important to compare that with the EBITDA that we had in the second quarter of last year. You're going to see that we are -- meaning a very important improvement -- if we can deliver this kind of results. So this was my first comments and now, I'll pass to Luciano [indiscernible] what the case of the results of the first quarter.

[Luciano Pires, executive]

Okay. Good morning, ladies and gentlemen. Just a few very specific remarks on the results.Starting by costs, you saw the iron ore C1 cash cost at $14.8 per ton, it was a small uptick compared to the fourth quarter and that's good news given that usually the uptick is greater given the lower volumes, lower production volumes. So that encourages us that we will be running at below $14 per ton on the second half.So we affirming the guidance we gave you last quarter.

On Base Metals costs, the Coleman stoppage impacted EBITDA in the first quarter by around $100 million, important for you to note that, about half of this impact was cost themselves, repair costs, higher [ feed ] cost to keep up plants running and the other half was lost margin on the volumes that we missed.

On the expenses, first remark is that SG&A, R&D and other operating expenses [ they are ] back to first quarter of '17 levels. Very important because there was a trend upwards during the year of '17. Now, we're back into first quarter levels. But pre-operating and stoppage expenses are much lower. If you look at the first quarter of '17 they were at $125 million. They are now down to $78 million, so on an annualized reduction of over $150 million and why is that? That's because of the ramp-up of S11D which reduces preoperating expenses. That's because of the return of the 3 pelletizing plants which reduce idle expenditures. So we've been saying that the long-term trend for this line is towards 0 and this is going to happen. Another line of the below the operating line that is improving is interest payments.You can see that gross interest payments in the first quarter of '18 were $336 million that compares to $452 million 1 year ago. So again, an annualized gain towards $500 million per year. That's a natural consequence of the reduction of indebtedness and that does not capture the repurchase of debt that happened in the late March and early April. So as time progresses, you should see more and more reductions in [ gross ] interest payments.

Capital expenditures, they have been running below $900 million. The lowest for a first quarter since 2005, but not only that, the quality of the expenditure is improving. We are spending less in environmental compliance for example, the emissions reduction program in Canada [ fail ] events for example with the dry process in the south and we're spending more in upgrading and optimizing our operations.For example, we approved in the first quarter, a very comprehensive automation and digital transformation program in iron ore. So the money we're spending will generate more and more results into the future.

On free cash flow, we may discuss this in more detail. There were some seasonal effects that brought down the cash flows when compared to EBITDA, but there was at least 1 one-off event, which is positive, which is the increase in prices of pellets. So volumes of pellets maintained somehow constant first quarter compared to fourth quarter. But the prices increased a lot , which means that the accounts receivable was impacted from a working capital perspective negatively. So we recorded more EBITDA than cash collections. But the cash should be coming on the second quarter. So these were the specific remarks for the quarter and now let's move to Q&A.

[Operator]

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Alex Hacking with Citi.

[Alexander Hacking, analyst]

I have 2 questions, if it's okay. First for Peter. Can you give us a sense about how your iron ore production profile is going to play out for the rest of the year. Obviously, you maintain the $390 million guidance. I assume that production is going to be a bit more backloaded as usual, but could you clarify or quantify on that. And then second question for Luciano, if it's okay, is there any way you can quantify the working capital needs for the rest of the year. I guess, if we assume that prices are flat?

[Gerd Peter Poppinga, executive]

Hi, Alex, thanks for the question. Yes, we are keeping our guidance $390 million tons production. It is, as you said, backloaded as usual and this time maybe even more because of the progressing ramp-up of S11D but also because of the intense rains we had -- that we were experiencing in the first quarter of this year. Higher rains than normal. So what we are aiming at managing is that the first half of '18 will have roughly the same production of the first half of '17 of last year. There is a balance between ramping up the S11D and also the reduction of some low-grade on the Southeastern System.But in the third and fourth quarter, this year, we will be distinctly over 100 million tons per quarter and that means ramping up the S11D will prevail and will be bigger. The effect will be higher than the reduction of low silica -- of high silica in the Southeastern System. I just want to take the opportunity [ to give ] some maintenance about the add back of S11D, which is going very well. We are at a pace today, at pace of [ 45 ] and we are forecasting to come to an average in the year between 50 million and 55 million tons in the S11D.

