Vale SA
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Earnings Call Transcript

Earnings Call Transcript
2021-Q1

from 0
Operator

Good morning, ladies and gentlemen. Welcome to Vale's conference call to discuss the first quarter 2010 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 Investors link.

This conference call is accompanied by a slide presentation also available at the Investors link at the company's website and is transmitted via Internet as well. The broadcasting the Internet, both the audio and the slide change has a few second delay in relation to the audio transmitted via phone.

Before proceeding, let me mention the 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 statements as a result of macroeconomic conditions, market risks and other factors.

With us today are Mr. Eduardo de Salles Bartolomeo, Chief Executive Officer; Mr. Luciano Siani Pires, Executive Vice President, Finance and Investor Relations; Mr. Marcello Spinelli, Executive Vice President, Or; Mr. Mark Travers, Executive Vice President, Base Metals; Mr. Carlos Medeiros, Executive Vice President, Safety and Operational Excellence; and Mr. Alexandre D’Ambrosio, Executive Vice President, Legal and Tax.

First, Mr. Eduardo Bartolomeo will proceed to the presentation on Vale's first quarter 2020 performance. And after that, he'll be available for questions and answers.

It's now my pleasure to turn the call over to Mr. Bartolomeo. Sir, you may now begin.

E
Eduardo De Salles Bartolomeo
executive

Thank you. Good morning, everyone. First of all, I hope you're all fine. In the first quarter of 2021, we kept our guards up in our operations as the COVID pandemic accelerated in Brazil. We have kept all safety measures and provision procedures adopt in operations. And I want to reinforce that only essential professionals are allowed in our sites.

In April, we completed 13 months since the start of restrictive measures against the pandemic. And over 25% of our workforce is still working remotely. Safety, people and reparation, these 3 words have been our priority since 2019. And they continue to make more sense now in this very critical moment for all of us. Well, a crisis of this dimension requires the urgency to do what's within our reach in the best way and as effective as possible.

We have been collaborating with governments and communities since the beginning, and we continue to focus our efforts on the most critical items in this fight. For this reason, Vale and other companies have joined forces to buy and donate 3.4 million medicines for incubation.

In contribution to the national immunization plan, Vale allocated resources for the expansion of the vaccine production of the [indiscernible] Institute with an estimated production capacity of up to 100 million doses per year and for the donation of 50 million syringe to the Ministry of Health of Brazil.

We are tempted so that our support is accurate and effective and that are help directly reach the people in need. This is part of our new pack to society.

As I have been saying at each of our meetings, Vale is determined to fully repair the damage caused by the Brumadinho tragedy. A major step in that direction was the signing of the global settlement in February. The decision that ratified the agreement became final at the end of March, bringing another layer of legal certainty for the reparation. One of the fronts that progresses consistently is that of water security. We are working on the commissioning of the construction works for a new water pipeline to supply the metropolitan region of the Belo Horizonte with around 6 million people.

At the same time, the reparation of individual damage is progressing. Since 2019, more than 10,000 people have been part of civil or labor indemnity agreements with Vale, which sum to almost BRL 2.5 billion. We remain committed to a fair and prompt preparation for Brumadinho and effectively. Talking about them safety. After works to improve stability, we have already removed the emergency level of 4 structures this year.

We hope to reduce or remove the emergence level of another 4 structures is still in 2021. With stabilization works in actions and respecting the safety of the process by the end of 2025, we hope to achieve satisfactory conditions for all 29 structures, which are at emergency level today, as can be seen in the graph.

We remain firm and progressing in the culture transformation towards a safer model. Last April 15, we launched our integrated report. With the main information on Vale's economic, environmental and social impacts. This is another delivery from Vale as a result of listening to our stakeholders. This document in addition to presenting our ESG performance in detail, helps to demonstrate how strongly our ESG strategy is connected to our business.

Another important point is that it provides detailed information about our risk management, including our assessment of emerging long-term risks.

With that, we closed 1 more ESG gap planned for 2021, totaling 39 gaps since 2019. As can be seen, our ambition is to transform Vale into a reference in ESG practice.

Well, now talking about our operational results. We started 2021 with a performance as expected, with a good improvement compared to the first quarter of last year. Our adjusted EBITDA was $8.5 billion, the highest in our history for the first quarter, which is seasonally weaker in volumes. In iron ore, we made progress in stabilizing production, resuming the rest of the capacity halted at the Timbopeba site and at the Vargem Grand pelletizing plant.

Our beginning of the year was stronger than 2020. We produced in this first quarter, which is seasonally weaker the same as we produced in the second quarter of 2020. This gives us a lot of confidence in reaching our production guidance for this year. Spinelli will give more details on that later.

In nickel, we also performed as planned, with a stable operation in Onça Puma and in the North Atlantic refiners with Long Harbor, reaching higher production levels in the first quarter.

