Vale SA
BOVESPA:VALE3

Watchlist Manager
Vale SA Logo
Vale SA
BOVESPA:VALE3
Watchlist
Price: 56.97 BRL -0.33% Market Closed
Market Cap: 243.3B BRL
Have any thoughts about
Vale SA?
Write Note

Earnings Call Transcript

Earnings Call Transcript
2019-Q4

from 0
Operator

Good morning, ladies and gentlemen. Welcome to Vale's conference call to discuss 4Q '19 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 slide changes, 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 the Securities Litigation Reform Act of 1996. Actual performance could differ materially from that anticipated in any forward-looking 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. Luciano Siani Pires, CFO; Mr. Marcello Spinelli, Executive Officer for Ferrous Minerals; Mr. Mark Travers, Executive Officer for Base Metals; Mr. Mark -- sorry, Mr. Carlos Medeiros, Safety and Operational Excellence Executive Officer; Mr. Luiz Eduardo Osorio, Executive Officer for Sustainability and Institutional Relations; Mr. Alexandre Pereira, Executive Officer for Business Support; and Mr. Alexandre D’Ambrosio, General Counsel.

First, Mr. Eduardo Bartolomeo will proceed to the presentation on Vale's 4Q '19 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.

E
Eduardo De Salles Bartolomeo
executive

Okay. Thank you. Good morning, everyone. 1 year has passed since the Dam I rupture. I want to express my respect for the families of the victims and thank all who have dedicated efforts to bring support and comfort to them.

We closed the year firm in our purposes, fully repairing Brumadinho, ensuring the safety of our people and stabilizing our production. Safety, people and reparation, these words remain our priorities. Please?

I would like to start our call today by talking about the reparation of Brumadinho. Vale is well recognized for its agility and execution capacity. And this is how we have been working on the reparation. To date, in indemnifications to the families and communities, we have already allocated BRL 3.2 billion in civil and labor indemnifications, specifically, we have entered into agreements, which include about 6,000 people and over BRL 1.9 billion paid. Important to notice, the families of 96% of the deceased workers have signed agreements, which have benefited 1,570 people so far.

On the environmental recovery, we launched the Ground Zero Project in January this year, a pilot for the recovery of the Paraopeba River and the Ferro-CarvĂŁo stream, which shows how those areas will look like in the future.

And another highlight is that the containment structures that we built last year have withstood the heavy rains of January Minas Gerais, which is a good sign of the effectiveness of our actions.

Finally, we have opened a dialogue with authorities, and we are looking for a definitive agreement to repair and compensate the environmental damage and collective ones. I believe that we will reach a broad understanding soon.

In summary, our work of caring for the people and environmental recoveries has evolved as expected. Please, next one.

Talking about safety. Vale is becoming more safe and reliable each day. Our Board of Directors is intensively overseeing the company with the support of specialized technical committees. The executive directors have also been supported by executive committees of different areas of expertise dedicated to risk management. What means is that our decisions have relied on more robust and conservative risk assessments from now on.

Regarding our dam management systems, we opened the second geotechnical monitoring center, which are now allows us to cover about 100 structures, 24 hours a day, 7 days a week, which is an important redundancy to ensure the safety of our dams.

And most importantly, we are revising and improving our tailing management systems with the support of renowned international specialists. A good example of improvement is the implementation of the engineer record of our dams in January this year.

Beyond that, we de-characterized the first upstream dam, 8B, in December. And the second will be eliminated this year. We also completed the construction of the first redundant containment structure at the Sul Superior dam. Two more will be delivered in the first half of 2020.

Another point to notice is that our safety and operational excellence executive office, created in 2019, is moving forward with the relaunching of VPS, which is our management model, and a rigorous assessment of other operational risks.

But most importantly, we are accelerating the cultural transformation at Vale with the new safety and operational excellence governance, and mainly with behavioral models that must be followed by the entire company. With actions like this, we will transform Vale into one of the safest and most reliable mining companies in the world. Please?

But our impact with society goes beyond safety. Starting this year, our performance will be measured against ambitious societal and environmental goals, for example, achieving carbon neutrality by 2050 and recovering or protecting 500,000 hectares of forests. As we announced at Vale Day, in our long-term compensation, our Board of Directors approved a 20% stake linked to ESG metrics.

Another key point is the treatment of our main ESG gaps. This is a very bold work to leverage our practice in those areas. One of those gaps has also become a goal to double the female participation in Vale's workforce by 2030.

Finally, with the recent change announced, the structure of our Board of Directors already reflects Vale's progress in governance, with a greater number of independent directors, an increase in gender diversity and an extensive experience in corporate governance and mining. Well, I'm confident that our capacity of execution will bring good results in those ways mentions very soon as well.

