Vale SA

BOVESPA:VALE3

Earnings Call Transcript 2023-Q1

[Operator]

Good morning, ladies and gentlemen. Welcome to Vale's Conference Call to discuss First Quarter 2023 Results. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. This call is being simultaneously translated to Portuguese. [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 is accompanied by a slide presentation also available at Investors link at the company's website and is transmitted via Internet as well. The broadcasting via Internet, both the audio and the slide change has a few seconds delay in relation to the audio transmitted via phone.

Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of Securities Litigation Reform Act of 1996. Actual performance could differ materially from that anticipated in any forward-looking statements comments as a result of macroeconomic conditions, market risks, and other factors.

With us today are Mr. Eduardo De Salles Bartolomeo, Chief Executive Officer; Mr. Gustavo Pimenta, Executive Vice President of Finance and Investor Relations; Mr. Marcello Spinelli, Executive Vice president of Iron Solutions; Mr. Carlos Medeiros, Executive Vice President of Operations; Ms. Deshnee Naidoo, Executive Vice President of Energy Transition Materials.

First, Mr. Eduardo Bartolomeo will proceed with the presentation on Vale's first quarter 2023 performance. And after that, he will be available for questions and answers.

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

[Eduardo Bartolomeo, Chief Executive Officer]

Thank you very much, good morning, everyone. I hope you are all doing well.

We started 2023 with great confidence in delivering our goals for the year. In Iron Solutions, iron ore production was solid, especially at S11D, thanks to a better performance of our truckless system and the installation of new crushers in 2022. In addition, our pellet production increased by 20% year-on-year, with higher feed availability and improving asset reliability in our pelletizing plants.

On iron ore sales, the gap to production was primarily due to weather restrictions in loading at our Northern port and a supply-chain rebalancing after strong sales in the fourth quarter of last year. Since production was not affected, we expect to offset this impact in the second half of the year. In this sense, our average iron content and quality was slightly lower, impacted by the port restrictions and opportunistic sales of low-grade product, which add value to the company.

In Energy Transition Metals, copper production grew over 18% year on year, supported by Salobo III start-up, and with sales up to 25%. Finished nickel production was impacted by the ongoing transitional period between the depletion of Ovoid mine and the full ramp-up of Voisey's Bay. On a very high note, our Sudbury mines continue to deliver remarkable performance, with record ore production rates since 2017. Also, we continue to make progress on the EV supply chain, with two important milestones for Pomalaa and Morowali, in Indonesia, which I will cover later.

Moving on to sustainability, we are steadily making progress with our dam safety management. This year, we upgraded our dam safety management. This year, we upgraded the safety levels of two more dams, removing their emergency protocols.

Our improvements in Health and Safety practice led to renewed perception by ESG rating providers. On that, Sustainalytics completed its annual review on Vale in March, with a substantial upgrade in our ESG risk rating.

On top of that, our discipline in capital allocation remains pristine. We are walking the talk and returning value to shareholders. In March, we distributed $1.8 billion in dividends while completing 47% of the third buyback program launched since 2020. So, let's see our performance in detail in the next slide, please.

We are well positioned to deliver the production guidance for iron ore. We already produced 4 million tons more than in the same period of last year, and we expect to continue with that steady performance as the seasonal challenges fade away. In the Northern System, asset availability increased at S11D, with lower non-scheduled maintenance and solid production output. The achievement aligns with our intensive efforts to standardize processes and ensure adherence to best operational practices.

In the Southern and Southeastern Systems, the heavy rains did not prevent us from delivering a strong production, contrasting with what we experienced last year. The loading restrictions mentioned caused the production-to-sale gap and the lower average grade which are temporary, and we should be able to compensate it in the second half of the year.

In addition, we are close to obtaining the operating license for Torto Dam, since we had its emergency plan approved in March. The dam will support pellet quality and volume, as well as product mix and average price premium. Another project that is moving well is the commissioning of Gelado, which will produce high- quality pellet feed by reusing the tailings that have been deposited in the Gelado dam. In this context, we are confident that we will reach our volume guidance and average grade for the year 2023.

Next slide, please. In Iron Solutions, tests in clients' furnaces are confirming the benefits of iron ore briquettes. We shipped the first cargo for international tests in April. So far, 8 industrial tests and 6 furnaces are under execution, with another 9 tests expected this year. Our first two industrial plants will startup this year in Tubarão.

I believe we are facing unprecedented opportunities for segmentation and demand growth for high-quality. Concentration is key to a high-quality low-carbon supply, reason why we signed up for the development of Mega Hubs in the Middle East and launched the green briquette. Therefore, Vale is uniquely positioned to be the supplier of choice in that scenario. We combine volume, quality, innovative portfolio, and well-structure supply chain for a decarbonizing world.