In copper, however, we underperformed with a drop of 20% to 30% in volumes of Salobo and Sossego. This is because we are reviewing Salobo's processes aiming to improve the safety of our operations at that site, therefore, impacting mine movement. In Sossego, we had a longer maintenance due to the difficulty of mobilizing contractors because of COVID-19.

On another front, in terms of addressing our cash drains, the sale of VNC operations was an important step in the commitment to transform our business. This commitment was made to our shareholders in the end of 2019 and delivered in a very responsible way with the creation of a local solution that meets the demand of our stakeholders.

We also signed the agreement for the acquisition of Mitsui stake in the coal and logistics operations in Mozambique, an important step towards our divestment in that business.

Another commitment made to our shareholders. In this sense, another relevant step was the conclusion of the revamp of the Moatize processing plants, which will allow us to achieve a production rate of 50 million tons per year in the second half of 2021.

In summary, we continue to take the necessary actions to stabilize our production, ensure growth options and allocate capital in a disciplined way. Any speaking of discipline and capital allocation, we presented more and more evidence of our commitment to returning value to our shareholders with the announcement of the share buyback program this month.

We are confident of our ability to deliver our derisking and maximize value creation for our shareholders in the long term. We believe the buyback is 1 of the best investments for the company. And 1 that does not compromise the continuity of dividends higher than the minimum set bar policy.

With that, to conclude -- summarized it for you. We are making progress with the reparation of Brumadinho quickly and fairly. We continue on the path to build a culture of safety above. We are working hard to make our operations more stable and predictable. Our ESG commitments and strategy are increasingly linked with our business.

And finally, our capital discipline remains unchanged. Most importantly, I assure you that we are doing everything we can to ensure the safety of the people in our operations in our communities. I would like to thank our 70,000 employees, our contractors, suppliers and customers for their resilience and high guard during this critical moment through the COVID-19 pandemic.

Now I pass the floor to Spinelli, who will give more details on the performance of iron ore. Thank you very much.

M
Marcello Spinelli
executive

Thank you, Eduardo. Good afternoon, all. Well, we've been updating about the resumption plan to reach 400 million tons. Next year. I'm going to use the same slide to facilitate our explanation and I start in my left-hand side. So you see the bar today, remember that the concept that don't evolve from now, that's the capacity we have for the year.

We came from a number, the 320 million tons last quarter, now we have the 327 million tons. We had an additional capacity in Timbopeba 7 million tons. Remember that we were running with 3 lines, we had the start-up of other 3 lines. So we have full capacity in Timbopeba now, but should be 325 million tons. So we have a minus 2 that we already update the forecast of Itabira. Itabira in the last call, we said would reach minus 9. We still have this minus 7 as a buffer for Itabira. At Itabira we have a temporary problem there with a lack of capacity for the disposal of the [indiscernible].

As we evolve during the year, we can update this minus 7, but we already put here the minus 2. So that's the number of capacity today. I want to highlight also in the right-hand side at the bottom, the information of Vargem Grande.

Now we now have the start-up of the tailings filtration plant we're not adding yet a capacity here. It will be important to the second half when you have the whole picture of Vargem Grande growing, but it's an important milestone.

That's the first plan of a sequence of plants coming from Brumadinho and Itabira and it's important milestone to highlight. I want to emphasize that we are really committed to deliver the production guidance for this year, our range from -- between 315 million tons to 335 million tons. What supports this formation?

Well, first -- firstly, we started this year in a very better way compared to the Q1 last year. As Eduardo said, we added 8 million tons this year compared to last year. Seasonally, the second quarter is better than the first quarter. You know very well that due to the end of the rainy season in the south and the southeast of Brazil.

Even in the north, we still have the rainy season there, but June is usually drier than the other month then the rainy season. So we are counting on that to improve our production and we can affirm that we have our guidance in perspective.

As Eduardo said, it's another information, the last Q2 last year was the same one last year. So that's another information that we are growing to achieve the guidance. And also, we have many actions that I'll follow-up with you in the next in slide. In our road map to achieve the 400 million tons.

First information in the southern system, 1

Vargem Grande next week, we are advancing our test with a conveyor belt. This test is a vibration test. We must check the impact in our upstream dam in that site. Fábrica is already testing the wet processing. We expect to have the final permit from A&M, the national agency mining to keep the operation. We expect to do this in the end of this quarter. And still in the southern system, in Vargem Grande, we are bringing online Maravilhas III dam, this is a very important asset for second half. We have some civil works there to finish. And the important information, we already have all the permits to start-up this asset, only missing the declaration of stability that's only in the end of the construction we can get.

I also want to drag your attention to the Southeastern system, and it's an important information. Good news here in Itabira, we are anticipating a partial operation of the filtration plant. This will allow us to offset that buffer the risk capacity that we have in Itabira, the minus 7 million tons that I mentioned, in the first. We are keeping here, but we are trying to anticipate now already having our plan the anticipation to bring -- to use the filtration and dry stack the tailings.