Please next one. Well, we are working, as I said, on all these fronts, and at the same time, we remain focused on safely resuming and stabilizing our production. We closed 2019 sales in line with our guidance, thanks to our operational flexibility. In 2020, we will keep seeking the resumption of our operations under safer conditions. However, we are monitoring and assessing the uncertainties related to this resumption like the approvals by the Brazilian authorities and also the impacts of the coronavirus in the Chinese and the world economy.

Marcello Spinelli will comment later in detail our plan to resume the halted iron ore production in 2020.

Talking about base metals. We had a very good performance in the Canadian mines in 2019, especially in Sudbury and also better results in our refineries in this fourth quarter. In the case of VNC, we have set a short-term solution with the halting of the refinery activities by April. Thus, starting to reduce the cash consumption of that operation. In parallel, we are in negotiations with interested parties, and I'm confident that we will have a definitive solution this year.

Please next one. With relation to our financial results, in 2019, our cash flow generation was significant, a strong evidence of Vale's recovered capacity, and we have had discipline in allocating our resources. We have prioritized the disbursement for reparation and actions towards safety. And we have fairly reduced our debt levels, and we have not searched new acquisitions.

One good example is the redemption and cancellation of the MBR shares, where a relevant move into the efficient capital allocation and to the planned cash outflows since we will no longer pay annual dividends of around $160 million.

Finally, we are working to have the necessary conditions to resume our dividend policy. We will inform you as soon as we have any developments in these matters.

To conclude, I complete my first year leading Vale with the certainty that the company has proved its resilience and its power of execution. I believe that we are building a safer path with operational excellence and that sustainable results will soon start to be noticed. 2020 will be a year of continuity and stabilization, as we execute the actions we planned and started last year. We have a present and vigilant senior leadership committed to the implementation of these plans. And more important, each day, our more than 70,000 employees have shown great strength to overcome the strategy and build a better Vale for everyone.

Thanks for your time today. I'll now pass to Luciano for further comments. Thank you.

L
Luciano Pires
executive

Welcome, everyone. We have a number of hot topics to address even before the Q&A. And I'm going to start by talking about this potential agreement with the authorities and the provision.

Marcello Spinelli will lead with the coronavirus and the resumption of production. And finally, our General Counsel will give his thoughts about the independent investigation report that was issued yesterday.

So you saw that we've included a footnote to the financial statements regarding a possible additional provision of USD 1 billion to USD 2 billion, connected to a possible agreement with the authorities. So some clarification on this.

This provision will only be recognized in our balance sheet if the agreement yields the suspension of the civil lawsuits and assure -- and if the agreement assures that there is a framework from a legal standpoint and to give speed in the reparation. So that's our goal: suspension of the civil lawsuits and a stable legal framework for the reparation.

If the lawsuits are not suspended, the company would naturally keep on the current path, which is to sign specific agreements for specific demands of the lawsuits, which so far has been producing good results. Our estimates of environmental reparation and compensation numbers are being confirmed in the talk with the authorities. However, the socioeconomic question has a more subjective matter. And the list of projects that were presented to us by the authorities, so mainly the socioeconomic projects, as a condition for the suspension of the lawsuits, is more extended than we initially thought.

Important that an agreement has to be good for both parties. If we, on the one hand, will get a suspension of the lawsuits, it's natural that the authorities, they want something beyond what would be normally expected in order to grant us this suspension. So we have a laundry list of projects.

And you remember that in Vale Day in December, we presented the new pact with society as a new strategic pillar for Vale. So our assessment is that to establish this new pact with society in Brazil and especially in the state of Minas Gerais, to leave a legacy to those people affected, to suspend the lawsuits and to have a stable legal framework for the reparation, then it's worth closing this agreement, which may then result in additional provisions.

Why do we have this uncertainty between USD 1 billion to USD 2 billion for additional provisions? We explained in the earnings release that the list of compensation and reparation projects, mainly the socioeconomic ones, is still being assessed, the estimates for each of the projects. It's still being analyzed what is the overlap with the provisions and the initiatives that we have provisioned for. And also the timing of those projects is uncertain, so therefore, the net present value of the disbursements is also uncertain. So there's a lot of uncertainty in the numbers.

Why are we not provisioning now? We're not provisioning because although an agreement is possible, the necessary conditions for us to approve this agreement are not here yet. So therefore, from an accounting perspective, we're treating this potential agreement as we treat other contingencies, so we -- for example, tax contingencies or labor continues or civil contingencies. So we are describing it in a footnote.

So the bottom line is that we -- the administration evaluation is that it is worthwhile to make this additional effort in relation to our initial estimates in order to get the suspension of the civil lawsuits, in order to have legal stability around the reparation, in order to reestablish the pact with this Brazilian society, which is fundamental for our long-term plans in the country.

Now moving to Marcello Spinelli with the coronavirus impact on the Vale business.

M
Marcello Spinelli
executive

Yes. Let's start with the resumption of operations. We have our chart to -- let's follow the numbers, walk through the numbers, and it's easy to understand the guidance that we have of 340 million tonnes and 355 million tonnes.

