Vale SA

BOVESPA:VALE3

Earnings Call Transcript 2022-Q3

[Operator]

Good morning, ladies and gentlemen. Welcome to Vale's conference call to discuss third quarter 2022 results. [Operator Instructions] As a reminder, this conference is being recorded, and the recording will be available on the company's website at vale.com at the Investors link. This conference call 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 via Internet, both the audio and the slides, 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 comment 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, Finance and Investor Relations, Mr. Marcello Spinelli, Executive Vice President, Iron Ore; and Ms. Deshnee Naidoo, Executive Vice President, Base Metals. First, Mr. Eduardo Bartolomeo will proceed the presentation on Vale's third quarter 2022 performance. And after that, he will be available for questions and answers. It is now my pleasure to turn the call over to Mr. Eduardo Bartolomeo. Sir, you may now begin.

[Eduardo De Salles Bartolomeo, executive]

Thank you, very much. Good morning, everyone. I hope you are fine. I would like to start guiding you through our main accomplishments in the quarter. We have made significant progress with regards to operation stability. In iron ore, our production was close to 90 million tonnes, an increase of 21% quarter-over-quarter. While the world is facing growing inflationary pressures, we remain focused on cost discipline. Our C1 cost decreased $1.5 per tonne.

In our base metals business, performance improved significantly after extended asset maintenance. In nickel, production increased 51%, but sales lagged production impacting our EBITDA. Deshnee will give you more details on that later. Moving to our strategic agenda, we are delivering on our commitments to lead the low carbon mining. Our solar project, Sol do Cerrado, is coming online to further reduce our carbon footprint. We are refining our strategy, positioning Vale as an iron solutions company and the partner of choice of the energy transition and the EV mega trends. We continue to strengthen our business to deliver the products essential to a more sustainable future.

In this sense, we are making progress in growing our supply of low carbon nickel and other critical minerals for the energy transition. In Canada, we have successfully concluded the first phase of CCM1 in Sudbury. The project will nearly double our production at Copper Cliff Mine. In Brazil, the reconstruction of the Onca Puma second furnace was approved recently by our Board of Directors.

On capital allocation, we stay committed to returning cash to our shareholders and to our share buyback program. We are shaping the value of the future, supported by the uniqueness of our assets and resources, our investments in technology and productivity and in our discipline in capital allocation to lead the mining transition, we are promoting solutions to expand the use of electricity [indiscernible] diesel in our operations. We just received 2 electric mining trucks with 72 tonnes of capacity.

We are not only cutting emissions, but also reducing noise, minimizing the impact to our communities. Our strategy to electrify assets already includes 49 electric vehicles in our Canadian mines and the operation of 2 battery-powered locomotives in the yards of the ports of Vitoria and Sao Luis to further move our electricity consumption towards clean energy. So do Sol do Cerrado solar project is coming online this month, as I mentioned, and we will ramp up until July 2023. The project has a capacity of 766 megawatts peak, and we supply 16% of Vale's electricity needs in Brazil. This energy would be enough to power a city of 100,000 houses.

We are delivering on our climate agenda. We are doing that because we are vigilant to the need of [ society ] but also because sustainability is crucial for the future of mining. Our society expects the mining industry to liver positive legacy. Mining companies play a key role in addressing global warming by supporting the global energy transition. The transition to a net zero economy will be metal intensive.

Significant expansion of low-carbon technologies, such wind turbines, solar panel and electric vehicles will boost demand for the metals needed for these technologies. For instance, producing [ Vale ] EVs requires 30 to 40x more nickel than the traditional ones. So the carbon footprint of these batteries is very critical, and we have a distinct portfolio for that. Our high-quality class on nickel in Canada is the lowest Q2 footprint, and we have third-party certification validating it. Now moving to iron ore. As I mentioned before, we are committed to provide decarbonization solutions for our clients. What do we have different from others, assets and technologies.

We operate the largest high-grade deposits in the world, Carajas with 66% Fe content reserves. We are developing products to help decarbonize such as Green briquettes, which can reduce over 10% of the emissions in the BF BOF routes. Our plants are under construction in Brazil with capacity of 6 million tonnes per year, and the [ extra top ] is expected for the first half of 2023. With those differentiators, we are a partner of our choice for our clients. We are establishing partnership with steel mills to jointly find new solutions that help to decarbonize the industry. We have signed with clients represented almost 50% of our scope 3 emissions.

Finally, shifting gears to dam safety. I'm very proud to announce that we have completed the works in more 3 upstream structures that were eliminated in September. As promised, in 2022, we have eliminated 5 structures. And so far, we have completed 40% of our program to eliminate upstream dams in Brazil. On top of that, we have removed the emergency levels of 5 dams [ in energetics].

The structures also received declaration of stability disease, which attested their safety conditions. Since the beginning of this year, 7 dams had their emergency levels removed. As part of our strategy, we have materially derisked Vale. As well in Brumadinho, we are fulfilling our mission to the [ decharacterization ] in a quick and a fair way. So we are delivering on our commitments to a safer and more reliable company. We are building a better value. With that, I now turn the floor over to our Vice President of Base Metals, Deshnee Naidoo for her remarks, and I'll be back to our Q&A session. Thank you. The floor is yours, Deshnee.