And I want to update you also about Brucutu site, an important asset that also -- are also coming online that is Torto dam. We are -- during the middle of the construction, we expect to finalize this construction during this year, but set differently from Maravilhas III, we don't have the final permit still have to apply in the process of 1 month to 2 months.

But both processes, construction and permit, we intend to have all completed this year. If you have any delay, it's important to say, that we have a backup position with the start-up of the filtration in Brucutu. Remember that we have filtration plant in Barragem in Ethiopia and is expected to start-up in the first quarter of next year.

I'll be here for further questions in the Q&A session. I pass you Luciano.

L
Luciano Pires
executive

Good morning, good afternoon, some highlights on the financial results, starting by cash flows. As you saw, they were very strong in the quarter.

Working capital had a positive contribution of BRL 550 million. You may have been surprised, but actually, the very strong sales of the fourth quarter of last year were collected this quarter, more than BRL 1.4 billion in reduction in accounts receivable and remember that prices spiked at the end of December remained strong in January. So that was the reason why working capital evolved positively despite also the first quarter being very heavy on other payments like payment to suppliers, inventory build, profit share with employees, but still working capital moved positively.

Still on working capital, you may have noticed that the price realization didn't actually move in parallel with the Platts price. And why was that? If you look at the fourth quarter, the average iron ore price, 62% for the quarter was $134 million. Whereas the provisional price at the end of the quarter was $158 million because of the increase in December. So there was a very strong recording of EBITDA in the fourth quarter on the back of the provisional sales. Whereas in the first quarter, what happened was the opposite. The average price for the quarter was $167 million, and the provisional price at the end of the quarter was still $158 million, $159 million, actually.

So the opposite, like the provisional prices, direct down the average price realization for the quarter, even more so compared to the fourth quarter, in which they pulled up. And so something to notice is that those sales that were recorded and $159 million in this quarter. They will be repriced at today's prices once ships arrive at ports. So therefore, you could expect a carryover of EBITDA of maybe about USD 300 million from sales from the first quarter towards the second quarter, cash and EBITDA. Talking about costs.

C1 costs before third-party purchases, we need to look before third-party purchase because the prices have been going up sequentially. They were in line $14.8 per ton compared to $15 per ton in the same quarter of last year.

However, despite the depreciated Brazilian real. And we now can see that for the for the year 2021, the costs are going to stay, like I said in the last call, slightly higher, about $1 higher than last year on average. And why is that? We have about $0.70 of impact from diesel prices, which increased substantially in dollar terms from last year.

And there's another $0.3 that will come from a shift in the mix because of the very high prices that we are experiencing, we are doing some opportunistic production in sales, especially from the Midwestern system, which is very high cost, has cost around $40, $50 per ton.

We're increasing sales from there. And although by a small proportion, it does impact about $0.30, the mix as a whole and C1 before third-party prices. Also on our competitiveness, some words on freight. You saw the recent spike in freight rates towards spot freight rates toward $28 per ton. Under this backdrop actually, the freight rates within Vale, they did not increase much from just to $15.7 per ton, but if things stay this way and as we use more spot freight in the second half because of our higher production, we should expect about $1.5 increase on average freight for Vale in the second half because of that spike in spot freight rates.

Finally, a word on New Caledonia and Base Metals. Just a reminder, from now on, you will not record under the Base Metals EBITDA the losses on New Caledonia, which were running at around $50 million, $60 million per quarter. And remember, also about a year ago, you didn't have Onça Puma also operating. So today, as compared to 1 year ago, we have Onça Puma generating around $50 million per quarter and New Caledonia out saving another $50 million per quarter, so a net $100 million per quarter improvement in results at the same conditions of price as compared to last year.

So these things start to make a difference as time builds up.

Finally, on capital allocation, this is no doubt the big questioning, what are you going to do with the money with these higher prices. I want to call your attention, we have had a lot of consistency and things are evolving quite quickly. Just a year ago, we were -- with the dividend policy suspended. We were in the middle of the first wave of COVID-19, a lot of uncertainty, markets diving the reparation of Brumadinho not consolidated. And then in the second half of last year, once the first wave ended and reparation advanced, we resumed the dividend policy, and we paid over $3 billion. Then in November, prices started to -- actually, early December, prices started to increase from the level of $120 towards higher prices.

Still, but Brumadinho agreement was still in discussion, so we didn't know what to expect. But finally, in February, once we reached the agreement and prices kind of situated at a higher level than $120, we decided to pay another $4 billion in dividend despite the burden from the brumadinho agreement.

But prices then were still fluctuating from -- big time $170, then down to $145. But after they're stabilized at $160 in April, then we announced earlier this month, the $5 billion buyback. And now here we are, again, running after prices, which are now at over $190. And naturally, it will create more options for cash flow allocation. So as you can see, the recent story has been of progress within Vale and upward surprises in the market. So what will be our response? There's nothing new in our response.