[Luciano Pires, executive]

Alex, when I talk about seasonality, just reminding some working capital. Just reminding some effects typical for the first quarter. The first one is payment for our employees of the profit sharing. Usually, you'll make the provision along the year and you pay during the first quarter. So you can see that there was a -- there's a line which is payroll which consumed working capital in the quarter. So that has no implication for the following quarters. It will happen again in the first quarter of '19. The second reason why you sometimes worsen your working capital position is when prices go up. So as I mentioned, prices went up. So this, we had a negative impact in working capital. Accounts receivable [ increased ] but absent variation in price, this shouldn't happen anymore. A third factor is that usually spending also in the company accelerates towards the end of the year, which means that there are some bills to be paid in the first quarter, that also happens in the first quarter, won't repeat itself in the second, third and fourth quarter. There is only one aspect that we are evaluating and also it decreased a little bit of working capital position. Which is accounts payable. We are shortening payment terms in exchange for discounts and better commercial terms and it's the opposite that we did during the crisis.

Sometimes in order to preserve cash, we accepted worse commercial conditions in order to extend payment terms. So this will tend to happen over the next, perhaps 1 or 2 years as contracts are being renewed but shouldn't be meaningful in terms of impact on cash flows.

[Operator]

Our next question comes from Carlos De Alba with Morgan Stanley.

Our next question comes from Jon Brandt with HSBC.

[Jonathan Brandt, analyst]

Couple of questions from me. First I guess on Vale New Caledonia, we've seen cash cost coming down, pretty significantly over the past couple of quarters. I'm wondering, how much more there is to go and then what the -- I guess if there's any update on the tailings dam that you do need to spend money on and or a partner. And then secondly, I'm wondering, if with the completion of the Mosaic deal, this sort of ends your asset sales. I know there's still some vessels to be sold. But I guess, I am thinking specifically on the Mozambique Coal, if that's something that you are interested in keeping, or if you are having negotiations to possibly sell that asset?

[Fabio Schvartsman, executive]

Well. A quick answer regarding VNC. VNC, we are operating at a level of 40,000 tons per year. This is below capacity. The capacity is [ 55,000 tons ]. So we have an upside of capacity utilization that can go up to [ 35% ]. Therefore, you can expect cost go down, fixed cost and rediluted because of this future increase in production and what [indiscernible] focus on doing in the next few quarters and stabilizing and improving the production of the operation. Regarding Mozambique. Sorry, I had missed your comment on Mosaic. The Mosaic is done, finalized. We are ready. Now we have a lockup of 3 years . So nothing will happen within this period of time regarding our relationship with Mosaic. And certainly there are no further meaningful assets that can be sold by Vale in the next several quarters. So you can say that the divestment program is all but finalized. Regarding, Mozambique. Mozambique, the [ goal of ] this group of Directors of the company is to realize the potential of that operation. That means that now we have a strong basis of operation there , that can and will be improved during the next few years. So we are certainly not going to make any decisions regarding Mozambique because we have the opportunity of creating a lot of value by just using the flotation that we have given the quality and the size of the investment that was made.

[Jonathan Brandt, analyst]

If I can just follow-up on the VNC. My understanding is there needs to be a tailings dam built in order to keep that asset running and you're also looking for a partner in that asset. Is there any update on either of those 2 issues?

[Fabio Schvartsman, executive]

Well, the process of looking for an investor continues. We have a goal of having a decision on this by the end of the year, either having an investor or not. And regarding the tailings dam, I think that we have good news because these delay that we had in this year, in this process give us the opportunity of look more deeply into how to build it And now, the good news instead of a dam of $500 million that was the idea a while ago. Today, we are considering an investment that will be lower than $400 million in this dam. So we are using the time in our benefit in order to optimize the project and if we decide to move forward, the total sales will be significantly lower than we were expecting before.

[Operator]

Our next question comes from Carlos De Alba with Morgan Stanley.

[Carlos de Alba, analyst]

Sorry about that, my line dropped for the second time in this morning. I wanted to explore the situation in Samarco, Fabio. Could you give us an update as to maybe to the extent you can as to how the conversations with the prosecutors, in particular, are going, are they considering more reasonable level of potential payments for the company, given that the example that they had used before was a little bit [ extreme ]. And also, what, how do you see the evolution of getting the licenses and getting the production up and running? And then the second question if I may is related to could you comment on the strategies, commercial, different commercial strategies that Vale is putting in place or will put in place in the future to be able to capture a higher premium for the nickel products that are more related to higher quality material and premium sectors.