Next slide, please. In the Energy Transition Metals business, I call your attention to our copper production growth, up 18% year on year, which allowed for a sales growth of 25% year-on-year. This was mainly the result of Salobo III ramp-up and Sossego's improved asset availability, benefiting from the extended SAG mill maintenance in 2022.

In Nickel, Sudbury delivered the highest production in the past 5 years, following another production record in the last quarter, due to the excellent performance of our Sudbury mines. As I mentioned before, the lower finished production for the quarter was expected, and was mainly due to the ongoing transitional period between the depletion of Ovoid mine and the production ramp-up of Voisey's Bay.

For the second quarter, we have planned maintenance for Voisey's Bay and Long Harbour operations as well, which should impact Voisey's Bay and Thompson production.

Next slide, please. As I said, we are steadily ramping up Salobo III. Both lines are operating, which is an important milestone for the site. We expect to reach full capacity within 20 months, with a relevant contribution to production by the end of 2023. Once at peak capacity, Salobo III will add 30 to 40 thousand tons of copper per year.

As you can see in the picture, this is a beautiful set for a promising project and a natural hub for copper production in Brazil, with substantial value creation for shareholders and society. With all that, we are confident on both guidance for Copper and Nickel this year.

Next slide, please. We continue to engage with clients and partners in the EV supply chain. We are setting the stage to pivot in Nickel. In that direction, together with our Chinese partner, PTVI signed a definitive agreement with global automaker Ford Motor Company for the Pomalaa HPAL project development in Indonesia. The three-party collaboration fosters conditions for a more sustainable nickel production in Indonesia.

We also launched the project construction in Morowali, in February. This an integrated nickel mining and processing plant powered by natural gas, with start-up expected in 2025. As you can see, we have unique assets, innovative technology, customer engagement, and a supply chain to be the supplier-of-choice for the EV revolution. With active listening and open dialogue, we have set the stage for the strong growth ahead of our Energy Transition Metals business.

Moreover, we continue to make significant progress on several fronts, including on the minority sale, and today I am happy to announce that we have advanced on bringing Mark Cutifani as the Chairman of our newly formed Energy Transition Metals Board, starting July this year. Mark needs no introduction, and we are certain he will be a valuable partner as we bring our tier-one portfolio of assets to the next level, unlocking significant value to our shareholders.

Next. We are moving safely towards leadership in sustainable mining. That starts with reducing the risks associated with dams. Since 2022, our approach allowed 10 dams to be stated safe and stable by external independent reviewers. With that, those geotechnical structures had their emergency level removed.

By August, we are on track to be adherent to the GISTM, the Global Industry Standard for Tailings Management for critical structures. That gives us confidence that we will be 100% compliant by 2025 to all other structures. With more robust safety practices, the ESG risk perception on Vale improved considerably. The company has been re-rated by important ESG risk raters, with Sustainalytics providing the latest grade improvement for our company. That decision came with an assessment of critical controversy and improved practices in Health & Safety, putting Vale in the industry 1st quartile.

We are seeking leadership in sustainable mining. For that, we continue to deliver on many of our public commitments, such as in Human Rights, Amazon Forest protection, and community relations. Finally, on Brumadinho reparation, we reached 59% of commitments delivered per the conditions and deadlines set by Integral Reparation Agreement.

Next slide, please. There is one thing I make sure to emphasize every single time. We substantially de-risked and reshaped Vale. On the de-risking, we had strong deliveries in dam management and decharacterization, besides advancing with the Brumadinho Reparation. On the reshaping, we simplified our business in a major way. We divested from more than 10 businesses in 5 different countries, tapping cash drains and allowing ourselves to laser-focus on our core business, on safety and on production stability.

The last milestone, to finally say we completed the Reshaping Program, is the divestment from MRN. We moved a lot in building Vale of the future, a company that promotes sustainable mining, fosters low-carbon solutions, and remains disciplined in allocating capital.

Now, I pass the floor to Gustavo, who will give you more detail about our financial results. I'll get back at the end for our Q&A session. Thank you.

[Gustavo Pimenta]

Thanks, Eduardo, and good morning, everyone.

Let me start with our EBITDA performance for the quarter. As you can see, we delivered a $3.7 billion proforma EBITDA in Q1, $2.7 billion lower than in Q1 2022. This decrease is mainly explained by $1.5 billion lower price realization for iron ore fines.