As we have been doing, we will make decisions, and we will announce those decisions that will prioritize return to shareholders. The story remains the same. We're going to be consistent. It can be an acceleration of the buyback. We can finish the buyback earlier. It could be another increase in dividends above the minimum. It could be both of them. So you should expect that we will continue to follow this track record of returning consistently money to shareholders.

The next question on the balance sheet. Is it inefficient that -- a lot of people start to ask this. First, a note here with low interest rates, so about 3% on a 10-year bond for Vale. The value of the tax shield, if you increase leverage is relatively small. So for example, if you add $10 billion on debt at 3% rates, you're going to save approximately $90 million per year in tax payments for $10 billion additional debt.

So if you want a meaningful reposition on the balance sheet in order to really take advantage of tax shields, you should add 30 -- $40 billion in debt to the balance sheet, which, obviously, in a cyclical industry, you wouldn't do that, right?

So these tax savings they should be weighted against the opportunities that the financial flexibility that today we have that may bring in the future. And that's the calculation we are making.

However, I also note that this $10 billion expanded net debt target, we've established that 2, 3 years ago, when prices were around about $80 per ton. And with the expectation of stronger for longer prices, we obviously could increase leverage, and we are evaluating that.

And most importantly, if we have the opportunity to deploy the additional capital in a smart way. So that's how we're thinking now about the balance sheet.

And now let's hand over to Q&A.

Operator

[Operator Instructions]

Our first question comes from Alex Hacking from Citi.

A
Alexander Hacking
analyst

Yes. I guess I wanted to ask about the potential for a basis metal spin-off. That's creating some headlines this morning. If you could just give us some color on where you are in your thought process there, what kind of transaction you would -- potential transaction you would be considering what kind of assets you would be considering putting in it? And then what would be the sort of logic behind any potential transaction?

E
Eduardo De Salles Bartolomeo
executive

Okay. Thanks, Alex. Well, let me be clear here, obviously, we are always analyzing this opportunities, okay. That's the main -- how can I say driver behind us. What is really pushing us to that situation, I think it's twofold. One is that we are in the midst of the foundation of recovering the business, and we believe we are on the right track. And secondly, we are undervalued, bothly on the Vale as a whole and on Base Metals story.

So it's a clear way to unlock value just on the basis of the multiples. So what we said, and I would be clear now to give you where our minds are is in exactly the conceptual phase of analyzing what does that mean?

First of all, let's put it this way. We have assets. As you know, in Carajás, they are interwind with the iron ore assets, we need to find out a way to how we deal with that. That's one issue that we are -- that we have to deal with, how we organize ourselves inside.

So there are several aspects within the -- how can I say, the precondition to do the business that we are studying, that said, analyzing. What is important? And then I might -- because now we're in the English poly, I can ask Mike to -- Mark to help me on that.

We have, first of all, as I mentioned before, to work on the foundations, and on the narrative. The foundations are very clear since the beginning. We need to get the North Atlantic operations productive and an operating adequately. We need to replace capacity. So Voisey's Bay, Salobo III, Copper Cliff mine and the sales of VNC. One of the things that triggered us as well, as you asked about our minds where they are is the sales of VNC, it unleashes us to think differently about the business. But I'll ask Mark because he's ahead in the business, and I was having beforehand as well. What is the narrative? I think Vale has a unique narrative here that we might be able to exploit. But not to be overly repetitive, we are on a phase of studying it, analyzing the possibility. Could you help me on that, Mark?

M
Mark Travers
executive

Sure, Eduardo. And Alex, I think Eduardo set out very well. Like the path really is to make sure that we get the optimal value for Base Metals, and he spoke about the need to build the foundation. Maybe the narrative or maybe the strategic direction to optimize value, I can spend a minute or 2 on it.

So I think more and more we're focusing in on copper, nickel in our business as a key for our participation in the decarbonization of the economy. And we clearly have lots of opportunities, which we've described in previous calls and on Vale Day around copper, where we have a current pipeline of projects that should bring us to about 500,000 tons of copper per year in the next few years with Salobo III, Cristalino, Alemão, we also have a number of projects in around the Carajás area which can optimize through synergies with the iron ore business and the current infrastructure in the area, plus some other options, for example, Victoria project in Canada and projects or 2 that can get us up to 900,000 tons.

So clearly, even within the internal pipeline, we have significant opportunities for growth. On the nickel side, we spent a lot of time recently talking about the dynamic of electric vehicles and what it's bringing to the industry. And clearly, we are going down that path of the electric vehicle penetration in the auto industry and the inclusion of nickel in the batteries for those vehicles.

Our approach is that we have the products. We have the products that have diversity and quality and form to go into the electric vehicle battery. And we have the ESG credentials, and we continue to try and build those. And those credentials relate to the low carbon intensity of our product coming from well-regulated, respected regimes such as Canada.