[Fabio Schvartsman, executive]

Sure. Thank you for your question, Carlos. First regarding Samarco. [ Samarco's ] conversations with the prosecutors are ongoing right now. Actually, we are having conversations today with them. [ We struggle ]. We are a conservative mood. And we hope that they are too. So unfortunately, it's impossible to disclose the terms of this conversation because we are in the middle of that. And as soon as we have a decision or a qualification, we certainly, we will transmit it to the market. And regarding the restart of Samarco. There are no further news here. The best scenario is to expect Samarco to restart by the beginning of 2019 today. And we are giving all the information, we are fulfilling all the necessities that are raised regarding the licenses, but we don't control the timing issue here. And we depend on licenses and authorization and giving the huge oxygen that we have there. People are very cautious over providing this license. But BHP and ourselves, we are doing everything that we can in order to make it to happen as soon as possible. Luciano will make a comment on this point.

[Luciano Pires, executive]

Carlos, without disclosing the details, it's not that we're negotiating a number with the prosecutors. We have the agreement with the federal government for BRL 11 billion. The initial claim of the prosecutors was [ 155 billion ], so maybe we were thinking that we are trying to negotiate a number in between. That's not absolutely not the case. What is being negotiated from a principal standpoint is a process to manage the remediation program going forward. So what is going to be the governance, how the communities are going to be involved and so on. So from this point of view, this is positive because it will be whatever will be. So it's not a preset number that will be negotiated.

[Fabio Schvartsman, executive]

Regarding the commercial strategy for nickel, let me just give you a broad idea, what I looking for and then Eduardo, you complement that. Look, we have a very simple [ water ]. We do have more Class I sold to the world market. We are selling Class I nickel to [ still parts of ] our production to the steelmakers. That's an impossible deal. The cost is just too high and the quality is too much for the need. So that's the wrong thing to do. And we are facing this in a very clear way by reducing our production. We are preventing ourselves from producing something that will destroy value when you think to the steelmakers. This is our very simple strategy in this case. That means that we keep the optionality, we keep the capacity and we can use it, if and when the market reacts regarding the [ busy ] market will be perfectly compatible with this excess nickel capacity that we have.So this is basically what we are doing.

[Eduardo De Salles Bartolomeo, executive]

Carlo, just to add on what Fabio mentioned, just put some clarity -- that if you look at our numbers and you do a proxy of the size of the Class I market that we serve. Last quarter, we put 12,000 tons more and this quarter 5,000 tons. Our focus basically, on the short term, is again going to the point that we have an opportunity and have an [ option now ] in the future is to regulate supply demand not to overflow or to sell high-quality product, what it doesn't need, it doesn't mean that we won't sell Class II, because of course, we are selling Class II. And that's another optionality that if you read our primer we are able to transform New Caledonia and [indiscernible] operations that can serve Class I. So it's a double, I would say double sword, but double way, we are going to end up short term commercially explore the supply demand and balance production to lead production by the way because extremely expensive to dig underground this high-quality material and to operate New Caledonia to serve market when it's there. So I think, it's well structure way to wait but generate cash on a very reasonable way. If you look our margins comparison through first quarter is double. So I think, it's working. And the price is coming back as well as the market is facing the absence, so I think, as a leader in the market, we have the responsibility to do that.

[Fabio Schvartsman, executive]

Just [ finalize ] with these movements, so we've been able to produce cash positive operation in all of our sites. That make our life sustainable, while we wait for the success of this EV demand. And as Eduardo just explained, we are preparing ourselves for this search in the market that will put Vale in the front end of the suppliers for the EV market.

[Operator]

Our next question comes from Andreas Bokkenheuser with UBS.

[Andreas Bokkenheuser, analyst]

Just 1 question from me on freight. We've obviously seen a lot of freight volatility in the last few quarters.We saw freight rates hitting $21 a ton in Q4. I think, down to $13 in Q1, now we're back to $18 a ton from Brazil to China. Obviously, your Valemaxes construction site has kind of come to an end, and you're waiting for delivery on the last vessels. But is there anything you can do from here to kind of mitigate or hedge your freight exposure? Or do you just want to exposure yourself to whatever fuel pass through there is in the Valemaxes, how you are thinking about that volatility?