On volumes, we had an impact of $574 million from lower sales of iron ore fines, which was down 5.5 million tons year-over-year, despite a 3.7 million tons production increase. This is a transitory effect due to loading restrictions at Ponta da Madeira Terminal during the rainy season and supply chain rebalancing after strong sales in Q4.

We expect to offset this impact in the second half of the year, keeping the annual sales plan unchanged. The $435 million increase in costs and expenses will be detailed later in my presentation.

So back to Iron Ore price realization. Iron ore fines realized price was $108.6 per ton, 23% or $32.8 per ton lower when compared to Q1 2022, mainly due to the decline in benchmark price of $16.1 per ton. Our average premium also contributed to lower price realization as our average sales quality was impacted by the temporary shipment restrictions at Ponta da Madeira Port and the opportunistic sale of high silica products, as discounts for these products were low due to steelmakers negative margins.

The pricing mechanism had a negative impact of $ 2.4 per ton on our final realized price. This is largely explained by the negative effect from realized lagged prices at $96 per ton which was partially offset by the better sales prices in the quarter as compared to the provisional prices accrued in Q4.

Moving to our cost performance in the next slide. As you can see, our C1 cash cost ex-third-party purchases increased to $23.6 per ton in the quarter. This is explained by three main factors. First, one-off events, which include profit sharing in Q1 and the anticipation of maintenance activities, taking advantage of the lower volumes in the first semester.

Second, the volume mix and inventory effect. The lower production from our Northern System, where we have the lowest C1, together with higher third-party purchases, had a negative effect on volume mix and fixed cost dilution. We expect these transitory effects to be normalized in the year to go.

The remaining impacts were related with the geological inflation in Serra Norte and higher fuel costs in our operations. We remain confident in achieving our C1 guidance for the year of $20 to $21 per ton, mainly due to the production recovery in the Northern System and the roll out of our productivity program, with gains in asset reliability and procurement initiatives with suppliers.

Moving to all-in cost in the next slide. As you can see at the bottom of the table, our EBITDA breakeven cost reached $58.2 per ton. Besides the C1 cash cost increase, which I just explained, there were 2 other drivers. First, our distribution cost, which increased by $1.5 per ton, mainly due to higher share of beneficiated products in third-party concentrators, improving returns and margins and second, lower market pellet premiums.

As we reduce our C1 cost and improve the average quality of our portfolio, with higher production from Carajás and more pellet feed production in Minas Gerais, we expect our breakeven to improve in the year to go.

Now, turning to Energy Transition Metals Business, starting with copper all-in costs. There was a year-over-year decrease in cost of goods sold per ton due to higher fixed cost dilution, largely attributed to the improved operational performance at Sossego. This was offset by a decrease in our by-product revenue due to higher proportion of copper concentrate from Sossego. Also, benchmark treatment and refining charges have increased this year. All in all, our EBITDA breakeven excluding Hu'u reached $4.464 per ton, which should gradually reduce throughout the year as we continue to ramp up production at Salobo III.

Now looking at nickel all-in costs, cost of goods sold ex-third party was impacted primarily by lower dilution of fixed costs and inflationary pressure, including higher fuel costs. In addition, volumes from third-party feed increased year-on-year, as we had anticipated. Although this increases our costs, it is aimed at maximizing the utilization and performance of our downstream operations, especially as Voisey's Bay open pit is depleting and we progress on the ramp up of the underground mine.

Now moving to cash generation. As you can see, we delivered a 62% EBITDA-to-cash conversion in the quarter, compared to 19% in Q1'22. Free cash flow generation was positively impacted by working capital as we had a strong cash collection from Q4 sales, as we anticipated last quarter. This effect was partially offset by transitory inventory build-up and seasonal disbursements related to profit sharing in the first quarter. We also paid around $1.8 billion in dividends and repurchased almost $800 million in shares in Q1, aligned with our capital allocation strategy.

So let me talk more about our capital allocation strategy and more specifically about our buyback program. We are close to reaching 50% completion of our third buyback program, and we expect to conclude it in Q4. We continue to see the repurchase of our shares as one of the best ways to create long-term value for our shareholders. After the completion of the third buyback program, we will have repurchased almost 20% of the company's outstanding shares. This means that for our shareholders with positions since the start of the program, without spending any additional dollar, their participation in future earnings would have increased by almost 25%.

So, before opening up for questions, I would like to reinforce the key takeaways from today's call. As Eduardo mentioned, we are very encouraged with the leading indicators coming out of our key operational sites and the solid operational performance in Q1 only reinforces we are moving in the right direction.

We are also focused on delivering value through accretive growth projects, such as Salobo III, levering on Vale's unique endowment. On portfolio redesign, we are happy with the progress to-date and strongly believe the current portfolio of assets and the recently announced organization will position us to successfully deliver on our key strategic objectives.