So really, what we're going to really focus in on is seeing that narrative or opportunity to build in this area. Currently, just by just to give a little bit of an update. We have buyers who are very interested in the products that we produce right now in the electric vehicle space.

We currently -- we recently signed a significant multiyear contract. With an OEM. It will -- it represents about 5% of our Class I nickel. And we see further opportunities to grow the sale of our Class I nickel into this space. We have some other opportunities there in terms of moving products around.

We have some opportunities with maybe some relatively smaller investments to repurpose some of our production lines to get a little bit more out. And then we have other opportunities for growth, which we look at. And we have a lot of government interest talking to us to try and tee some of this out.

So in the end, we're looking to build up to about 30% to 40% of our Class I nickel going into the EV space.

So Eduardo, I think that's probably the narrative that I would give in terms of how we increase value within the Base metals business.

E
Eduardo De Salles Bartolomeo
executive

Yes. And Alex, just to conclude, it's a process that, as you asked, there are several questions that have to be answered. We are in the initial phase of going back to that view that we had in 2014. But in a much different way. Now we think we have a better foundation. We are still work to do in the foundation. We have a better narrative now. And of course, there are several questions that has to be answered, as you asked, how would be the potential transaction. We didn't get to that yet.

We're just in the beginning phase of analyzing the possibility to unlock value. I hope I have answered your question.

Operator

[Operator Instructions]

Your next question comes from Timna Tanners with Bank of America.

T
Timna Tanners
analyst

I wanted to get your perspective on the situation in China. It's been interesting to watch iron ore prices rise even as China talks about cutting production. And yet, very little production actually cut, as you point out in your release in the first quarter.

So just wanted a little bit more of your perspective on what's happening there and what you see happening as the year progresses. And then if I could, a second question is just on any impact that we should think about or prepare for with regard to the Samarco bankruptcy filing.

E
Eduardo De Salles Bartolomeo
executive

Go ahead, Mr. Spinelli.

M
Marcello Spinelli
executive

Timna, thank you for the question. Well, China, we -- as you said, we are -- we have 2 points to main questions, actually. We have a solid demand based on the stimulus in business trade war problem that started some time ago. China is going really well. All the indicators we can see coming from properties, 7.8% growth rate considering few years manufacturing and infrastructures, a lot of new starts last year, they are under construction this year. So we have the scenario of a fantastic demand coming. To the point -- the question that we have open here, for how long we going to have this scenario -- prospective? We don't see a huge process to stop this we see as school's process coming on the second half, we don't see this in this half, we are going to face a stronger demand in the next quarter. For the rest of the year we can see something going in one -- in a smother way. On the other hand the steel supply is as I've said -- China just after the 2 sessions with a -- of the party meeting, they came to the world as a country that definitely are going after the decarbonization, they are really -- being really strong about this. We saw [indiscernible] as you see. The second question is how will we everyone else of this case? We see -- our market intelligence, we can see that they are coming really seriously this time. We can see seize up, try to control this process with their 3 actions that they -- 2 or 3 Yongzu. They say that, if you want your catch the guys that didn't their homework, the swap production or they didn't follow the permit to get something in 2 years, 3 years ago. Or they are not compliant to the ultra-emissions, low emissions that they should comply on.

And they say that if you are complaint to the ultra-emissions, part of the production are going really well in this area then you should -- so again what we can see [indiscernible] declining, blast furnace in a very high utilization. So this scenario, Timna, for instance, is to have high prices, it can decline in the second half and mostly high premiums. We can see a support for the premiums for the whole year. If you consider that the utilization of blast furnace will be high, price of steal be high-margin high. So the scenario for our forecast is to have the premiums in this level for the whole year. I'll pass to Luciano for Samarco.

L
Luciano Pires
executive

Timna, while it's going to be a BHP as well, we're going to be expectorators in the Samarco JR bankruptcy filing. So the company has started to operate. So the company has started to operate, the creditors have got some synthesis in their favor, not the company, no alternative but to file for JR. The process will take at least 240 days by law, likely more. The company is generating operational cash flows. Those cash flows will be available for distribution to the creditors. This is going to be done through an organized process in court. And we don't have any expectation to have residual equity value from Samarco. And also there's no expectation whatsoever of any additional capital injections to support operations at Samarco, given that the debt is nonrecourse to value in BHP. So we're going to be at the stands, watching what's going on.

Operator

[Operator Instructions]

Our next question comes from Mr. David Gagliano with BMO.

D
David Gagliano
analyst

I just wanted to drill down a little bit more on the capital allocation questions and issues. First of all, has Vale bought back any of the $270 million shares associated with the buyback that was announced in this April?

L
Luciano Pires
executive

Okay, David. Yes, we have. You're going to see the monthly reports, we're required to file with the securities regulator in Brazil. So it's going to be available for everyone. However, just noticed that we had a blackout period because of these results issued yesterday. And therefore, in the 15 days prior to the issue of the results, we were not able to buy back any shares by regulation.