[Gerd Peter Poppinga, executive]

You're right. There is lots of freight volatility, but maybe you have seen also that our freight costs came down from 1 quarter to the other. We are managing it more actively. In the past, it was not the case. We had a freight department -- detached from our business and now we are more integrated in the supply chain.And what we are doing is exactly against this volatility we are it's a long-term strategy, which started some years ago and but the investors are not, they have not yet arrived. So you have the first generation Valemax which are, they're all there 30, 35 vessels. Now the second generation vessel is arriving more efficient energy-wise than the -- than with lesser emissions than the first generation. But it's just the second of first vessel arriving now, I will take another year for [ others ] to be delivered. And yes, we are thinking and we are discussing some more vessels this third generation, it's not decided yet and it's in the studies, but we, if you compare those generations one after the other, they are dropping progressively in this bigger bunk of [ 300 ]. It's coming down from the $13, $12, $11 a ton. So this is a net advantage vis-à-vis the recent spot markets and will reduce exactly the freight volatility you are referring to. So -- but it will take some time because those ships, they are not delivered yet.

[Fabio Schvartsman, executive]

And I have just some complementary on Peter's remarks. Regarding this new generation of vessels. We are studying as Peter mentioned. And I expect that in the next quarter, we will have a better scenario in order that we eventually will be able to announce a new generation of ships coming in.

[Operator]

The next question comes from Novid Rassouli with Cowen and Co.

[Unknown Analyst]

This is [ Anana ] dialing in for Novid. So I just have a couple, first, could you please discuss if the commodity price movements were taking into consideration of your new dividend policy and the net debt target in the near term. And also oil prices have come down from the March high. I was just wondering, if you could give us the sense of your view on commodity price outlook and if it would affect the new dividend policy anyway. And secondly on pellets. I think, you guys talked about your -- the 2018 average of $60 per ton, which is very sizable and we're just wondering, how do you -- how sustainable do you think the premium will be in 2019? And what would happen next in order for us to see the power premium improving next year?

[Fabio Schvartsman, executive]

It give us the opportunity of making a very important clarification and how this dividend policy was structured. It was structured to work in any price scenario. That means that this policy is here to say. It is a minimal policy. It means that we can go further than that but we cannot go below that. It means that, as I mentioned in my opening remarks, we already have $1 billion that is [ currently] for the next quarter and if conditions continue more or less the same, we are going to [ $8 billion ] every quarter from till the end of this year at least.

[Gerd Peter Poppinga, executive]

You had mentioned about the iron ore price dynamics, I can only say, we haven't changed our mind from the last call, means, we think it's a balance market from a supply and demand perspective. Why it's balanced because we see around to [ 40 million ] coming in from the seaborne out of which [ 20 million ] is from Vale, [ 10 million ] from Australia and [ 10 million] from others. There are some people exiting, so we think, there is a 20 million, symbolic 20 million ton surplus which easily get absorbed by the higher steel demand worldwide. So for me, this is balance, steel margins influencing that as well. We have sustained synchronized growth in the world economy and we have the supply starting from [ January ]. We don't see the steel margins collapsing. And the cost curve, which is the other dimension of this -- of this analysis, as we have said before, several times the cost curve is getting steeper. Why it is getting steeper because of depletion. The inflation is returning to some of our competitors. Not in Brazil actually becasue industrial inflation in Brazil is -- because of the low inflation is quite low, and because we have no depletion. And because of why is the cost curve also getting steeper because of low grade penalties, which are very substantial. So if the cost curve gets steeper, price get the highest support, that I don't see any reason why we should have prices on average of the year lower than last year, which means something around $70, that the rough analysis. So on the pellets, on the pellets, we have a [ 60 ] premium average for the whole year. Some of our customers have in your contracts and others, they have to negotiate now and we are negotiating already. We see the pellets market very strong. We are completely sold out. We are doing whatever we can to anticipate our new pellet plant in Tubarão, into the Northern System and in [ Talouise ] to anticipate the ramp-up . In those countries where we see actually the -- which accounts for the pellet demand is for instance Europe. The bigger end production it went up by 2% in the Middle East and other countries producing DRI. It was a 16% growth year-on-year. So the demand is very strong and the supply is lagging behind also because of some suppliers, which are out of the market and others, which are on strike and so on. So it's a very tense situation and we, for the annual contracts, it's far away to start negotiations and for the second half of this year, contract there is probably going to be very stressful, intense negotiation for this pellet supply.