We came from last year, 302 million tonnes, that's the number we closed. This year, in our current system, we have the ramp-up of S11D. Our number is 210 million, so we add 21 million tonnes. The run rate of Alegria and also Pico mine that came back in the last year, the end of last year, the run rate is another 12 million tonnes. So for those 2, we see that the risk is really low.

From now, on the right, we have operations that we need to have authorizations from the agency, the mining agency and also the prosecutors. In other, we need to assess some further information about safety in the dams.

So we start with Timbopeba. Timbopeba, we already have the authorization for maintenance. And we are waiting for the operation authorization in the end of March. So for second half, second quarter, we are counting on Timbopeba.

Fábrica is just for the second half. We're still in the beginning of the process, testing the impact of the operation, the mine operation, the dams. So remember that we have a step-by-step test to check the impact of our operations processes in the dam. So we are waiting for the second half.

Vargem Grande, the wet processes, we don't add volumes, but we add quality. We're waiting to resume the operations on the second half at the pellets plant, and we will only have the end of the test to get the approval.

Brucutu mine. The end of last year, remember that we stopped the Laranjeiras dam to have a better view about the safety of the dam. It's a downstream dam, just to remind you. But the base case is to count on Laranjeiras only the second half. So Brucutu is operating now with 40% of the capacity. And considering in this planning, Brucutu coming back in the second half.

If we are -- during the assessment of the Laranjeiras, if we have, in the end of March, good news, we can return in the second quarter and add another 3 million tonnes in this projection. And the other 2 million tonnes is regarding the possibility to have some gains in the operation of other mines. So that's the way we are, from the left to the right, more uncertainty or less uncertainty with our numbers for the guidance.

Now let's talk about the coronavirus. Well, I'll start with the -- some numbers about the cases. It's important that we are tracking this every day. Probably you're doing the same.

Last day, we had about 900 new cases. We are splitting these analysis in Hubei area, that's the center of the problem, and ex-Hubei. Hubei represents only 4% of the China GDP, and also, we don't have many clients in that region. And ex Hubei, in 2 days ago, we only had 4,000 to 5,000 and this is declining. This is a very important information.

Yesterday, there was a spike based on new information from [ LGU ] in Shandong. But the main information here now that the cure case now more than 2,000 cases a day, better, higher than the case that we have new infection. So that's a possibility to have better position for the source of the problem in a few weeks.

Well, the consequence of the economy is huge. So I want to share some information, some final indicator or lead indicator, like the consumption of coal should be at the stage at this moment after the Chinese New Year at the level of the 90%, 95%. We only have 60% of the consumption of coal. Another interesting information is about the transit of people. Based on the daily railway passenger, we have -- already have 100 million people to go back to their houses. The impact is -- in the workforce is really clear now.

At the same time, the government in China is really -- is to achieve the economy target based on -- or double the GDP per capita, and they need to grow this year 5.7%. And the way they're going to do this help us a lot because it's based on infrastructure and also manufacturing and helps the consumption of iron ore in the end of the chain.

So moving in the chain, the steel demand now is really under pressure. Construction didn't go back. The automotive is -- they're -- we have news that they are coming. But if you check the consumption of tires, they are only 20%. And according to Mysteel -- there's a lot of information here. Mysteel is an agency of information for our business for steel and iron ore. They are, in a daily survey, checking when the industry -- the downstream industry will go back. And the expectations for [ all of March ] is, in average, 75% of the industry will come back, some more optimistic like the white goods, some less like the construction. White -- the white goods is 100% will go back, will come back; and construction, only 53%. So this is the scenario that we have. This is a very slow but gradual return of the economy and the impact of the steel -- the high record steel inventory now based on the lack of sales, logistics constraint, a lot of logistics constraints and a lack of workforce also.

Well, the impact on iron ore. Our clients at the end of the day is the blast furnace. So the decision to quit -- to stop the blast furnace is the last one to take. So firstly, they can't just shut down the EAF. So it was more than 40% more expensive than the blast furnace. They can reduce the scrap during ventures or cut some rolling output. But we don't see that today, if you compare the blast furnace cuts compared with what happened in the environmental cuts last year -- over last year, is still less than that period. So that's a good news from our main client, that is the blast furnace.

Well, at the port side, the stocks now, inventories is about 123 million tonnes. This is a very low level of inventory, and it's a good news. We have our operations in all the ports in China are running very, very good. Some very important information. We have the domestic concentrate, they are struggling with the logistics constraint part of the -- out of the market. This is another buffer for our iron ore. And this explains another phenomenon that is going on that our premiums for BRBF, even Carajás are really high from the average comparing for -- over the last quarter because we have a lack of low alumina product based on the restrictions of the mass concentrate.