[Deshnee Naidoo, executive]

Thank you, Eduardo, and good morning, everyone. I would like to start by highlighting the progress we continue to make towards achieving our base metals growth goals. I am happy to announce, and as Eduardo mentioned, we have approved our Onca Puma second furnace project this quarter, which will see our legal production grow by 15,000 tonnes on average per year in South Atlantic and are making progress at PT Vale Indonesia on the approval to establish the Pomalaa, a 120,000-tonne JV with Zhejiang Huayou Cobalt and Ford Motor Company. Looking at our project delivery, we officially opened the CCM South Mine refurbishment project earlier this month and are at 98% physical progress at Salobo III. There, we are on track with our commissioning activities. We are also on schedule with our revised VBME project.

The next slide, please. Now looking at the performance in the quarter. On the operational side, we recovered production in quarter 3 for both nickel and copper following the completion of our major plants and some corrective maintenance work in H1, specifically, the furnace for rebuilt at PT Vale Indonesia and the [indiscernible] mill maintenance at Sossego. Both safety concluded last quarter. On the nickel sales, we have an 8,000 tonne difference to production this quarter.

Some tonnes were retained to meet quarter 4 commitments given our scheduled current maintenance at Onca Puma, Long Harbour and Matsusaka. And linked to global supply chain constraints, we faced challenges to hire container ships at Onca Puma and shipping issues in the U.K. due to port industrial actions that led to port congestions. These also affected sales. This timing lag will be trued up at the end of quarter 4, where we would see higher sales and production volume. In copper, and as previously highlighted, when we revised the copper guidance, we have increased our maintenance activities at our Salobo operations in H2.

We are already seeing the results of the work to date, translating into improved plant availability and throughput rates. We have improved our throughput by 10% from June to September this year. The next slide, please. Now turning to our financial performance. We had a significant impact from LME prices quarter-on-quarter. Nickel dropped 24% and copper 19%. Nickel price drop had a significant impact on our quarter-on-quarter EBITDA. In copper; however, the quarter-on-quarter price impact was largely neutral as we had a huge adjustment in PPAs in quarter 2, given the significant backwardation of forward curves from quarter 1 to quarter 2, as explained in our call last quarter.

We also had timing impacts on cost this quarter. as we had carryover inventory from quarter 2 priced at a higher cost, mainly due to major PMPs. In addition, the quarter 2 fuel cost increases at PT Vale Indonesia are reflected in our consolidated results this quarter. As you could see in our latest reports, we are looking at ways of maximizing our downstream capacity while we ramp up our projects. This means, some portion of our production originated from processing third-party material. Third quarter alone, we produced 6,000 tonnes of nickel from purchased feed, while in quarter 2, we have produced 3,000 tonnes. So there are positive takeaways. The improvement in operational performance would have translated into better financials had we translated all production volumes in quarter 3 to sales and not seeing the timing impact of price variations. I now hand over to Marcello for his comments on our Iron Ore business. Good morning, Marcello. Over to you.

[Marcello Spinelli, executive]

Thank you, Desh. Good morning, good afternoon. Good to hear you all again. I'll start my presentation and give you some colors about our production in Q3 and also Q4. We are back to 90 million tonnes. That's a good news after some headwinds with the heavy rainy season in the Q1 and the moisture problem in -- can -- we increased 10 million tonnes in the north system. It is below our expectations in the planning of the beginning of the year due to the delays of some license that made us increase the waste movement in that mine. We have better news in these regards. I'll give you an update in some minutes. Production guidance remains 310 to 320. You may notice the gap between the sales and production, it is the same pattern of previous years related to the [ season out ] of production and the lead time to reach China.

We may expect higher sales comparing to production in Q4. Now moving to the next slide, I'll give you now some update about the production plan. We had some important progress North range, Gelado project. We already started the commissioning of the first phase, and we expect to ramp up next year and 3 [ products ]. We got the previous license, the LP after some delay, we are really working close to the agents to get installation license by the first half of next year, start the construction and bring volumes in the first half of 2024.

The rolling licenses as an example, is the vegetal suppression or a redesign of a mine [ case ], we had a wave of small license in the last month in September, and we expect another group of license in the first half of next year. A closer approach with the agencies is helping us to progress in this area. We've been investing in technology, studies, universities and people to help them increase their capacity to analyze our projects and process in terms of quality and also in terms of time.

Moving to S11D. With the improvement of the ore board knowledge, we addressed the small jaspilite [indiscernible]. You know that. And by the end of 2025, we'll be able to bring the bigger crusher that will allow us to move the larger jaspilite. Until we have the plus 10 coming online in December, and we expect to offset that problem, plus 20 is under construction and all time. So [indiscernible] system first phase of Itabirucu raising works is done, mission accomplished. That will bring flexibility to Itabira to improve the quality. It is a hybrid operation with them and dry stacking tailing disposals. And this is a point of attention. When we have dry stacking, we need continuous expansion of area to stockpile and that rely on continuous licensing process in [indiscernible]. In Brucutu, Torto construction is ready for now almost 3 months that we are still waiting for the final permits. That's a new regulation that came after [indiscernible] that increased a lot of steps in multiple agencies approvals related to the emergency plan.