[Fabio Schvartsman, executive]

Again, just a quick compliment. There is a very interesting phenomenon that I think is important to look into it. That now, that the market has been segmentated among different qualities of ore, with a meaningful premium for [ Kaoshiung ] for instance, and with a meaningful discount for the lower quality. The consequence is that prices are actually less volatile in the iron ore as they were in the past. If you look for a longer period of time. You are going to see that now the [ variation ] is typically contained between $60 and $80 for the pellets, why, because the segmentation is absorbing part of the volatility.

[Operator]

The next question comes from Grant Sporre with Macquarie.

[Grant Sporre, analyst]

I have 2 questions if I may. The first one is really on the nickel market and your outlook and I guess my question is what do you need to see in the nickel market for you to start investing in the business, again, for example, going underground at Voisey's Bay. That's my first question. And the second one is perhaps one for Luciano is, just, can you give us a sense of in your copper business, in your nickel business, what percentage of your costs are fixed costs, and what are variable costs, please.

[Fabio Schvartsman, executive]

Regarding nickel and specifically regarding Voisey's Bay. Voisey's Bay is a very important investment decision for Vale. It will be taken if we can have a scenario where this investment will become profitable in a metal what nickel price level. That's what we are working in and the good news here that we are highly confident that we are getting to this equation and there if we get, the investment will be made because as and I think, it will be basically independent of the nickel price.

[Luciano Pires, executive]

As regards costs breakdown. Typically, in Brazil, and that works for the copper mines in the north as well, proportion is 2/3 fixed costs, a third variable cost. And fixed cost, you have labor, you have some services, maintenance and there it goes. However, for nickel, the tendency is to have more fixed costs like [ $75, $25 ] would be more of the proportion. And that's because, for example in Canada, the wages are higher. And in surface plants typically as well the cost of material inputs and regents, it's more marginal in relation to the fixed cost. An interesting example, for example, if you take New Caledonia, the total cost base of New Caledonia, currently is about $520 million per annum and that doesn't increase much. If you increase production let's say from $40,000 to $55,000 per tonne, and curiously if you take Cobalt, once New Caledonia reaches full ramp up, it will be producing approximately 4,000 tons of cobalt per year. At a price of $90,000 per ton, you get $360 million of annual revenues in Cobalt, so you see that Cobalt alone will be able to pay for a significant portion of the fixed costs in New Caledonia once it's fully ramped up.

[Fabio Schvartsman, executive]

In order to clarify the -- what I said before regarding invoices, it's the same thing. The Cobalt [ content ] that we expect to have invoices, they -- we will make the magic of guaranteeing the feasibility of the investments.

[Operator]

The next question comes from Alfonso Salazar with Scotiabank.

[Alfonso Salazar, analyst]

I have 2 questions, the first one is regarding a free cash flow generation and the minimum dividend. If we assume that the price of iron ore is going to stay at least similar to last year. I think Vale will be generating a lot of free cash flow and above the minimum dividend, so what is the plan for -- once you reach the [ $10 billion ] net debt level, what is the plan. If you don't have any massive or important investment opportunities. What is -- are you going to be paying up cash or you prefer to be paying dividends, what's going to be that final decision regarding the size of the dividend? And another question regarding this iron ore price. Do you see any challenges in the long term regarding iron ore demand? There are many moving parts there you see India is planning to increase steel capacity substantially. On the other hand, you see China promoting more electric furnaces. So I don't know, if you can give us like a long-term view on what do you expect for iron ore demand beyond this year?

[Fabio Schvartsman, executive]

Thank you for your questions. I will start with the answer regarding the free cash flow and dividend. For the time being, any excess cash flow will be paid out as for the dividends for the shareholders. We don't have, [ Luciano ] did mention, we don't have any massive investment in front of us. So there is no reason for us holding this cash back.We are trying to deliver a very clear message to the markets here, where we want to build first in the management of the company that we are -- in such a way, that we are going to be able to use the market if and when we find investments that are worth doing. And now, I am going to pass to Peter, to mention a little bit about the market of iron ore as he is -- are specialist in [ Asia ].