And finally, we remain highly committed to a disciplined capital allocation, as evidenced by our highly accretive buyback program.

Now I would like to open the call for questions. Thank you.

[Operator]

Thank you, ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Rodolfo Angele, JPMorgan Bank.

[Rodolfo Angele, JPMorgan Bank]

Good morning, everyone. My two questions are the following. First, on the operating side, we know that with lower volumes that costs will naturally trend higher. But I've been more and more asked by investors about the trend that we've been seeing particularly on n iron ore and also on the nickel business where costs did deteriorate substantially.

So my question is, what can be done to kind of reverse this trend? If you could comment, what would the costs have been, if we didn't have, especially on the iron ore the restocking that we saw? And how relevant are the new licenses over there to lower this? So, any color on the cost trends would be greatly appreciated.

And my second question is more on the industry. And now, Vale's position itself. So we started to see after years of an extreme focus on shareholder returns, the industry is now moving back a little bit more into growth mode, especially through some M&A. Vale has just completed a divestment program, we've been discussing, also, the strategic move on the base metal side, with a potential partial sale of a stake there to a strategic shareholder as well. And my question is, should we expect the Vale also to join this new kind of trend in the industry? Should we see the base metals also as an opportunity to speed up growth eventually, not only through organic but also through M&A opportunities? Those are my questions. Thank you very much.

[Eduardo Bartolomeo, Chief Executive Officer]

Thanks Rodolfo, here's Eduardo. I will let, Gustavo elaborate on the cost-related to dilution and growth for iron ore and nickel. I think you're spot on, Vale is completely focused on is two core businesses. First iron ore, we are always looking for some opportunity, some of the also -- some smart M&A that we can do in adjacent of our operating assets. In base metals, energy transition metals that we call now is this platform, we never hide it, that is almost three years that we're talking about ring fencing it, creating the right drivers. As you see, today, our moves are substantially and effective. We just brought Jerome from Tesla to be independent board. Now we have the -- hot say in English to happen is to have Mark, good friend and old friend that worked with us in the past, to lead the board of this new company. And this new company is going to be a platform of growth. We have organic growth, we have an endowment that nobody has in the world, in the right jurisdiction, both [indiscernible] Canada and Indonesia.

We have to tackle execution issues as you know, as well, we're going to consolidate, this industry is going to be consolidating. So we are going to have the right entity to do that. So yes, the answer is, we are going to grow. We are going to go organically. And we can go inorganically when we have the right entity. And that's what we are building and we are truly on track on both the software as people, the hardware as the legal entity. And even the participation that you mentioned there we are advancing as well, with the 10% that most participation in the business.

I hope I have answered your question. But I think is a very exciting moment for the energy transition metals world for sure. But we're going to do it with an extremely cautious and disciplined way as we always have been. And Gustavo, please could you elaborate on the question about costs?

[Gustavo Pimenta]

Rodolfo, I think everybody is facing cost increase in the sector. I think if we look at the last three years, pretty much everybody has increased it materially, they're all [indiscernible] to fund 50% to 100%. It's not only Vale but our competitors. I mean, there's a higher fuel costs impacting everybody in the space, label services. I think that applies to everybody.

Now, I wouldn't read too much into our Q1 cost numbers. And for few reasons. I think the major impact we faced was regarding the Ponta da Madeira restriction, the shipping restrictions that we had. If it wasn't for that impact, our C1 would be probably $2 lower. So we should be normalizing the C1 in the second half of the year, the major leading indicator that I think we have to look at its production, and we were able to put $4 million up quarter-on-quarter compared to last year. And the shipment, we do have flexibility in the system and to offset this in the second half.

So I think I'll lean when we bring this volume, especially Carajás, our cost should be benefited. There is also Torto, which as we've said before, it will help us with pellet feed almost 9 million tons, which will then lead to lower, better all links in terms of better premium. So we should be, we are very confident that we should be normalizing these figures in the second half of the year.

And Nickel, there was a similar component there. We had more third-party feed in the first quarter of this year than we had last year. But we should be also compensating and having more own production in the second half of the year. And therefore we continue to point to the 13 kilotons as our previous guidance for nickel cost.

[Operator]

The next question is from Leonardo Correa, BTG Pactual.

[Leonardo Correa, BTG Pactual]

I have a couple of questions. And sorry for moving back to the question on costs from Rodolfo here. I suspect that this is going to be one of the big themes of this conference call. But it seems clear that Gustavo from what you're saying that there's a very big element of this cost performance, which is non-recurring and somewhat of a one-off. If we think of the breakeven costs, just for fines into China, the number moved up to $62 coming from about $52 in the fourth quarter. So this is a $10 per ton sequential increase, which I think obviously caught everyone by surprise.