Let's take a longer time, but we still expect the operational license by the end of this year. So in summary, I'd like to reinforce some [ matters ] here. We are adjusting our production plan based on more realistic expectations about licenses, regulations and project accomplishment. We are working close to the licensing agencies to improve layer capacity to analyze our processes. On the other hand, we always assess the market to understand the demand and the balance of supply demand. There is not an excuse for the headwinds to speed up our production plan that it is very important to take in consideration.

Finally, moving to the next slide. It is happening a huge transformation in the market regarding the decarbonization and [indiscernible] of high-grade ores. We are in a silent transformation [ size value ]. We are running an aggressive action plan to lead the Class 1 market for iron ore with higher premiums. I'll give you more colors in the Vale Day in 1 month. In Q3, our finance premium decreased due to the negative margins in the Chinese market, driven mainly by the downstream demand, the downstream sentiment demand, and the pellet premiums stayed in a high level with a strong demand for the [ rent ] reduction pellets. So we'll be here for further questions. Now I hand over to Gustavo.

[Gustavo Duarte Pimenta, executive]

Thanks, Marcello, and good morning, everyone. Let me start with our EBITDA performance for the quarter. As you can see, we delivered the $4 billion EBITDA in Q3, $1.5 billion lower than Q2. This decline is largely explained by the 20% to 25% decline in the benchmark prices for copper, nickel and iron ore during the period. The other 2 external factors, bunker and FX basically offset each other out. On volumes, we have delivered a strong quarter across the board, contributing to better financial performance on a quarter-over-quarter basis.

Same for costs and expenses, where we started to see the benefit of the efficiency program we launched last year. Just to remind everyone, our objective here is to keep our total fixed cost and sustaining CapEx flat versus 2021 in local currency, and we are on track to deliver that.

Now moving to iron ore all-in costs. Our C1 cash cost ex third-party purchase decreased by $1.5 per tonne, mostly driven by higher production and the positive effects from the Brazilian real depreciation, another important component of our evolving cost structure is freight, which went up from $21.3 per tonne to $22.4 per tonne. This is explained by 2 factors. One is the seasonally larger spot affreightment followed a strong production in the quarter as CFR shipments increased over 25%. Some of the cargoes are still in transit and should be recognized as sales in Q4.

The other is the lagged effect. It takes about 30 days for the bunker cost to be recognized as cost of goods sold. Before Vale Q3 bunker cost has not yet captured the drop in prices observed in September and we should see a benefit in our Q4 performance. The premiums we earned in our pellet also play an important growth in our all-in cash cost. The average premium decreased by $0.7 per tonne despite the record tariff [ business contracted ] in Q3 and an improved quality mix within our product portfolio. This, as Marcello explained is a consequence of lower market premiums for [indiscernible] products and the absence of seasonal dividends from JVs.

All in all, our EBITDA breakeven closed at $51.20 per tonne, and we continue to expect our Q4 performance to be in line with last year. Now turn to cash generation. Our EBITDA to cash conversion increased from 41% last quarter to 54% in Q3. The positive working capital variation is mostly due to better days payable [indiscernible] and as we continue to improve the efficiency of our working capital management with clients and suppliers. This one is offset by regular uses of cash, such as CapEx advance.

And by about $4 billion of cash returned to our shareholders, reinforcing our continued discipline and capital allocation. Now moving to the next slide. This quarter, we review the expanded net debt [ content ] to be more aligned with the market and have an indicator that [ better informs ] management on capital allocation decisions. As a result, we excluded from the expanded net debt concept, the provisions for the [ beef ] tax renegotiation and then the [ decharacterization ] program.

These obligations are distributed over a longer period of time in our cooperation in nature as compared to the Brumadinho and [ Mariana ] provisions and obligations. This change does not affect our targeted $10 million to $20 million expanded net debt, which we continue to see as a very adequate through-cycle leverage ratio. So before opening up for Q&A, I would like to reinforce the key takeaways of today's call.

We delivered a strong operational quarter across all of our products. On derisking, we have eliminated 5 upstream beds this year, breaking throughout structure of 5% since the beginning of the program. We announced the startup of the Copper Cliff Complex South Mine Project in Sudbury and the approval of Onca Puma second furnace implementation in Brazil. They are important milestones as we position base metals as critical supplier for the [ energy ] transition. And finally, we remain highly committed to a disciplined capital allocation as evidenced by the $3.1 billion dividend paid in September and our continuous progress on the highly accretive share buyback program. With that, I would like to open the call for questions.

[Operator]

[Operator Instructions] And our first question comes from Leonardo Correa with BTG Pactual.