So what we have -- our operations are running now. We already have booked for the next 30 days. We have some noise coming from some credit, some letter of credit from our clients. There is not a big noise, but we are -- we have some concern about the health of the -- of our clients. But so far, so good.

We are running, but -- very period of time that we must take care on a daily basis to check what will be the consequence and the return of the coronavirus.

Now, Alex D’Ambrosio.

A
Alexandre D’Ambrosio
executive

Thank you, Marcello. Thanks, Luciano. This is Alex D’Ambrosio, I'm the General Counsel at Vale, to address specifically the report that the independent committee released yesterday. We received this report and immediately published at CVM site, this summary, executive summary. And we've been since reviewing the full report.

I think it's very important to stress that the report was based upon the same inventory of information that we made available to the public prosecutors, identical information source and the same facts. For that reason, the report does not really bring anything new to the investigation. But it does have its own interpretation of the facts and of the information. It's the -- the committee, our reviewed information then reached its own conclusions and interpretation.

We do not see any reason or any reason to believe that this report would change or influence prosecutors' conclusions because the prosecutors themselves reached their own findings based on their informed views of the evidence that they reviewed. So in that sense, the report brings some conclusions and some recommendations, the recommendations come actually, in our view, as an endorsement of the many practices and actions that the company has been taking over the past years. There's recommendations that relate to culture changes and improvements in governance, things that have been already in the works for the past year. So we see those as an endorsement.

And as far as the conclusions go, they are conclusions reached by the independent committee, and they are in parallel, but not in conflict with any of the conclusions reached by the prosecutors.

Thank you.

Operator

[Operator Instructions] Our first question comes from Andreas Bokkenheuser, UBS.

A
Andreas Bokkenheuser
analyst

Yes, just 2 questions from me. One clarification, Luciano, on the provisioning when you mentioned, obviously, suspension of any lawsuits, what specifically is that referring to? Are we talking about any lawsuits that could be brought forward by the central government or the state government of Mines Gerais? So if you could give a little bit of color on that, that would be great.

And the second question relates to shipments. So you obviously gave us your iron ore production guidance for the year, 340 million to 355 million tonnes, which is unchanged. How should we think about sales or shipments? Or maybe asked in a different way, what are you targeting in terms of building inventories for blending in China and elsewhere? Those are my 2 questions.

L
Luciano Pires
executive

Andreas, thank you. I'll defer to Alex, our General Counsel, on the first question.

A
Alexandre D’Ambrosio
executive

Thank you, Luciano. Thank you, Andreas, for the question. The agreement that we are trying to put together is with the state authorities, indeed, and the federal prosecutors will also participate in the agreement, if not as direct beneficiaries of the agreement. They will be involved in the governance of this agreement. What I mean by that is that the lawsuits that we are looking to settle are lawsuits that were brought by the state authority. The state prosecutors have and the state attorneys have filed one lawsuit by state attorneys and 2 by state prosecutors. There are no civil actions by the federal prosecutors at this point.

L
Luciano Pires
executive

And Andreas, just as complement. There are yet no provisions recognized because we do not have yet the conditions for such an agreement. But we are indication -- indicating as a possibility that we'll do so. And the existing provisions will be complemented by the additional, if any, provisions in that case of USD 1 billion to USD 2 billion.

M
Marcello Spinelli
executive

Andreas, this is Marcello Spinelli. Thank you for your question. About the shipments so in sales, we expect to have, in parallel, the sales and the volumes of production. But you're right, we have some inventories to build in China. We have -- we had, last year, to consume part of our stocks in China for BRBF. So we are -- we have to build up again, part of the -- that stock that we lost last year.

Operator

Our next question comes from Alex Hacking, Citi.

A
Alexander Hacking
analyst

I have 2 questions. The first one is maybe you could discuss a little bit the production outlook for the northern range in Carajás. Obviously, that declined last year, which was something that we were not expecting. And I guess, is 230 million tonnes still the long-term target for production out of the whole Carajás system and would you anticipate getting there in 2021?

And then second question, just on VNC. I think if I heard correctly, you mentioned you're still kind of exploring sale options there. My question is, what happens if none of those sale options work out?

M
Marcello Spinelli
executive

Alex, this is Spinelli. For the Northern system, as I mentioned, we -- our forecast for this year is 210 million. Yes, we have capacity for 230 million. We rely on not only in the ramp-up of S11D, but we have -- we had a delay this year, a 6-month delay to start a new front in the mine that is called [ Mohon ]. We already started, but the volume will come -- the full volume will come only at the beginning of next year.

In the mid to long term, we have other fronts in the North branch. But for next year, waiting for the return of Serra Leste and also the [indiscernible] project, they are coming. So again, 230 million is a mid- to long-term goal. Based on your pits and 2 and 3 for the North branch. And Serra Leste and [indiscernible] project, we can reach again the 230 million.