D
David Gagliano
analyst

Okay. And then just going forward, obviously, you mentioned it, obviously, after regular dividends, total CapEx, Brumadinho payments, there's still a lot of cash here. And so the question in terms of a little more detail in terms of how you -- how we should expect from a cadence from a timing perspective? And in what form should we expect these incremental shareholder returns over and above the regular dividends. Is this something we should be expecting before, say, for example, the next regular dividend payment?

L
Luciano Pires
executive

We haven't discussed that. So as you said, the regular payments occurred just in March and September, so the more obvious way to allocate -- return cash to shareholders in between is through an acceleration of the buyback. But this could be discussed with the upcoming board, which will be elected if we should or not do something airing.

E
Eduardo De Salles Bartolomeo
executive

Luciano, just to add on that. I think the word -- keyword here, David, is consistency, right. We don't want to be stuck to the September, March dates but of course, we need always to gauge the market that we are in, sometimes overly optimistic sometimes wonder who we're pessimistic like last year in March. So we did about the buyback in between because it was clear that we had to do it. But normally, we would be willing to do consistently. But as Luciano mentioned, we have to talk to the Board. And you should expect, of course, dividends above minimum payment.

Operator

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

C
Carlos de Alba
analyst

I

guess on the same topic, Eduardo, Luciano, are there any -- I mean, clearly, the company generates a lot of cash flows. It was a surprisingly strong quarter in that regard. As you mentioned, prices are higher. Are there any caps or limits to the amount of dividends, special dividends that you would propose the company or the Board for the company to pay. I guess, the regular dividends are very clearly defined by a formula. And we can probably look at the growth CapEx or growth -- potential growth projects on Base Metals. But other than that, is there any cap or limit to the amount of dividends that the company would consider paying back to shareholders?

And my second question, if I may, is on the Mitsui divested process. How can we -- what are the expectations in terms of timing or next steps that we should expect from that process? And also, Luciano, maybe if you can walk us through how the process or the incorporation of Moatize or Nacala into Vale's books would look like? I guess you have to increase your debt and your interest payments in the coming quarters?

E
Eduardo De Salles Bartolomeo
executive

Luciano just me get the first one. I think there is no cap. There's always a balance, of course, we need to -- and again, we need to assess market conditions, debt structure, capture our and again, as I think you pointed out very correctly, our CapEx is really well behaved. It's all around platforms of growth. So we don't -- you shouldn't expect extreme CapEx. So there's nothing in our radar like that.

And secondly, a question that a lot of people make. So I'll take the opportunity to to make it clear, there is no transformation and M&A in our radar as well.

So with that said, and Luciano mentioned in the beginning, I'm just part of phrasing Luciano, the return is going to go to the shareholders. Right, Luciano?

L
Luciano Pires
executive

Yes. On Moatize, so we just finalized the revamp, which started to ramp up. We hope it will be quick. We hope by the beginning of the second half, we'll be already producing at 15 million tons. By the end of the year, we should receive equipment on-site in order to upgrade the production to 18 million tons. If you consider today's thermal coal prices and met coal prices a little higher than that, maybe $130, $140.

The business can turn EBITDA positive quite soon and be cash flow positive at the beginning of next year without the burden of the Project Finance, and that goes to your following question. The burden of the Project Finance was always felt within Vale's financial results through the EBITDA of coal. So coal EBITDA is penalized today because the mine pays a tariff for the corridor. Which is punitive because it needs to be, so in order to repay the Project Finance.

So when you watch less $150 million, for example, EBITDA for coal, about $100 million negative is just a service of the Project Finance funded through the tariff. Once you purchase Mitsui, what's going to happen is that everything is going to be consolidated, and therefore, the Project Finance will become Vale's debt and those $400 million a year or $300 million, $400 million. They will be seen at the financial statements. Part of it is interest and part of it is just debt repayment.

But on the other hand, the core EBITDA will immediately improve by the same amount. And so that's why I'm saying that you don't need much in order to turn coal EBITDA as a business to positive. We just need to produce and price is slightly better than what you're seeing today. So -- and that leads us to the next stage, which will be -- even though I do have a Project Finance, which bears Mozambican risk and higher interest rates.

There's obviously the opportunity to refinance at much lower Vale corporate rates and save money with that. That's what we're going to do. In terms of timing for the divestiture we already have over 20 NDAs signed with interested parties. Obviously, there's a way to go between people wanting to look at the asset and offering a firm intention to bid.

We hope that we'll start going to have those intentions, again, by beginning of the second half. Obviously, people will are going to do a lot of diligence on that. And if we succeed hopefully, the target would be to try to sign a deal before year-end.

Some variables put some risk on that. So obviously, there's this dispute between China and Australia, which is weighting on met coal prices. Now you have all the COVID-19 situation in India, which is a big importer of thermal coal and also good weight on international thermal coal prices. So let's see if we -- if we're a little lucky, I believe we can sign a deal still by the end of the year.