[Leonardo Correa, analyst]

So my first question on base metals. Eduardo, the units is posting results which are, I mean, below what the company had been [ bid ] over the previous years, right, [indiscernible] looking at the annualized EBITDA figure for this year, now the number is slightly above $1 billion, right, in EBITDA. So I just wanted to hear more about the [indiscernible] path to normalization, right? I mean I know that several issues have been impacting. We've been seeing maintenance issues and several other issues on the cost side. But I just wanted to hear more about this normalization process and how long you think it can last. And on a similar topic, I mean, does this delay the monetization of this base metals unit, right? Because I mean, results being depressed, I can imagine this could impact, I mean, the perceived value of the assets.

Second point on volumes, on iron ore volumes and maybe we can bring Spinelli in the discussion. Spinelli, there is a big debate on value on what -- I mean, on how this normalizes as well, right? I mean how iron ore volumes will normalize in the medium term. The company is running on, let's say, 310 million tonnes of production now, right? Your nameplate capacity is 400 million. The market discusses whether 400 million is achievable or whether this, let's say, effective production would be much lower than that, maybe 340 million, 350 million. So I can understand that you'll give more guidance during Vale Day at December 7. But can you just help us understand exactly how the medium-term path on value is in terms of production increases? And let's say, what is the more realistic long-term targets for Vale's production?

[Eduardo De Salles Bartolomeo, executive]

I think the -- I'll try to separate maybe bring Desh to help as well. But anyhow, let's put this way. It's not fair to analyze a quarter like that because as Desh has mentioned, there was one like some carry from one quarter to the other. So it's not the number that you should look at us by the way. So -- but on specifics, some of the first quarter and first half of the year, events are largely hangover from COVID, a lot of [ meters ] that were postponed. I think we're pretty good on track on what we're trying to achieve in North Atlantic with the refineries.

The underground mines are improving their productivity. I'm very comfortable with the nickel coproduction. We just featured, I think the highest quarter since I was there, I think, since '19, so pretty well, pretty comfortable with the nickel within the guidance, and I don't see issues there. As Desh has say, we have to replace the feeds. They're doing that very well [ in voice be ] -- so that's not for me a question.

On the copper, yes, more challenges than we expected in Salobo, but Salobo is back on track after the long , the very long [ winter ] that we had last year. So it's -- I think going to your second question, I think it's more importantly because this game is about R&R, resources and reserves, and we have the best of all in the world, like -- and this is where the value is. We'll fix the asset. It's be fixed, as I mentioned on nickel. I have no doubt about that. In copper, as I said, but the assets are there. The assets are located where you should be first rolled jurisdiction like Canada. Brazilian that we know they were about and [ Carajas ] with the growth projects. Salobo has been there last month. It is 98% complete, [ Salobo III ] -- so our growth plan is there and people that has understanding of value know where the value is. So I don't think it changed perspective.

I mean, they are not buying past performance, they're buying reserves and reserves and resource and future performance. And by the way, that's why we believe that [ ring-fencing ] the business, bring a partner. We will speed up this performance that you're asking us to deliver, and we have 100% with you on that sense. But the value is above and beyond that. So -- and by the way, of course, you cannot analyze it this quarter because it doesn't make any sense to know that. We just we already had more than what we analyze as results for this year. But now I think it's a good point. And again, we are very -- how can I say that? Very sure that we are in the right track to fix the assets. The ring fence will help speed up that. But fundamentally, the values in the reserves and resources, and we have the best in the new on in the world. I'll pass it to this to Spinelli to go over the iron ore.

[Marcello Spinelli, executive]

Well, thank you for the question. First point, we couldn't -- weren't able actually to predict to plan the impact of Brumadinho and also Mariana that happened when we changed the way we are mining and disposing the tailing dams in the Southeastern [ season ]. But we got it, and we are replanning our growth, our recovery plan to the future. So this is the first point on one side.

The other side is -- we are -- we need to change the approach with the agencies, and we just did it. And we are closer to them. There is a lack of capacity with a huge amount of license that we need to bring online in all the systems and our system, mainly, but also in the Southeastern system. So we're working differently with them and we bring readily this volume. So we'll give you some numbers and callers in the Vale Day.

[Operator]

Our next question comes from Caio Ribeiro with Bank of America.

[Caio Ribeiro, analyst]

So my first question is on the different avenues, right, that you're exploring to unlock value in the base metals business. And I know Eduardo that you recently mentioned at the Financial Times conference, right, that IPO and the [ division ] was an option that you guys were looking at. But there are other options on the table, right? As you've mentioned in the past, like selling a minority stake in the business, setting up a partnership with another miner. So I just wanted to see if you can give us more color on which of these avenues that you tend to be leaning more towards? And also if you can give us a sense on timing, that would also be great.

And then secondly, in regards to your value over volume strategy, right? Iron ore prices, they've come under considerable pressure lately. And in the fourth quarter of last year, a similar situation unfolded. So I wanted to see if this time around, you would consider removing lower quality or higher cost money from the market to try and protect prices.