I mean, using your judgment and using all the other signal numbers that you guys have inside the company, what percentage of this or how much of this would you say is non-recurring? I think this is super important, just so we have the right base to forecast going forward. This very particular important line. Just wanted to get a sense on how you see this line, how much of this $10 junk is non-recurring?

You mentioned that the guidance, the C1 guidance for the year is still upheld, right at 20 to 21. So I just on the C1, I can assume you guys have like a $2 to $3 potential reduction in cost going forward. When I look at the breakdown for premiums, I mean, clearly the result was very weak, I think quarter on premium. So just wanted to hear you on how you see this line going forward and how much of that weak performance is non-recurring?

The second question regarding production, and more specifically at the crown jewel of Vale, which has always been the case at Carajás. Carajás has also been struggling for a while. And certainly there's several issues which are exogenous and out of control, like licensing, like the case law in the region. So first of all, I mean, how are you see these the sessions? Has there been anything new with legislation to improve the situation and to allow Vale to operate more efficiently. But I just wanted to hear your sense on that. And if you can give us any color that you can on how you see production at Carajás is evolving and developing in 2024. Thank you very much.

[Eduardo Bartolomeo, Chief Executive Officer]

Okay, Leonarda. Gustavo is going to answer the cost, I'm going to go over the Carajás production.

[Gustavo Pimenta]

Leo, you're right, I think the view on C1 is around $2 to $3, exact $2-ish in terms of transit or impact. Now, you understand well, I mean, the transitory impact and the quality also impacts our lien, it impacts premium, it impacts some of the beneficiation costs because we concentrated more presently in China in this quarter versus last quarter. So there's probably a similar impact in C1 applying for the other line is that we have in the rolling, call it $6. I think a lot on the final or lien for the year, we will depend on how the premiums perform. They were indeed a little lower, but a lot to the mix. So if we resolve the mix, if we bring towards online in the second half of the year, if you bring Carajás, you should expect to see ourselves posting a better premium and therefore, have a lien substantially below what we had in the Q1.

So with that, I'll pass it over to Eduardo.

[Eduardo Bartolomeo, Chief Executive Officer]

Okay. Hello, this is a very like, I think you as you understand this, I think it's easier to explain to you, but let's be very clear here, let's separate Carajás Northern system with the S11D. S11D is all endogenous, it's all in our hands, we need to take care that was built to compensate the loss that we were going to have on the depletion of the Northern Range. And we mentioned already, we are improving there. And that's where the growth is coming. When you look at our guidance and our numbers for this year, there is no licensing at that edge on the Northern Range, we are planning with together to stabilize around the 100 million tons on Northern Range and [indiscernible].

So how are we advancing with the legislation with the licensing, because, as you might understand, we had the last big license in Northern Range in 2014, if I'm not mistaken, and the last small one was [indiscernible] in '19. And now we are pointing out to the body and three, that we already had the installation of the [indiscernible] provisional license for that. But as it's been early needs to have the feed to make iron solutions, we are working very thoughtfully but for the medium term, not for this year. This year, we did very well, by the way. We operated to the program in Carajás on the Northern Range where we hit the program, by the way. But it's a program that is lower, we are aiming as I mentioned 100 million tons on both systems. So that is not an operational problem. They're different from S11D, that I mentioned already.

But we're not sitting there and waiting. And not only the plus 20 that we already got the license, the plus standard is being commissioned. So growth from the northern system is going to come from S11D for sure. That's what is being designed. So we're going to move from 80 something this year, we're going to go up to 110, 120 that what we are investing by the way, and I think a good new deal -- maybe we didn't stress enough that we have licensed plus 20. So we are executing plus 20, onus S11D. There is no problem licensing there. So we are up and running with that project.

But you're right, we need to get back to the production on the northern region and [indiscernible]. And it's been early leading several initiatives that I think he can share some with you. Because we're not sitting here waiting and letting our mind, I can't do on 40, stay at [indiscernible].

[Gustavo Pimenta]

Eduardo. Let me just remind, the main projects, we already have the license for plus 10, plus 20 new crushers in north and south we have Capanema. So this is one site so we've been evolving in this site. In the northern ranges, as Eduardo mentioned, we have a combination of small licenses and big license that we need to metered long term. You may notice that we are not counting on that range with our volume. So we flat the production there to guarantee that we're going to deliver that. So we have N3, N1 and N2 in sequence. And you mentioned a small piece sometimes is related to suppression or like cavities, as you mentioned. So we are working really close to the agencies. I believe that we have people in the front line. I'm personally on the frontline to discuss this. We see good news coming with very technical analysis. We are bringing new studies, we're bringing investment in the field like ITV, the Valley Technological Institute, that we are supporting a lot of this stuff.