Operator

Our next question comes from Mr. Alfonso Salazar with Scotiabank.

A
Alfonso Salazar
analyst

I want to ask about the outlook of the pellet market. And if you can provide some guidance regarding production for the rest of the year and in the coming years, if you can give us some color on that.

M
Marcello Spinelli
executive

Okay. Alfonso, it's Spinelli here. Thank you for your question. Well, pellet market, let's talk about the demand side. It's in a split, there's blast furnace pellet and direct reduction pellet. Blast furnace pellet is quite the same as iron ore.

We are not in China. China is going really well. It's related to the problem of necessity to improve the use of the blast furnaces there. But the same pattern you see in ex China, that's our market. Very good prices, steel prices, margins and necessity to improve the production. So from this perspective, you can see a room for sales and premiums.

The supply side in -- on the other hand, is a limitation -- there is a limitation today. And Vale is the key producer and the key opportunity today. We expect the production this year slightly better than the year before. The limitation is the pellet feed production and we have temporary restrictions to dispose of our tailings in the main sites. So Brucutu, Itabira.

So we don't expect to produce more than this year. But we are targeting to go back to 60 million tons capacity for next year. We're not -- I'm not saying that [indiscernible] to 60 million tons, but we want to be ready to do that. It depends on the demand perspective, the marketing perspective to define that. So as a conclusion, we see a market that the premiums, we doubled the premiums in the first quarter compared to the last quarter last year.

This current quarter, we again have another increase in the premiums. And we expect there is room for some -- another increase in the premiums as we have -- the demand is really tight, supply demand is tight. Just an update about the direct reduction market.

That's quite the same that I mentioned for blast furnace. We have some 2 more ingredients here. The U.S.A. coming really fast in their economy and all the stimulus that are coming, they are -- they produce -- they use a lot of scrap, but they need pellets to improve their production, direct reduction. And the Middle East is our main market because of the U.S., the increase of the use of scraps, the price of scrap in Turkey is really high that make our clients, they can charge higher price to have good margins now.

And definitely, there is room again to improve the margins, improve the premiums in this market. So the outlook for this year. The supply is limited, and we can see good premiums because of the demand that is strong in place.

Operator

Our next question comes from Mr. Christian Georges with Societe General.

C
Christian Georges
analyst

And well done with your medical assistance in Brazil, i.e. very good indeed. I have 2 questions for you. One of them is -- you just said no transformative M&A even in a scenario of higher prices for longer and large cash flow. Does that exclude also some small M&A on copper because in your statement, you seem to be a very positive near-term and long-term on copper outlook. So is this an area where you may consider putting some cash in a large cash availability scenario.

And on the side of that, would you consider any investment in hydrogen in the context of your customers in steel sector and trying to move to green steel, decarbonize. Can you be part of that? Or is that something which you're just looking at from a distance?

And the second question is on nickel. You're out of nickel, you're still obviously in Indonesia. What was the situation with Class II nickel out there moving to -- being able to do sulfate and serve the battery market. Is it something you're still looking at down there? Or is it something you're looking at only doing from Canada and Brazil?

E
Eduardo De Salles Bartolomeo
executive

Christian, first of all, thank you for the acknowledgment of the medical assistor. Thanks very much with our team. Yes. So you're right, there's no transformative M&A. We are always looking for copper. Very hard, as you might understand.

But we could -- we shouldn't stop. So obviously, it's 1 area of interest. Another area of interest is energy and we have a very bold goal to eliminate our clean energy -- to add not eliminate substitute at all of our matrix for clean. So might happen to have some very small acquisitions on that environment. And hydrogen specifically, it brings us to another subject that is very dear to our heart because we just announced the scope 3 targets. One of the few that did that, by the way.

And where we are? We're following up some players that are doing that, but necessarily, I think more on a watching, how can I say that, seat we are actually working very close to our customers as near it could go. But I think because of time constraints, we wouldn't go there that far. But we are looking to help our clients with high-quality iron ore and high-quality metallics that will be needed if hydrogen, and we believe hydrogen is the best together with carbon capture, best alternatives for the steel industry.

But we are watching closely what the hydrogen is happening, but no investments on that, okay? And I think for nickel, I think it's better to Mark to answer. He'll be more short and more objective.

M
Mark Travers
executive

Okay. Sure, Christian. In terms of class -- sorry, the sulfate, you're right that the primary area of focus would be the Canadian nickel. But there are opportunities in Indonesia. The most prominent of which is the Pomalaa HPAL project that is being studied and being discussed with Sumitomo Metals, that would be a clear -- that product would clearly go into the sulfate market.

So that one is right in front of us. The other ones are, I would say, aspirational or early, there are opportunities, but nothing really of significance at that point in time. For example, there are HPAL projects that are on the books by others in Indonesia, and there are parties that are interested in our limonite, for example, but there's nothing significant at this point in time.