[Eduardo De Salles Bartolomeo, executive]

Let's see, well, it's true. We've been very clear on the path to unlock value in base metals, as I mentioned in the previous question is exactly where we see enormous, how can I say, that amount of value to be delivered. What -- the execution path that we've been discussing, and again, as you mentioned, the IPO, I'm going to get back to it in a minute. We've been very disciplined on that. We've been communicating to you. First of all, no decision has been taken within our Board, but we were going to segregate our assets. We did that. So we just announced that very recently because, yes, we see avenues, but the avenues, they have a path to that. And the past goes back to the execution of our operating assets, the execution of our growth plan within that we could see a partnership in built. I think this is the most natural and it has been again voiced by us even in the event that you mentioned and in our calls.

So we have engaged advisers to help us on that. If we are able to find partners because one very strong point here for you and for everybody -- we are not selling base metals. Base Metal is the best assets in the world, value we keep it. So what we want is a partnership event to look at these values that you just mentioned. And then the word that I used there was eventually and might be confusing word for English in versus Portuguese. IPO is an optionality. It's not the one that we believe that's going to be happy now because of the previous correction. We need to fix the assets still.

Partnership can be done now because we can find partners that see the value that we see in this business help us deliver the growth, help us deliver the execution, help us with creating a new curves? Yes, to go after these avenues. And timing-wise, I'll pass to Gustavo, because he can give you more color on that. Then Spinelli can come on the value over volume question.

[Gustavo Duarte Pimenta, executive]

Thanks, Eduardo. So Caio, on the timing, I think what we've been saying since beginning of the year is that we expected to be able to give you more color at Vale Day. So you continue to work with that time frame. -- it's going to certainly take some time for execution, probably early next year. It's going to be more the ideal time. So stay tuned. I think Vale Day, we'll probably be in a position to share more information in terms of the specifics there.

[Marcello Spinelli, executive]

Thank you for the question. And I'll split this the answer in 2 parts. The first one, Canada's also to lay from BTG. Value [ for ] volume, we have all the time to check the value part, the volume part of the value. So we really have to check the amount that we are bringing to the market to not give a problem to the cost curve and decrease the whole system. So that's the reason why we must take care about the way we're bringing volumes in the near future and is as important when we are talking about the mid- to long-term production plan, we have a window to adjust that. It's important to say that. And you talked about quality. So all the volume you're bringing to our production plan is related to quality.

So we need to address that mid to long term. Long term, we will have a high demand for high-grade ores, even agglomerated products, to pellets or bricks -- that's a trend. That's the value one to focus on. And every day, Caio, we assess our supply chain. We have the flexibility to hold low-grade ore concentrate later in China, concentrated in our supply chain, and that's what we do. So today, if you ask me, if you have in our supply chain low-grade ores, you can hold it, blended or concentrate. We are not selling in negative margins.

[Operator]

Our next question comes from Amos Fletcher with Barclays.

[Amos Fletcher, analyst]

A couple of questions. First one for Deshnee. Just looking at the base metals business and the cost base at the Sudbury assets, it seems to have blown out to quite a big degree. If I look at the revenue minus EBITDA number at Sudbury, it reached over $1 billion in Q3 against the quarterly average for the last few years around [ $600 million ]. My question is what happened there? And should we expect it to mean revert in Q4. And then second question on Onca Puma. The CapEx for the 2nd furnaces have gone up quite a bit to $555 million against $320 million you spoke about previously. Can I again ask why is that?

[Deshnee Naidoo, executive]

Thank you, Amos. On the first question regarding the cost. As I guided in the presentation itself, and as you said, there's about $300 million in terms of the quarter-on-quarter increase that actually comes from the purchase of third-party material. So let me explain that. The third-party material that we buy is actually concentrate that we buy at market prices. Now during quarter 2, you would recall that the nickel prices were sub -- well, actually, it was above $26,000 to $28,000 per tonne, and that led to a very high price. So when we consumed that material, about 60,000 tonnes and at a 10% grade, that affected our cost of about $200 million in quarter 3 itself.

Now to put that number into context and at current LME prices, I will possibly treat about 7,000 tonnes in the coming quarter, and that price is around $120 million to $130 million. So that's the impact of price. And as we indicated, there was inventory that we priced again at a higher price in quarter 2 that came into this quarter. That's a one-off of $50 million. But as with everyone else, we are experiencing inflationary pressure. And I did have some inflationary pressure, both and a bit of few that came into my ops services. So on a go forward, are definitely not seeing those numbers, and we should see the numbers from quarter 1, quarter to somewhere around the middle of that materializing.

On the next question on Onca Puma Furnace 2. So you are right. That number is at a higher capital intensity than we were previously planning to. And a big factor there in the last 6 months when we finalize the estimates, we had a very high inflationary ticket coming into these costs. And we approved it with in parallel, the team working towards relooking at some of those estimates. So inflation is a big factor there. In addition, I mean, you can't be building furnaces in 2022 without relooking at the greening of these furnaces. So there is money in the capital budget to make sure that we can continue to work on fuel switching, and we are looking at using biomass down the line as a fuel option. So that's the other larger one. And we have put some money into the budget for some of the social obligations we have in the region.