[Gerd Peter Poppinga, executive]

Thanks for the question. The iron ore price in the long term, of course, depends on lots of issues. There is supply and demand and you mentioned the scrap price. The scrap -- increase of scrap usage potentially in China, right. I think this is correct. This is [ an element ] which has [ to do ], but you know, we have to also look at what's realistic. Today, the scrap price in China is higher than the peak iron price because it's not only about scrap, it's a good scrap for steel making. After the shutdown of the induction furnaces, we have lots of scrap available but the distribution channels are not ready and the good scrap is not available. So yes, I think, they will build some new capacity on electrical furnaces. But -- first of all, this will have a balance because energy is very expensive in China. Energy is based as you may know in China, mostly on thermal coal, which goes against the pollution and the supply side reform to the government.So it's not so easy to justify electric furnaces when you look to the energy. So I think there will be, yes, there will be a long-term evolution, there will be some, some iron ore being substituted by scrap. But I don't believe in that, in the next 5 to 10 years that you don't -- you may not feel it. You will not feel it substantially hurting anybody in the next 5 to 10 years. On the domestic mines in China, they will come down further, that is very important. We have breakeven today of roughly [ $55 ] probably on the average, but you may to $60 when you look to the [ 4 tier ] producers getting complicated to situation and less and less investment in the mines, means that you will see even in the SOEs, you will see reduction and production of concentrate in China. And then if you go seaborne there are some marginal suppliers. If you look at the situation today where you have this 30% discounts of when it comes to penalties. We will need at least $65 price for the breakeven and there is probably 100 million to 150 million tons out of the market if the price falls lower than $65 because of the -- multiplied by 0.7 which is the penalties and then you come to production cost of breakeven because it's [ 40- 45 ] which lots of people will be having trouble with. So that's why I see scrap not in the near term -- concentrates in China coming down further even in SOEs and to seaborne, there is also this, if it's only cash cost, you must consider the huge penalties with marginal suppliers under $65, some of them will struggle with. So that is the -- that is my view.

[Operator]

The next question comes from [indiscernible] with Bank of America Merrill Lynch.

[Unknown Analyst]

My first question is regarding the strategy on nickel is a follow-up question merely made from Carlos previously. So what would make Vale changing stance regarding nickel production and increase it again closer to the total capacity? Should we look at premiums for Class I nickel, meaning that it would continue to stay [ freeing ] assets for higher demand of EVs, even if you see rebounding prices or I should look only at absolutely prices. And how fast in cost it would be to increase the production closer to the 300,000 tons capacity. And my second question is on iron ore, we can see that the current pricing increases quarter likely as of our result of the sale of the unsold volumes from the 4Q. My question is, is there any strategy on iron ore pricing regarding the share of current and provisional pricing going on?

[Fabio Schvartsman, executive]

I will start with the comment on nickel. Look, the scenarios that we are looking for in the nickel business is similar to the one that we were able to build in the iron ore business. The segmentation is the right answer in order to each market pay the right price for different products. And this will allow the nickel market to grow and Vale to produce more because it is very important that the steel markers, they need lower cost and lower price in nickel. And this has to be the fact. This has to continue like that. On the other hand, the Class I is not for this purpose and the cost of using and having Class I is much higher. So it is very important to separate one thing to the other. That will enable companies in general, being there companies like Vale that have high quality nickel or companies that are producing nickel pig iron to have the right pricing for their products.

[Gerd Peter Poppinga, executive]

And [ Ron ] just to add on Fabio's comment, I think we're going to follow up closely as we said prior as well to supply and demand and that sales not to overflow Class II with Class I. So any reserve -- our reserves that are very expensive to the future. We have no rush. We need to balance that. I think, it's sensible, it reasonably make sense and we capture. Our numbers are proving this quarter. We believe this is the right track, but it is again is a supply demand, usually that will come with time. And we have to have patience and look a lot internally to our cost base, our cost structure, even our switching from batteries because we can switch our production to batteries. So it's a long-term gain with a short-term pain, so let's put it this way.

[Luciano Pires, executive]

All of the sales especially to China, they are provisioning. So the final price is only know when the ship arrives at port. So the difference between current and provisional is just because the current sales, they were completed within the quarter. The provisional ones were still open at the end of the quarter. Usually, the fourth quarter is a very strong one, where Vale used to empty the pipeline and because of demand preceding the winter in China, strong production and so on. This year was different. Part of the sales, they moved into the first quarter. So these sales that moved into the first quarter, they were settled within the quarter. So that's the reason why the current portion, went up, but there is no, whatsoever a deliberate strategy towards one or the other. We had a more, a more stable homogeneous profile time wise of sales within the quarter than in past quarters. That's the reason why currents when up, provisional went down as a percentage.