E
Eduardo De Salles Bartolomeo
executive

Alex, Eduardo, I think, as I mentioned in the beginning, we are already redesigning the operation for a flow sheet that we believe is more suitable to the reality of that plant after we learned. But for sure, we have strongly focused on finding sales solution, a solution that gets a new partner or -- sorry, not partner, a now operator that can execute it better. But I would like to -- Mark to elaborate a little bit more.

M
Mark Travers;Executive Officer for Base Metals
executive

Thank you, Alex. What I would say is that, as Eduardo indicated, we do have interest in the project, which is encouraging. And we're hoping that we'll know in relatively short order, how that is proceeding. Of course, we announced in Vale Day that we would have to make a decision by the end of 2020 as to our course of action. And we had indicated the desire to leave New Caledonia.

So of course, by the end of 2020, if we do not have a solution, we have to -- we'd have to find another way to deal with this, potentially exit.

Operator

The next question comes from Carlos De Alba, Morgan Stanley.

C
Carlos de Alba
analyst

So the first question is, maybe, Spinelli, you can give us a little bit more color on the actual situation on the blending that the company is facing, given not only the constraints after the Brumadinho accident, but also with the rains that you are experiencing and potential, but we've heard that there is some height -- some high impurities in some of the mines that the company is operating right now that may be affecting the blending. So if you could give us a little bit more color as to what the situation is right now and when do you expect any challenges that the company is facing to normalize?

And then maybe, Alex, if I could, just to pick your brain on the challenge -- or on the new investigation or the report from the investigation of the Board committee. Is this -- can federal prosecutors still present charges against the company even after you guys reach an agreement with the state prosecutors? Or it would be independent to the process that you elaborated the company is trying to conclude with the state prosecutors? And then if you -- if I may add to that last point, the potential agreement with the state prosecutors, is that mostly focused on civil actions and environmental charges? Or it would also include criminal and/or potential corruption charges?

M
Marcello Spinelli
executive

Carlos, this is Spinelli. Thank you for your question. Regarding the blend, we expect a new record in China this year. Actually, we don't have any problem with quality directly in the blend. We have -- our levels of inventory are low so we are recovering that. But regarding the shipments and the north is important to say, as I mentioned in the last question. We had a delay in the license of [ Mohon ], so we decided to have a smoother production in the first quarter, anticipating some maintenance. To have the total volume for the production.

The south, as I mentioned, we are recovering the production with the dry processing. So for the part of the blend with the high silica product, we don't have a problem. Actually, it is a lack of high-quality products in the south. But that, gradually, we are going to recover, as I mentioned, to the end of the year, the dry processing, step by step.

So for blending, again, we don't have any problem. And this is a gradual production in this beginning of the year regarding the north.

Operator

Our next question comes from Christian Georges.

U
Unknown Executive

Wait, wait, wait. Hold on. There's still an answer.

A
Alexandre D’Ambrosio
executive

I haven't answered Carlos De Alba, sorry. This is Alex D’Ambrosio. Okay, so I'd like to answer Carlos De Alba's question. So Carlos, let me start, I think, in reverse order, okay? The agreements that we are trying to close with the prosecutor, their state prosecutors, they will address civil and environmental and social obligations. So it's based -- the idea is to suspend the civil actions, and the environmental actions that are brought by the state. And there are now, as I mentioned before, there are 3. Now it does not address criminal, criminal is completely independent. In fact, in Brazil, you cannot make this type of agreements like to -- like as we would in the United States to end the criminal prosecution by agreement. So what we're focusing here is in the civil and the compensation and indemnifications and reparations. And the answer is no new actions would be able to be brought by the state that versed about these topics.

So once we close these, the idea is that we will have a section in the agreement that precludes the state from bringing new actions related to those items that we have addressed in the agreement. Hope that answered your question.

Sorry, sorry, let's complete the answer to Carlos De Alba's question. I was reminded that there's a question about anticorruption.

Well, first, make clear that Vale has never endorsed any actions that are illegal and unethical and that violate our code of ethics. We are very confident that if any actions were to be brought on these fronts, we would defend them in the proper channel. So we do not anticipate at this point that we could be charged with any action on that front.

And again, reminding that the report by the special committee, the independent committee, did not bring any new facts, and does not point out any new liabilities. None that were not yet already known by the prosecutors. So that's why we don't anticipate that it would change any of the charges already brought.

Operator

The next question comes from Christian Georges, Societe Generale.

C
Christian Georges
analyst

I'll go for a -- possibly a simpler question and one on Mozambique. If you could give us perhaps some indication of what you're targeting in terms of production there on thermal and coking coal this year? And what kind of running rate in future we are looking at for both types of coal, ideally?

And the second question on copper, so there's some pushback, we understand, in China for taking some of the copper shipments. Is it something you have experienced already or not something which is impacting you?