So this is not your typical budget from a capital point of view that we would typically see. I think just to also mention that this project does bring a lot of synergies and to the current operation because, as you know, the complex was built for 40-odd thousand tonnes. So returning the complex to 40,000 gives us a significant cost benefit, and we're seeing that at least a 15% reduction in unit cost once the project ramps up. I hope that gives you sufficient color. Thank you, Amos.

[Operator]

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

[Carlos de Alba, analyst]

A couple of questions. One on iron ore costs. I think Gustavo, you mentioned that the expectation for the fourth quarter is to -- for iron ore unit cost to come down to levels similar to the fourth quarter last year. But we're a little bit surprised at least relating to our expectations in the third quarter. So very optimistic outlook for the fourth quarter. What can you talk about the outlook for the cost going forward? Every single mining company in the world is facing inflation pressures. How do you see that on using cash cost moving into 2023, maybe beyond that. On the one hand, you have the benefit of higher production. But again, the inflation cost inflation pressures are negative. So if you can share some color, that would be great.

The other would be in terms of the Mariana negotiations, I mean, Vale has done a tremendous effort to basically turn the page and do everything right to repair the damage that was done in Brumadinho, or tremendous efforts as well down by your partner, Samarco, in Mariana. But to finally really move ahead from this situation, I think the Mariana situation is still end. So you can share any colors there will also be very useful.

[Gustavo Duarte Pimenta, executive]

I'll take both. On cost, yes, we've shown some improvement quarter-over-quarter, $1.5 per tonne. This quarter, particularly, we had a little higher percentage of third-party purchase, which impacted the all-in and the C1, particularly, which should be normalized in Q4, as I said in my prepared remarks. In the all-in, you've seen freight coming higher as well, a lot of the drop in cost, especially in September wasn't yet materialized, but we should see this in Q4. So overall, you should see a better picture in Q4 as we continue to bring volume and some of those pressures reducer. Looking forward for the next couple of years, look, we'll talk in more detail at Vale Day.

Certainly, I think the entire industry is suffering from high inflation. It's affecting particularly in terms of fuel cost being [ this ] and bunkers. So we are seeing some impact on it. But we'll share with more details during the Vale Day, what is our view for 2023. I think one thing that we are doing very well is we continue to move on our cost reduction program. Remember, we had announced a $1 billion cost reduction. It's moving super well, and that's certainly helping to offset some of those external pressures.

On Mariana, look, we are positive about engaging and reaching an agreement. I think for all parties here, including ourselves, a solution makes sense and the potential settlement makes sense. So we think it's -- we'll be able to sit down again and resolve this. As you said, I think it would be beneficial for Vale and for BHP for sure as well. And we are optimistic that within the next couple of months, we'll be able to resume conversations and hopefully reach an agreement that works for everybody.

[Operator]

Our next question comes from Rafael Barcellos with Banco Santander.

[Rafael Barcellos, analyst]

My first question is a quick follow-up on iron ore production. So could you please elaborate further on your production outlook for S11D operations? And in your view, what are the main challenges for Vale to deliver a better production figures in the northern system into 2023? And my second question is related to your new expanded net debt concept. So could you please give us more color on how was the decision process of revising this concept? And as a result, can we assume that Vale will accelerate cash returns to shareholders after this announcement.

[Unknown Executive]

Thank you, Rafael, for the question. Well, let's talk about S11D. [ Name play top ] for S11D is 90 million tonnes. We are below that. And we had that knowledge with the [ OBK ] with the founding of the huge amount of jaspilite that made us change the mine planning and the way we are processing the [ ROM ]. So what we can expect in [ states ] here. We have the small jaspilite already done. So to midterm, we expect to solve the problem only by 2025. But we have coming online the plus 10, so plus 10 cannot set this nameplate difference between what we are producing today, the nameplate. So that will bring volume for next year. So we can consider that. And the plus 20 is under construction.

So by 2025, we have an additional capacity solving definitely the problem of the jaspilite and until there we have an [ improvement ] coming from the plus 10. And the whole picture for North system, the other side, North Range, we are facing the increase of [ strip ] ratio. Because we've been waiting for license, continuous license. It is delaying. So it forces us to move more waste, so increase your cost and your decrease your production volume. So what we have to do there, keep the path to reach the license, to bring the license; and 3, it's a body, not a big one, but it will be important.

We already got up now the LP, the previous license. So we expect to have the final license by the end of next year. So we'll bring volumes in 2024. And we called it this a small license. So every time we need to have a suppression in the mine or to reduce the radios close to a cavity that we redesigned the cave that we have, we'll have to keep the [indiscernible] agents together to speed up this.

So we've been doing this, but it is -- it's not as fast as we can. So we are adjusting the plan to reflect this -- all this sophistication and the right time line for that. But that's what we have to do. Big Gelado now this year N3, and this is small license try to be as fast as we can, but in the right plan.