Operator

Our next question comes from Mr. Andreas with UBS.

A
Andreas Bokkenheuser
analyst

I hope you're all safe and well. Well 2 questions, a volume question and then a freight question. The volume question is kind of 2 parts. And you talked about it a little bit already, but Vale obviously has a number of licenses that are kind of required to reach your production goal of 400 million tons down the line. Is there any kind of comfort or clarity that you can give us on these licenses? I mean, are there merely a formality? You obviously expect to get them, but is there any kind of visibility you can get that they're not going to be significantly delayed at this point in time, either conversations with the state or federal government on this. That's the first part of the first question.

And within that, you obviously have always had a focus on value over volume as has your Australian peers. And 1 of the things I'm thinking about there is your additional capacity as it kind of materializes out of the northern system in particular, but Barley's consolidated capacity could be 450 million tons. We're sitting at almost $200 a ton of iron ore and if there was a time to kind of monetize that additional capacity, I would think it would be now and basically add additional volumes beyond the 400 million tons with iron ore $200 million.

So how do you think about that strategy value over volume given where prices are and given that you could have additional capacity throughout Vale systems going forward. So that's kind of the first -- sorry, slightly long volume question.

And then the second question is on freight. Luciano, you talked about a bit of freight inflation, obviously, and how it impacts your second half of the year. How does that -- if we look beyond the second half of the year and if we look into 2022, 2023, Vale is obviously going to be putting more volume into the market, that could keep freight rates high. Like if we're still sitting at $28 a ton by the end of next year, is there additional freight inflation that kind of flows through your P&L? Or are you still well protected on your freight contracts. So that's just a longer-term view on the freight cost. So those are my 2 questions. Sorry, if they were a little bit long.

M
Marcello Spinelli
executive

No problem, Andreas. Spinelli speaking. Thank you for your question. Regarding the risk to achieve the volumes, obviously, licenses or authorizations are always in our track. And we try to plan with some extra delay to keep the -- our planning, okay. So what you see, if you split the challenges in 3, the north, we need to keep the license as a rolling process. We just got the license of a pet in Serra Sul in [indiscernible].

So it's business as usual, it's going well. We don't see any delay. In the Southeastern system, we are really close to bridge the gap of the lack of of capacity, dam's capacity to install the filtration. So it's in our hands actually. We have final licenses, yes, we have, but we don't see in a big deal.

And I explained about the Torto dam that we still have to do this, but if you have delay, we have a fallback position for that. We -- I'm emphasizing that we are trying to bring in our planning process buffers, contingencies to be reliable in the end of the day. Jumping to your second part or the second part of your question, value for volume is a mantra.

So we are ready to bring back to 400 million tons. And we are building the extra 50 million tons, this is 450 million tons. Why? We want to be okay with that we want to be reliable with our target of 400 million tons. And we can use an extra 50 million if the market demands that. So that's our mantra.

We're going to decide this as we evolve in the market. So again -- but definitely, we need to be ready for an extra capacity. And about the freight, Luciano, I think I can start, you can finalize it. And the freight side, we again can say that we are less exposed this quarter this first half.

Luciano said the second half, it's seasonally more explosive to spot freight. But don't -- you must have in mind that we are bringing an additional 18 Guaibamaxes for this year that will match for the demand of 400 million tons. And the extra 6 new Castlemaxes for our fleet. We are talking about 170 vessels in our fleet today. So we are growing this natural hedge for the spot market freight.

And definitely, we consider the inflation today and the last problem was really related to small vessels to Panamaxes that just came the soybean seasons that make this happen and contaminated the -- and all the big vessels market.

So again, we need to live this. We're not forecasting any big inflation for the spot market, and we are working hard to have our own fleet to offset any problem in the market. And an additional point is total fleet today we have installed all the scrubbers. That's another point that we are not being affected to the gap between the high sulfur and low sulfur also. So the shipping business for us is very important to be stable.

Operator

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

E
Eduardo De Salles Bartolomeo
executive

Okay. Thank you. Thank you very much for your attention and questions and interest to talk to us. I think we've been repetitive in that way from day 1 it's a marathon that we're going through. I think in a Vale Day, we said derisking, reshaping and re rating. Derisking is advancing pretty well. Still a lot of milestones to achieve example, be better on safety, be more assertive on production, but we did strides very good on Brumadinho.

Capital discipline is 0 doubt that we are on that. Reshaping VNC, it's a tremendous good example of how to do it with respect with communities. Mozambique is going to be another one. And re-rating is going to -- it's going to be our final mark. So we're going to be a more reliable, more safe and a more human organization that will be priced correctly. So thanks a lot.

Thanks a lot for your questions because that moves us to the right direction. And I hope to see you in the next call.

Operator

That does conclude Vale's conference call for today. Thank you very much for your participation. You may now disconnect your lines.