So we see in this new crew that is leading this in the government that we have very technical and grow in perspective about this. So we are confident, we need to work hard in this trend. But we are protecting our plan in the next three years to guarantee that's going to deliver that.

[Operator]

Next question is from Thiago Lofiego, Bradesco.

[Thiago Lofiego, Bradesco]

Two questions. So the first one, sorry to insist on the cost front, Gustavo. But how confident are you guys on the guidance $2,0 $21 for the C1. So that would basically entail C1 costs below $20 every quarter from here to the end of the year, or significantly below $20 in the second half. I just want to try to understand how realistic this is just additional color on that would be great.

Second question. For Spinelli. Spinelli, can you talk a bit about the reopening dynamics in China, we are seeing steel margins still depressed, steel prices actually falling at the margin. But at the same time, there's some positive data out there, steel production is increasing. So what's your take on supply and demand dynamics for iron ore becoming, let's say a couple of quarters? And also what kind of a play is sentiment having on this whole, price formation story here for iron ore? Thank you.

[Gustavo Pimenta]

So Thiago, Gustavo, here, let me take the first one. So it's going to be gradual. And most of the benefits we'll see in the second half of the year, as we bring more volume, and as we bring better products into the mix, especially the products from Carajás, which has substantially lower C1. So you're going to see the benefit from it, then there is about $0.5 to $1 of efficiency initiatives that we've been pursuing strategic sourcing, overhead efficiency, discussions that we've been having with some of our suppliers.

So we've been laser focused, since last year on cost efficiency. So we are seeing benefits and we have that in our plan for the rest of the year. So you see a decrease -- a gradual decrease, we are feeling good about it. And we believe that 20 to 21 is a reasonable number to be achieved, assuming that we bring the volume, especially from Carajás, online in the second half of the year.

[Marcello Spinelli, Executive Vice president of Iron Solutions]

Hey, Thiago. Spinelli here for your question. So we've been seeing the recovery in China. Definitely we have strong numbers. You mentioned that GDP FAI very resilient, infrastructure investment properties, we have good news also. So the bright side that we are in the stocking mall in China. So, we see the sales increasing also the accomplishment of construction also increase.

You mentioned all the micro numbers, blast furnace going well, we just came from China. It's a common sense that production will be flat this year. So the production is there. So what is concerning today, so, the first thing is related to property. It is a cycle. So we firstly we need to sell, finish the construction. So land sales and new starts are coming. So that didn't come yet. So that's the main volatility that we see in our -- even in our clients. They are in a wait and see mode. But everybody's waiting that for only for the second half. So we are on track and we need to wait for that. I think price in steel, it's another concern. But the good news is, if you see the export that you had in China, this quarter. That implies that we have a symmetry in the price, ex-China comparing to China. So there is a wind that can help China to improve the price in the steel market. And as a combination of all of this, we have a tepid or really tepid margins steel mill. So with all this, we have this wait and see behavior, we have old inventors are really low.

So in our perspective in short-term, we can see a rebound, we have this next holiday that is coming out and they will need to replenish the supply chain. In the second half, we need to wait and see what is going to happen to the property, I'm not saying that we see a growth in the property, but a smooth and flat demand.

But just to conclude Thiago, I want to drag your attention and everybody that the supply demand balance is really tight. So that's it, I think is a very important information to give to you. The demand ex-China is growing 1.5% to 2%, there's a important demand. In the supply side, you have a growth but it's not that important growth that is a balance in this in both growth. So we can see an addition of 5 million to 10 million tons in inventory that is very little today 130 million tons in China. So I'm talking about iron ore. So, we see a balance in the market for the iron ore and that can bring an upside risk for the price or at least the stability. The name of the game of these years is stability, we are all the time try to bother that but production is very stable, the macro is coming and we see the supply very, very organized, very tight with the supply balance. Again, we are cautiously optimistic we do to wait and see the property market in the second half.

[Operator]

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

[Caio Ribeiro, Bank of America]

So my first question is on third-party ore purchases in the iron ore division, right? This quarter, you purchased almost a million tons no more than in first quarter 22. So I'm just wondering if you see room to increase third party ore purchases in 2023 for the full year versus last year. And if you can provide any indication on the volume of those purchases for the year. And then, my second question on your expanded net debt where you continue to follow a target of $10 billion to $20 billion I just wanted to understand if you would be willing to temporarily surpass like that upper range of the target, if you do encounter an attractive or smart M&A opportunity as you put it and if this opportunity does not unfold whether the focus will continue to be on cash returns via buybacks and dividends. Thank you.