[Gustavo Duarte Pimenta, executive]

So Rafael, Gustavo here, just to close on your second question. Look, I think the objectives were want to make sure we had an indicator, more aligned with market. I think that was one of the reasons why we've revisited. The second one is you have an indicator that could inform us better in terms of our capital allocation decision, right? So the items that we took out of the expanded net debt, we're very long-term in nature, operational in nature. So we thought it didn't make sense to have them included in our expanded net debt concept. And this, at the end, just provide us with more financial flexibility. We've been extremely disciplined over the last several years since [ Eduardo ] came, and you should expect us to continue to be very disciplined focus on cash return to shareholders.

[Operator]

Our next question comes from Rodolfo Angele with JPMorgan.

[Rodolfo De Angele, analyst]

I think most of my questions are already answered, but I just wanted to insist a little bit on what's happening in the North. So the issue with licensing, I just wanted to understand exactly what is the issue because those -- that operation has been around stable. We had mining plans defined already. So there should have been a lot of visibility of which areas need to be licensed. And just wondering what is happening? Is it the authorities are being more tougher? Or what exactly is the issue? And how is it that it's going to be overcome?

[Unknown Executive]

Many points here. First one, after Brumadinho, we have a huge transformation in the mining business in Brazil, not only regarding the license, environmental license, but all the permits. And this is one point that we must take in consideration. The other point is the capacity of the agencies. So many times we have to prioritize, and we don't have enough capacity for that. And that's the main thing that we've been working together with them, bringing a priority to the agency and giving them tools and hands to help them to speed up the process to define the license as a whole. So the mine plan consider that. But you -- if your mine plan considers to get a license in 1 year, and if you don't get, you have a problem in your mine plan. Every time you have to do this, you made a mess in your mine plan. So 2 things here, as I mentioned, we need to be more realistic in our mine plan to sider that it's tougher.

Yes, it's one point. It's after Brumadinho. And don't forget that it's a common, I can say, wave of the environmental pops in every place in every world is getting more sophisticated. We need to bring more studies, and there's not a problem only in Brazil but in every part of the world. So the combination of these 3 factors, we need to implement a different approach. That's what we are doing, bringing more capability to the agencies.

[Operator]

Our next question comes from Daniel Sasson with Itau BBA.

[Daniel Sasson, analyst]

My first question, maybe to Eduardo. If you could comment a bit, Eduardo, on how you think the entrance of [indiscernible] to your inter base, shareholders base could help you to develop in your strategic operations or your strategic planning? How have been the first conversations or interactions that you've had with members from [indiscernible]? How you receive this increase or this participation that they just acquired in the market, that would be great. And maybe my second question to the Gustavo or Spinelli, if you could comment a bit on your expectations for China now that the Party Congress has finished and she was reelected for a new term. If you could comment a bit on the conditions on the ground that you are seeing for the property sector. I just wanted to move a bit the call towards these operational metrics or operational performance.

[Eduardo De Salles Bartolomeo, executive]

Thanks, Daniel. Great question because I think we see [indiscernible] moves as a validation of our investment thesis, right? When you look at [indiscernible] with the record -- the solid track record that they have on creating growth people that has this mindset and take this bet on us makes us extremely positive. Our interactions so far have been great in the sense that they see the uniqueness of our assets. They -- by the way, they say that, as I mentioned in the beginning of my speech, we have materially derisked. We are extremely compliant [ with ] ESG. So I think it just -- it's a great movement because somebody with track record that can -- obviously, we did our Board of shareholders can help us see opportunities help us unlock value and see the value, as I mentioned before, on my base metals discussion. It's only positive.

So it's, as I mentioned, it's a validation of our investment thesis. And Gustavo, right, I want to -- you won't comment a little bit because what's about confirmation, right?

[Gustavo Duarte Pimenta, executive]

Yes. And I'll just say before passing to Spinelli to talk about China. We -- you probably saw a recent report from Moody's reaffirming our rating, but more importantly or as important is giving us an upgrade on the ESG stats. I think this is one external -- very important external validator seen all the progress that we've done over the last couple of years, and you've seen [indiscernible] talking about that. So I think the company has evolved a lot in the last several years, and we're starting to see some external validations of that progress.

[Marcello Spinelli, executive]

Daniel, well, now about China. So let's [ keep this in ] short term and mid to long term. So best phase for that is cautiously optimist -- every time Gustavo says that. And coming from the Party Congress, we have some mix at filings. On the negative side, the geopolitical message, no change in the COVID policies in short term. Some neutrality, I think, came from the properties. I know that the properties is declining, the demand. This is a bad thing. But nothing -- they are controlling the implementation of the 3 red lines. This is a good news. So no disruption is perceived. Despite a decline is at least being well controlled. And the good side for that of the Party Congress is the infrastructure in manufacturing or you can see the FAI. So they are [ betted ] on that. And their commitment to the environmental goals that will bring an extra demand for our high-grade ores.