M
Marcello Spinelli
executive

Okay. For Mozambique, there's a clear distinction about the production rates we expect after the shock that we described in December, which is a 3 to 4-month stoppage in the operations to change the flow sheet and to correct all the maintenance issues, so we expect a run rate, we continue to expect a run rate of 15 million tonnes per year after that. But until then, honestly, there is no expectation that we will have any step change or substantial improvement in the current conditions because the many problems that we have identified, they really require the stoppage for correction. So I'd say we are completely focused on established the 15 million-tonne run rate after the large stoppage. Whatever happens until then, I don't think it's relevant for the overall case for Mozambique because the operation is not in a good condition. The calendar year production will depend then on the effectiveness and the speed in which we can fix the situation with that stoppage.

So far, we've maintained the stoppage for the beginning of the second quarter. However, we're monitoring very closely the impacts of coronavirus on the arrival of parts for the changes that need to be made. So there are initial indications of some delays, but we still expect that, by the second quarter, we'll be able to initiate the stoppage, and we're still targeting the second half, we are going to get to the 15 million-tonne run rate.

M
Mark Travers;Executive Officer for Base Metals
executive

On copper, Christian, I would say that 2 things. First of all, copper, most of our copper concentrate is contracted for 2020. And secondly, relatively little of it goes to China. So there is certainly an impact in the sense of shipments that are coming up, but we are monitoring, they may be delayed, and we need to look at logistical concerns. But overall, it should be relatively minor in the Base Metals division.

Operator

The next question comes from Tyler Broda, RBC.

T
Tyler Broda
analyst

Great. My first question, just to the operations report. You mentioned about the 340 million to 355 million tonne guidance for the year. You also mentioned the statement there that with the achievement of the higher end of the production range, continues to be possible on several upside as being explored. I wonder if you could provide some color on that. And then secondly, just in terms of some of the other costs coming through, the establish expenses, some of the research development, some of the other costs within the P&L, just some of them were up this quarter, how should we look at those going forward into next year?

M
Marcello Spinelli
executive

Thank you, Tyler, for the questions. This is Marcello Spinelli. Some -- to mention, we are recovering the production and we actually -- we rely on some authorization. So I can say that in that figure that you saw, the recovery operations. The more is in the left, there is more risky -- in the right -- sorry, in the left is less. Upsides, I think we have some initiatives in Brucutu to anticipate some idea from using other dam, that is the [indiscernible] dam, using some addition of products that we can use the dam that is almost full.

We have other initiatives in Itabira, but I can say that the small initiatives that you can -- some and have some number, like I mentioned, some 2 million or to 5 million tonnes. But mainly, we are focused on the return of the operations and the assessment of the safety.

As regards the expenses, you noticed probably that R&D expenditures were higher in '19 than in '18, that relates to some of the projects we are developing, engineering studies and the catch-up in drilling. But it should remain at the same level of '19 throughout 2020. So no surprises on that.

The operating and stoppage expenses were very large in 2019, a total of $882 million for the entire company, of which, not surprisingly, $823 million were related to Brumadinho and the iron ore business. The iron ore pre-operating and stoppage expenses should be directly proportional to the amount of production, which is stopped. So you can do a linear extrapolation. If we resume the volumes throughout the year, the stoppage expenses should reduce proportionally. There were some stoppage expenses recorded in Base Metals, but we believe they will pretty much vanish this year. As the operations like Sossego and Onça Puma and others that were stopped, they're coming back online successfully.

Operator

The next question comes from Edward Sterck, BMO.

E
Edward Sterck
analyst

Just a couple of questions from me. The first one on the topic of provisions. If we cast the mines back to the half year results, when the first provisions were announced. I think at the time, they were described as being full provisions to the best of management's ability -- knowledge at the time. We've seen further increases since then. Now there's obviously potentially $1 billion to $2 billion more.

Are there any other actions outstanding against Vale that could result in further provisions? That's my first question.

And the second one is I'm afraid this is rather a naive one, I'm not familiar with Brazilian law. But on the topic of criminal charges, can they be brought against Vale itself as an institution or just against individuals? And I'm sorry for the rather crude nature of that question as well.

L
Luciano Pires
executive

So Edward, on the provisions, we made it clear throughout the year. In the first quarter, we mostly provision for our estimates of individual indemnification, socioeconomic liabilities then -- in the second quarter -- and ended the commissioning of dams. On the second quarter, we came out with the environmental provisions. We have complemented some of the indemnification provisions given the extension, for example, of the emergency monthly stipends for a very large population. And in the fourth quarter, we did the provisions for 2 new dams to be decharacterized following a reclassification in September by the National Mining Agency. Those are obviously all to the best extent of our knowledge as management.

We -- I can tell you that for decommissioning, for example, the -- our knowledge has evolved substantially throughout the year to decharacterize very large dams and to make an estimate, as we did in the first quarter, was quite a challenge. Actually, that portion was reduced. But across the year, we had -- because of laws that were enacted, we had to decommission also smaller [ bags, ] and we added provisions for that.