[Marcello Spinelli, Executive Vice president of Iron Solutions]

Thank, Caio for questions. Third party is a trend. I don't -- we don't see a huge growth of talking about 2 million or 3 million tons probably in this year. It is an ecosystem that we have mainly [indiscernible] in Brazil, there are some -- we say the smaller miners they're big companies that we've been developing for many years. So we see a good thing here just to figure right we made a $20 ton in margins with this kind of business. So, it is -- as we have capacity in our supply chain you have the market and if you can improve this product with some application like pelletizing plants for blending or even in the future, the briquette plants we made taken advantage of that. So that's something that we want to strength and bring this partners more and more reliable and with more quality, sustainable way. So we want to foster that but for this year, we may expect some growth but smaller like numbers like 3 million tons.

[Gustavo Pimenta]

So Caio, on your second question on the balance sheet. No, we are not expecting and planning on going beyond the 20 billion that we have in our target leverage ratio. I think what Eduardo was referring to is, first on these smart M&A, those are adjacent opportunities with limited capital that we continue to look. Especially, we're assuming a high quality products, so you're seeing some opportunities, but they shouldn't be intense in terms of capital deployment and organize, but they shouldn't be intense in terms of capital deployment. And on base metals, if we decided to do something, it's certainly using the currency that we are about to create. That's one of the reasons why we've been discussing the curve out of base metals. So we are not expecting to use Vale's balance sheet for any move. We continue to believe that the share buyback, especially at the share price that we are seeing today are one of the best if not the best investments that we have for available cash.

[Operator]

Our next question comes from Liam Fitzpatrick, Deutsche Bank.

[Liam Fitzpatrick, Deutsche Bank]

Two questions from my side, both on the base metal strategy. So I just wanted to confirm is the target still to complete, the stake sale by the mid-year point? And then in terms of next steps, I'm sure Mark could finally hasn't joined to be Chairman of a subdivision within Vale. So does this appointment more or less confirm that you are eventually headed down the IPO routes? So any color on that would be appreciated?

The second question, and I'm sure, full well, why we're all asking around M&A, but when you say the correct entity, and then you'll consider inorganic opportunities, will you have that correct entity once you complete the minority stake sale? Or are there further steps that are needed before you get there? Thank you.

[Eduardo Bartolomeo, Chief Executive Officer]

Okay. Thank, Liam. First of all, I think, as you mentioned, I always said that, actually in one of our meetings, I said, eventually, and I understood that eventually in English is we are going to go, obviously, an IPO down the road, is a liquidity event that you could pursue. But the fundamental reason why we brought Mark is to help us on the execution of this plan to this liquidity event. It can have several forms of liquidity. So I won't go over them. But he's joining as a Chairman, because he sees the opportunity to transform the best assets of transition metals in the world. And he knows it very well. And of course, he wants to unlock substantial value from it as we do. So that's, I think, answer your point. But we always said that, that is not the definitive option that we are going to IPO. We want to create this optionalities even if you want, if we said earlier about M&As for sure, like I mentioned.

When you go back to your second question, I think adds to this first one as well. Because the legal entity is being designed, it doesn't relate, of course, it does relate with the sell of the participation. But let's be very clear as well, if we don't find the right partner, that adds value to us and perceive the same value as we do, we're going to do it anyway, this organization, it is being ring fenced as we speak, because of the legal and time issues we believe is going to be hitting and running after 1st of July.

And we believe at that moment, and I think Gustavo can help me with more details and clarity, we're going to be able to see that, no way to have a partner. But we are going to have an independent board led by Mark, I'll be part of it. It's going to be run through our energy transition metals as active coal and in a run to create a huge amount of value. And organically as I mentioned already and when is ready, it can go inorganically as well. But IPO is not necessarily one of the -- maybe it's not the only option that we have in this optionality. So you can help me a little bit Gustavo with the details.

[Gustavo Pimenta]

I think you covered most of it Eduardo, I think Liam, in terms of timing, we continue to work hard to have it finalized by mid this year, discuss with our board and then share with you the news. But it's moving along very well. I think there is a lot of interest as you are all following in the press. There's a lot of interest for this type of platform. And we think we have a very unique platform in our hands, which as Eduardo said, we are working hard on many fronts, including by bringing Mark to take this to the next level. That's the goal.