So this is the -- what we heard from that macro numbers, we see GDP last quarter higher than expected. We expect a 5% growth for the GDP next year. We see a decline for properties in an upside for [ interim ]. And as a whole, we see this year, the CSP, [ the steel ] production in 1,020 million tonnes around that and next year, above 1 billion below this year. So we have this macro analysis. And I think the other point is mid to long term, we see -- it remains intact. -- stability when the parties said is stability, we -- it means for at least 4% to 4.5% GDP growth in the coming years. CSP around billion, a big market tailwinds in this front. We see a strong demand coming from the decarbonization infrastructure with a lot of stimulus. The remaining urbanization, we need to keep this on track. We have a huge opportunity in China. And the consumption, the steel intensity in the construction. So this together with the environment commitment, we see the mid, long term our theses remains intact.

[Operator]

Our next question comes from Tyler Broda with RBC.

[Tyler Broda, analyst]

I just had a question. The West 3 project, you mentioned that that's been halted now. That was the blending facilities in China. I guess on a water basis, you're according to our analysis, you'd be at record levels of inventory at the moment. I mean how does that -- does canceling the West 3 project change your blending strategy? And then secondly, I mean, how much capacity do you have to be able to hold iron ore within the system? And then the second question I wanted to ask is just around the base metals progress there in terms of the partnership. And I think it sounds much more like this could be someone that's providing more of an industry partnership, I guess, Eduardo from your thoughts. So how do you sort of play off the difference between the benefits from a more financial or downstream partner versus a sort of a peer.

[Marcello Spinelli, executive]

Well, we -- if you see the numbers of inventory in China, actually, it is low. So we are hitting now 130 million tonnes as a whole in China and our inventories is in the low level also. So we are confident we don't have any problem to raise any inventory even for our operations blending. So we have spare capacity for that. And we also can add the capacity we have in Malaysia in our center. And regarding the West 3 project, that's an expansion in [indiscernible] and the main entrance of Delta River. So this is -- it's more related to a Chinese strategy to reorganize their establishment of the CMR, the China mineral resource. So CMR is -- they have the mandate to expand or to optimize their services, and we are really close to them to make this happen. So I think they are holding this decision because of the organization. But in terms of strategy and synergies with them, we are total aligned. But we don't see any -- this is not a message of that is enough inventory or capacity. It's just a question to reorganization of the Chinese side.

[Eduardo De Salles Bartolomeo, executive]

I think [indiscernible] help me his leading the process. But just to get clear, I think when you look, again, it's a question of value, right? So we want people that perceive -- we want partners, not selling. We want people that perceives the same value that we do perceive in the assets. Otherwise, we won't do it, by the way. So it has to be -- I don't see a peer in this case because it doesn't make any sense. But Gustavo can give you more color on that, okay. But we want partners and partners that things like us.

[Gustavo Duarte Pimenta, executive]

Yes, I think Eduardo covered well, look, we are -- we have a very unique asset base here. We are seeing a tremendous amount of resources in very good jurisdictions. We are very well positioned for 2 of the most relevant macro trends of our generation, right? The mobility electrification. So everybody wants to be closer to us. That's clear, and we hear that loud and clear from the market. We are evaluating what is the preferred path. But as Eduardo said, it has to be -- if you were to partner with someone, it has to be with someone that believes on those long-term fundamentals is willing to invest is willing to create probably the most exciting future facing commodity platforms in the world. And that's what we are after here.

[Operator]

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

[Eduardo De Salles Bartolomeo, executive]

Well, thank you. Thank you, guys. I think thanks for the interest, and I think this quarter, it really changed a little bit the perspective was a solid one. In terms of production, costs came in line, Freight, as Gustavo mentioned, [indiscernible] a little bit, but not because it is fact based. It's a question, it's just a moving average. So I believe we're doing the right things around cost, as Gustavo mentioned, I think it was a solid quarter. We need to do matter, I think we're in the right back.

As we've been saying since day 1, we will focus on people, on reparation and safety. We have materially derisked the company. We have materially derisked -- so the case of the [ decharacterization ] on the dams is one evidence of that. The Moody's changing rates is a lot of certification. As a lot of the questions were done, I think we are taking profit of the uniqueness of our portfolio. We are able to deliver Salobo III. We start Pomalaa, [indiscernible] Carajas, as Spinelli on discussing how we can improve and accelerate that, but the assets that we source are there, and we're going to get them out on the right time because we have a unique portfolio, a unique time of the world.

We've seen all the geopolitical tensions, but nobody questions that the way we, humanity, has to face the climate change challenge. And Vale, I believe without any doubt is one of the best miners, the best position miners in the world because we are good on both. We see this not as a threat. We see this as an opportunity, and we want to help the climate agenda and, of course, create value for society. That's why we exist, by the way, otherwise, there's no reason to be a miner.

And then lastly, I think not necessarily to be reinforced as been discussed as well, we will be extremely disciplined. We only -- we are here to create value to our shareholders, to our society, to our employees, to all the stakeholders. So it will take time. And as I used to say when we get after [indiscernible], it's not a sprit, it's a marathon, but it's a marathon that we still have a lot of guests to get it to the final end. And I think we are within our team and our employees are doing the -- what it takes. And I hope to see and listen to you in the next call. Thanks a lot. Keep safe.

[Operator]

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