[Operator]

Our next question comes from John Tumazos with John Tumazos Very Independent Research.

[John Tumazos, analyst]

Thank you very much for the dividend policy on the shareholder. With regard to the 30% payout of EBITDA minus sustaining capital. Should we interpret from this policy that Vale will never build a project again as large as one the -- for Goro or New Caledonia or if Vale were to undertake a large project, would there be external, financing the equity joint venture partners? If you had a large project, how would you undertake it given the dividend policy?

[Fabio Schvartsman, executive]

I'll head my questions here to Luciano Siani, our CFO, delivering your question.

[Luciano Pires, executive]

John, if you had delivered a dividend policy which said that we would distribute a portion of cash flows after growth investments, then we will be telling investors that look investments take precedence amongst everything. The idea was precisely the opposite to establish our competition and give preference to dividends towards investment. So in other words, the excess cash beyond the minimum dividend, there will be a competition amongst all the alternatives for them. If we had done it differently, we would be signaling that the dividend policy would be just something that's over after management did with the cash flow, we are very pleased with it, which is absolutely not the case. We've given priority to dividends, for the minimum dividend whatever is left over, then everything will have to compete for that.

[Fabio Schvartsman, executive]

And finally, if I may. We are not in the business of distributing dividend or making big projects. We are in the business of creating value to the shareholders. And every moment in time, what is better for creating value to the shareholders is different. Now, we are convinced that given the recent investment that we have done, giving the opportunity that we have in improving all of our operations that we want to have a strict focus in delivering that and therefore, there is not reason for keeping money back in the coffer. So we have no decision regarding project as we had no decision regarding dividend. What we are saying that today and for the time being, it certainly will create more value for the shareholders to pay bigger dividends and that's what we are going to do.

[Operator]

The next question comes from Marcos Assumpção with Itaú BBA.

[Marcos Assumpção, analyst]

A question for Eduardo Bartolomeo. Still on the nickel strategy. I'd like to understand a bit more on how the Vale's contract work on the nickel side, and if so to understand how quickly can you stop supplying this present nickel market with the premium material that you have? And eventually what will be the impact of you reducing your production by eventually another 20%, 30% in terms of -- on your cost, or on labor issues, what -- is there any -- is there any restriction to do that?

[Luciano Pires, executive]

On the contract base, we have sold, we have analyzed our discussions with our suppliers, so we have some contract as well, but we are able to capture yet. But I think I need a clarification here because we have supplied for -- we supplied without question for sure, from PTBI and from New Caledonia and from Onça Puma. So we will keep this production and we reduced a little bit as well. If you see the premium per price to recapture already on first quarter as well is double from the last quarter and plus one is the idea is to balance, as I said before on the size of the market, we can supply to, mainly plating in high alloys, and for those contracts we fixed our price and premium. So there are some producer pricing that we do as well. So it's a myriad of strategies to capture that and it's been proven that again as I said before, successfully because we did for Class I double over last year in absolute terms and even in the dollar term as well. So I think we are able to capture that. And the second point, if you could you repeat, please?

[Marcos Assumpção, analyst]

So, if, by any chance, you stop supplying the steel market for example with your Class I material, will there any be any restrictions on or what would be the implications of reducing production on nickel even further like another 20%, 30%, yet?

[Luciano Pires, executive]

No, we don't. I think that's the point. I would -- I said I think I answered in the first time. We don't need to do that, because actually our production is going to be switched it to Class II for Class I is going to be New Caledonia and PTBI. So just longer -- it's a long-term thing. As we said before the pain is for now and the gain for the future. So we are still selling that there and it's profitable as well as as we said before, but we won't have any 20% reduction. I don't think we need to do that. As I said, we just did 5,000 tons of nickel this quarter to Class I and for Class II, sorry, and that's normal, that's unacceptable. So it's a reasonable size. We could reduce 5,000, but that's nothing in the sense. So I would do that by the way. We are managing supply demand, that's I think the most important take a hit from our strategy. We are very cautious on supplying the right segments, we have segmented the segment and doing the right approach. And of course, as I mentioned before, as well reserving to the future, because the price is wrong, our price today it doesn't pay to produce 99.9% nickel. So we cannot just give this away and when the future comes, we don't have our reserves anymore, so it's strategy to follow up the market supply demand and then capture the premiums.