I think the Carajás do create a series of options for the goal. I think the Carajás do create a series of options for us to really take this business to another level, grow the business and create value for our shareholders. So in terms of timeline, yes, mid this year, we should have some news to share with you all.

[Operator]

The next question is from Daniel Sasson, Itaú BBA.

[Daniel Sasson, Itaú BBA]

My first question is regarding supply and demand balance. You mentioned, and you are seen very confident that you will reach your guidance for Q1, any thought, because of increased volume in the second half and more volumes come Carajás and two different sources. But my question is on how your values of volume strategy could impact the seeming up better volumes in the second half. And my question also, because in [indiscernible], is China producing as you experience 2023 that actually implies decline in production in the second half of the year, exactly at a moment when you expect to increase volumes, usually one that's seasonally strong. So this year scenario in which you might not be able to sell anything expect to because of a decline in demand in China.

And the second question is, more related to external risks, right, imagine the things that are in your hands to control and to try to see clearly symbolizes the creation of those sorts of fortune. We have CSMA in Brazil, a month scenario in which alternatives for including regarding prior renewals are being assessed. And then these two biggest risks [indiscernible] volume increase or again both interest on capital benefits, anything you could add on that, that will be great. Thank you.

[Eduardo Bartolomeo, Chief Executive Officer]

Thank you, Daniel. Good to hear you. Why demand balance? So second half, I mentioned one number that it was really important plus export in China, the first quarter 20 million tons. So just keep this in mind because this is important about demand in China but we do have a connection in ex-China also. So we don't have only China to supply we have the second half, we have the flow to them. We expect by the end of this June. And we have production in [indiscernible] with last high silica. So it's not about improve the pallet [indiscernible] to produce less product that today is paying more premiums. The gap between high grade ore and low grade ore is narrowed because of the margins in the industry. So we don't expect this for the whole year. But we're going to increase the production of pellets. So this is one important thing is not in China. It is for Middle East or Japan and in Europe, also in Brazil. So this is one point of view.

The other point is, we are going to increase the hybrid ore and our premiums. Today, the premium by product is very good. So the RBF is with a good premium. Given Carajás, we're talking about 16 spread today could be higher depends on the -- today depends on only in the -- and margins of the industry. We don't have the problem of energy. And this is a good thing. So we're going to have the right product that is Carajás, the RBF increase of pellets so we have the right product in the right moment for the year, despite if you have any in adjust of production in China to support this goal of lag production, we have other markets that are aiming for hybrid ores like Middle East or Europe. So that's our strategy for the year, while keeping our sales plan -- as planning for the year.

[Gustavo Pimenta]

So, Daniel, Gustavo here. It was breaking up a little bit with your question, but we understood it was more on the external with your question. But we understood it was more on the external less Brazilian institutional uncertainties, potential uncertainties, and I think you've made a reference on taxation and so on.

Look, our view is, what we've heard so far is tax reform to pursue neutrality in terms of potential tax burden, which I think makes sense. And that's what we are hopeful. This is a very critical sector. I mean, the mining sector is very critical for the country in terms of employment, in terms of taxes. So when we compare ourselves with the Australians, for example, we are very, very highly taxed. So in our perspective very important to remain competitive, especially as we compete in the global stage. So we are feeling good about it. And we are following very closely, all the discussions.

[Operator]

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

[Eduardo Bartolomeo, Chief Executive Officer]

Okay, thank you. Thank you, again, for the interest and attention to our call. I think the four messages that Gustavo wanted to point out, I'm going to just very, very wrap up them in a very short. We are very confident on the production for this year on the guidance that we set up. The worst seasonality factors, mainly for iron ore are over. So I think the production was solid wasn't reflect on sales, but we will be in second semester as we mentioned, for both business, the energy transition metals and iron solutions.

As you may have noticed in the questions, Vale is uniquely positioned even in this M&A frenzy that is starting to happen now. We still have in our iron ore business, inability to grow 4 million tons, we can use third parties, as [indiscernible] a huge amount of iron ore that can go through our infrastructure that we are going to use is a new project for us. We have as mentioned, even with the optionality is that we're designed here, eventually, for the new energy transition metals business to IPO. It's in the future, to M&A in the future. So we are creating a tremendous opportunity to unlock value on both business through growth.

I'm very proud with my team to really, really ready to focus on Vale, and we're very happy to sell the least part of our reshaping that was MRN today, coincidentally, it was today. And so we now are really ready to focus on our two main and great business, iron solutions and energy transition. And for the shareholders, I think you have no doubt that capital discipline and shareholder return is the main priority, of course, creating benefits for everybody in society.

So with that, I'd like to end the call and thanks a lot for your attention and interest. And hope to see you in the next call.

[Operator]

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