And these 2 large dams that we are adding about USD 600 million. They basically came from a -- as I said, there's a reclassification from the agency that happened in September. There is no more such reclassification going forward because the agencies already did what it needs to be done, which means that the upstream dams that need to be decommissioned, now they're all accounted for.

When it comes to the environmental liabilities, the conversations that we're having with the authorities, they are confirming our initial estimates. So again, in this regard, there is no -- nothing to expect in addition to that, so the conversation is ongoing. They relate to sanitation measures, to water supply security for the City of Belo Horizonte, some works in water, new water pipelines with the state utility company. So no surprises in that.

When it comes to the socioeconomic provisions, that's where the -- what I called an additional effort is being requested from us by the state authorities in order to grant us this very large benefit, which will be the suspension of the actions and the no -- and the shielding against potential new lawsuits regarding socioeconomic and environmental.

And right now, what we're doing is we are assessing these requests. We are crossing them with the existing programs that we -- when we made our provisions, we thought they would be the ones necessary to address the socioeconomic issues. But from a conceptual standpoint, we agree that -- we believe that there's value in doing this additional effort in order to suspend the lawsuits. That's kind of a tit for tat, like we're going to receive a very large benefit. And we, on the other hand, will give an additional -- a legacy for the state with all these projects that are being asked for, very beneficial for the company.

We believe we need to reconnect with the Brazilian society and the society and the state of Minas Gerais. So putting all in context, we're willing to enter into such an agreement. But we haven't provisioned yet because the conditions are not yet here, very important. So we're treating this from an accounting perspective as a contingency, rather than as a done deal or something that we will do. So as a listed company, we need to bring those things forward. So we're bringing it to you.

A
Alexandre D’Ambrosio
executive

This is Alex. Well, typically, under Brazilian law, criminal charges are against natural persons or of course, individuals. There are some few statutes that will present possibilities of bringing criminal charges against the institution or against the company, but then the prosecutors would have to prove there's an institutional intent to practice a certain crime. And that applies specifically to environmental, there's strict liability environmental prosecutions, yes, there could be antitrust and, in some instance, anticorruption.

But as I said, for these last 2, in particular, you have to prove that there is an institutional intent that ranges from the entire organization. So typically, even in these issues of anti corruption and antitrust, the individual natural persons have to be the center of some type of indictment or accusation.

Operator

The next question comes from Timna Tanners, Bank of America Merrill Lynch.

T
Timna Tanners
analyst

Thanks for all the great detail. I just wanted to ask 2 specific questions. One, on the iron ore market, if you could add some perspective. Clearly, the weaker demand outlook for steel in China has been matched by less supply, whether it be cyclone or rainy related. I just want your perspective on how much of that shortfall in supply was weather-related in your view or external-related and how much is intentional to match the lower demand. And if it's just because of the weather, is there, do you think, willingness to match lower demand if that does manifest?

And then the second question is on the dividend. I just want to be really clear on is there a checklist here of steps that need to be met before you consider resumption? Or is it really more qualitative? And if you could provide a little more color on that.

M
Marcello Spinelli
executive

Timna, I think we have a market before coronavirus and after coronavirus. So that's the main point now. It's many times now difficult to understand the consequence of the coronavirus. But I think I have some color for you.

First, as I mentioned, and I think China will try to reach the growth this year. So what we think that demand in China that will be around 1 billion tonnes of production of steel will be -- addressed it in last month than -- during the year. So we can have a boost to the consumer of iron ore after the coronavirus. So that's a common sense for the market in China.

I think, ex China, we already have some good news. We expect to grow more than 3%. Part of that, some recover from situations, like in Japan, that we had a problem last year in -- with typhoons or like Europe, that you have a technical growth better than last year. But again, all of these numbers now can be adjusted with the impact of coronavirus in all the world with the center coming from China.

From the supply side, I think we are very close to the demand. And Vale is returning to operation, nearing second half, we had some lack of production in Australia this beginning of the year, but we see that the supply-demand will be tight for the whole year.

E
Eduardo De Salles Bartolomeo
executive

Timna, it's Eduardo. I think, answering very objectively, there's no checklist point. It's a qualitative assessment, for sure, but biased on the advancement of the work that we've been doing here, on the reparation front that we believe we are advancing very well, as I mentioned before. So it's a system that we will find the right timing, but we need to. As I've always been saying, focus on the reparation and improving the performance of the company.

But I'll ask -- you didn't ask, but I will ask Luciano to elaborate as well on the return of the policy because this has to be, of course, done when this management think it's time. And of course, the Board thinks the time and there are some doubts about that. I think that needs to be clarified as well.