[Marcos Assumpção, analyst]

Okay. And just a follow-up here as well on the potential agreement between Vale and Glencore in Canada. Do you see any opportunities there you see in the short term, that we could expect?

[Fabio Schvartsman, executive]

Marcos, we need to discuss with them as I think it's a opportunity of win-win for both parties. We believe that we can come to an agreement, but still we will discuss with them. We have a good partnership by the way with [indiscernible] with them operationally speaking. And it's just a matter of our finding a solution. We are advocating for a very simple one and I think we'll be successful. We're still on the negotiation.

[Operator]

The next question comes from Thiago Lofiego with Bradesco BBI.

[Thiago Lofiego, analyst]

I have 1 follow-up question, and that would be your full access, you guys have any breakeven target when to reach this year and the coming years considering the ramp up of the operations in [ S&B ] ? And would you consider divesting from coal eventually specially considering the main activities that has been picking up in that space? I know you are now in ramp-up phase, but eventually let's say 3 years from now or 2 years from now, would you consider divesting?

[Fabio Schvartsman, executive]

I will start answering then Peter will give more precise information on. But regarding strategy, our yield of promotion is that we have in place a very big infrastructure and we put an investment there. Yet these rents are leveraged, other size of operation. So it would be a mistake in our assuming to consider selling this operation without realizing its full potential. Because the value we will be -- we are rising this potential. And this will take time several years. Then it means that there is no chance of analyzing, discussing or selling this business during the next few weeks.

[Gerd Peter Poppinga, executive]

Look we are ramping up in Mozambique. It's not an easy operation, but we have made a lot of progress. We are aiming to get to 20 million tons in the next 2 years or 3 years. To do so, we must do some mine plant optimization. We have to increase the productivity of the mine equipment. We have to have an intermediate stockpile. between the mine and the plant, which is not, doesn't exist . We need to interconnect to the two beneficiation plants, lots of actions which, it won't cost a of money, but we have to do that in order to improve them and also to get a better training to do our workflows, all this is in place now. So, in some years, 20 million tons a year. And if you look to break-even or something we -- the OpEx which we already discussed -- the Vale daily OpEx, long-term OpEx, should be around $60 with a real OpEx mine, railway and the port. But then you have the net tariff, on a net basis you should add another $20 or something on a net basis, and that would be the break-even, so to say. And we are confident that we in the next couple of years will get to the 20 million tons, consolidate the business and -- when we go from there.

[Operator]

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

[Fabio Schvartsman, executive]

Well, I would start to say that we think that we made the right movement by putting our people in iron ore in charge of our core business in Mozambique given the expertise, specialty that they had in this kind of operation. It is proven very helpful, and I'm pretty sure during the next few quarters, the results will start to show-up. Well, and to finalize, I would like to say that Vale is building its future. All our future now is clearly linked to the quality of our process -- but quality demands investment. And therefore, we are restarting. We now [ operating ] with meaningful effort, 3 new [ palletizers ] in Brazil, 2 in Vitoria and 1 in [ Sanguise ] this year. And we are having S11D that will represent more capacity available of high quality iron ore, and we are increasing a lot our blending outside Brazil. And what means that we are able to deliver a very splendor quality to our customers therefore, focusing exactly in the demand and the needs that they have. So, quality is -- it not comes as an accident, quality comes as a continuous effort that the company is making. In Base Metals, we are, we first of all restructuring the business, I think that we are doing the right thing, that we are generating cash consequently. We have the time to do the right thing and we are doing a complete turnaround in all of our operations in Brazil to start to show. And others there is this optionality of EV that is not there, yet. But eventually it will become a major force of results for Vale in the future. Finally, paying the dividends and reducing at the same time the leverage is not a small thing. This is -- this will be delivered this year as well. So, we are pleased to say that we have unfortunately no big surprises to the market and I hope that we can continue for a long period of time without surprises. So thank you very much and let's meet together in next quarter, and hopefully without any surprises. Thank you.

[Operator]

That does conclude Vale's audio conference for today. Thank you very much for your participation. Have a good day.