L
Luciano Pires
executive

Yes, Timna, there was a question on the Portuguese call, and I'm repeating it here about what -- how do we think about the framework in terms of the indebtedness and its relation to the dividend. Well, first of all, the intent when the dividend policy is reestablished, is to do exactly as we did before. Same formula, EBITDA less 30%. And so the discussion here is how are you going to think to pay dividends beyond -- above and beyond whatever the formula yields because there's no doubt that once the dividend is reestablished, that the minimum dividend according to the policy will be met. But what about above and beyond? Some people found it a little strange. And what was the intent when the Vale put in the release, a demonstration of expanded debt and then expanded debt and commitments that went up to USD 17 billion? The intent was simply to show that some people start to speculate Vale is going to go towards a net cash position. And this is a narrow view because we do have, yes, lots of commitments beyond headline debt that need to be considered when looking at the liability side of the balance sheet.

Well, but does that mean that your $10 billion leverage target is not there anymore? Look, the $10 billion was established when it was established, most of these expanded into other liabilities were already there. So we already had the Samarco and Renova liabilities. We already had fees. We already had the leases. So in that respect, nothing changed.

On the other hand, Brumadinho came, and this is a big change. So although we're now below the headline USD 10 billion, by USD 5 billion, it is also true that we have an additional USD 5 billion provision recognized in the balance sheet for Brumadinho expenses. So net-net, we're about where we want it to be. If you think about the framework as before.

We're not at USD 10 billion, we are at USD 5 billion headline debt. However, we do have USD 5 billion additional more commitments to match.

So the consequence of this is if the dividend policy was reenacted today, every cash flow that the company generated from now on would potentially be available for discussion with the Board of Directors for distribution for shareholders. So that's the consequence. But there's -- as of now, there will not be sort of a catch-up dividend, extraordinary $5 billion dividend to come back to the USD 10 billion.

Having said that, those additional commitments, they tend to decrease over time. So as we spend the money in order to do the reparation in Brumadinho, the $5 billion will decrease. And then, over time, we will be able to relever the company, the headline debt back towards USD 10 billion. And in that process, also, we will consider this to pay additional dividends above and beyond the minimum dividend policy. So that's the thinking right now.

Operator

The next question comes from John Tumazos, John Tumazos Very Independent.

J
John Tumazos
analyst

Could you explain the large drop in the pellet price realization? Almost $18. Was that due to the German recession and softness in the Atlantic market? And secondly, concerning the dry processing of the lower-grade Southern Southeastern ores and the shipment of the lower grade material to Malaysia or China for blending is a big freight -- bigger freight expense. The blending takes effort. The high-grade ore that is blended loses its price premium. Then when it gets to China, there's going to be more slag after they make the iron from the material that never went in the tailings dam to begin with.

Why not just simply shut the lower-grade mines where you can't use the tailings dams anymore? The dry processing seems to have a lot of disadvantages.

M
Marcello Spinelli
executive

John, this is Spinelli here. Regarding the pellet premium. I think the number is higher than that. It's about $30, not $18. And I think that -- it was a drop. Okay. And I think the market is -- we reduced the production of pellet feed with all the problems in Brucutu and we see the market to be very tight and we expect some better premium for our next quarter. But this is still a very good premium.

The good news in the premium side is, in China, for pellets, we've seen that some premiums now come in the spot market around 40, just to figure out, we're not in this market. But as now we are reconsidering to see what will be in this market during this year.

And regarding the dry processing in the blending and the high silica or Carajás fines -- pure Carajás fine. We've been assessing this decision for some time, and we are still convinced that we have the best solution blending in China.

We are struggling now to recover the production. But in mid to long term, the premiums from BRBF is much better than the discount of the high silica. Even shutting down the production, we still have margins selling BRBF rather than selling Carajás plants or being out of the producer of high silica. So again, it's a good business.

L
Luciano Pires
executive

But John, on the other hand, it is also true that we had a plan, an initial plan for this year of going up to 370, 375 by accelerating the dry processing of the operations where now we can do it. However, the silica discounts were so large and the costs were also prohibitive because we're not blasting, we're using mechanical dismantling of the rocks. That we said, okay, we're not going to produce it. So we're very mindful of those trade-offs. We cautiously removed about 20 million tonnes from the production plant in order to get to this 340 million to 355 million tonnes precisely on the grounds of optimization.

So we have all the information. We have dynamic optimization. We're very mindful. We're on top of things, and we do what's best for the overall profitability of the company.

Operator

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

E
Eduardo De Salles Bartolomeo
executive

Okay. Thank you. First of all, thanks, everyone, for your time and attention and the questions. Definitely, 2019 was one of the -- it is the hardest year we ever faced. But I believe that the path that we choose through operational excellence to a safer company will bring sustainable results and will start to be noticed soon.

So as I mentioned in the beginning, 2020 will be a year of continuity and stabilization. But for sure, Vale will be out of the strategy in a much better shape and a much better company. Okay. Thank you, and see you in the next call.

Operator

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