Vale S.A.

Good morning, ladies and gentlemen. Welcome to Vale's conference call to discuss first quarter 2020 results. At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer session, and instructions will be given at that time. If you should require assistance during the call, please press the star key followed by zero. 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 investor's link at the company's website and is transmitted via internet as well. The broadcasting via internet, both the audio and the slides change, has a few seconds delay in relation to the audio transmitted via phone. Before proceeding, let me mention that forward-looking statements are being made under the safe harbor of 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 Sales Bartolomeu, Chief Executive Officer, Mr. Luciano Ciani Pires, CFO, Mr. Marcelo Spinelli, Executive Officer for Ferro's Minerals, Mr. Mark Travers, Executive Officer for Base Metals, Mr. Carlos Medeiros, Safety and Operational Excellence Executive Officer, Mr. Luis Eduardo Osorio, Executive Officer for Sustainability and Institutional Relations, Mr. Alexandre Pereira, Executive Officer for Business Support, Mr. Alexandre D'Ambrosio, General Counsel, and Mrs. Marina Quintal, Director of People. First, Mr. Eduardo Bartolomeu will proceed to the presentation on Vale's first quarter 2020 performance, and after that, he'll be available for questions and answers. It is now my pleasure to turn the call over to Mr. Eduardo Bartolomeu. Sir, you may now begin.

Okay, thank you. Good morning, everyone. First of all, I hope that you and your families are well and able to maintain social distance. This will be a very different call, as our management team is also apart from each other, each one in its house or office. First thing I would like to point out is that VAR is facing this unprecedented scenario brought by the COVID-19 with responsibility, discipline, and sense of urgency. Since March 13th, we have been managing the company remotely, Just to give you an idea, we went from 600 to 20,000 remote accesses, and we continue to operate our assets. Definitely, we are in a war scenario with a common enemy. For this reason, Vale joins forces with communities, governance, and our value chain with a humble attitude to win this war. The main message that we have been communicating to our employees and partners are resilience and overcoming. Resilience because this war will not be a quick one. Overcoming because I'm sure that we'll succeed and come out much better as a company and as a society. I also want to emphasize There are efforts with the full reparation of Brumadinho remains firm. Finally, reparation, safety and people remain our priorities and are very up to date in the face of this crisis. Could you please pass the slide? Well, we have a very solid plan to face the pandemic. In January, we started to monitor the scenario and to structure and implement preventive and safety actions. Our response plan is ongoing and is updated constantly. It has five fronts which prioritize, first, the continuity of the reparation of Brumadinho and our dam safety actions, the health and safety of our employees and our neighboring communities, the support in fighting the pandemic Honoring our new packed society, the support to our value chain, and finally, the stability of our business. Could you please pass the next slide? As I said earlier, our effort to fully repair Brumadinho remains firm and goes together with our actions during the pandemic. We remain committed to the reparation, and so far, almost 7,000 people are part of the civil or labor agreements already signed, which total about 3.6 billion reais with emergency aid paid so far as well. Regarding safety, the dam de-characterization plan remains on track and our tailing management system is improving. We have implemented the function of engineering record as an additional step in assessing our structure in Brazil. The engineer record is external to the operations and is directly linked to Vale's line of defense. Thus, our commitments to Brumadinho and safety continue. The second front of our plan addresses the health and safety of our people, which is our top priority. In all of our operations, we have implemented world-class safety standards to face the pandemic. and we believe we were the one of the first companies in Brazil to adopt the home office regime on March 13th. On the slide you can see, we mentioned the main measures, but the watchwords are safety and discipline at home, in our operations, at all times. So far, three sites have adopted more restrictive measures as we already disclosed, in Malaysia, Canada and Mozambique. Although the impacts of COVID are currently contained, advancing the pandemic may lead to more restrictive measures in this or other operations. Could you please go to the next slide? We are fully aware of our responsibility to society and our essential role in the economy. At the same time that we took our operational actions, in a listening process, we offer support to society. We have already committed R$ 500 million to fight the pandemic in Brazil, of which R$ 353 million were already spent. But it's not just about financial resources. We made use of our logistics structure in China, where we have been present for almost 50 years, to purchase and bring to Brazil over 30 million personal protection medical equipment and 5 million rapid tests to detect the new coronavirus. In total, 15 cargo planes will bring these volumes. In addition, we are providing resources to expand the capacity of existing hospitals and to build field hospitals in territories that we operate. In other countries where we operate, we have also made important donations to the healthcare system. For example, in Malaysia, Mozambique, and Indonesia. On the front, We are committed to keeping it very healthy and preserving the jobs. At a time when we are experiencing great uncertainty, we are using our presence at the basis of the production chain to help our suppliers face the pandemic. We have anticipated payments to around 3,000 small and medium-sized suppliers in Brazil, injecting over R$ 900 million into the local economy to date. We have also provided financial support to the contractors in projects suspended by us so far. We believe that, with these actions, we are helping society to overcome, together, the challenges of this crisis. Next. Finally, we continue to stabilize our production. In the first quarter, the impacts of COVID in our business were limited, but there are still many uncertainties. Therefore, Stabilizing our production remains a challenge. We started to see fruits of our work in North Atlantic, with a solid nickel production in the first quarter this year and in the last quarter of 2019, as a consequence of relevant actions to stabilize the value chain that we took last year. In our war, the quarter was very difficult. On the positive side, we hope to resume TIMBOPEB activities as early as next week. This is another important step to resume and stabilize our iron ore production in the southern and southern eastern systems. Next slide, please. Well, as we've been saying, in addition to the pandemic plan, which also addresses the reparation of Brumadinho, the improvement of our safety and the stabilization of our production, capital discipline is fundamental to the risk value. We have been reinforcing this point in other opportunities. In this regard, I would like to point out the withdrawal of $5 billion from our revolving credit. We continue with our approach of prudence, reinforcing our balance sheet to face an environment of great uncertainty. It was an insurance at an interesting cost, increasing our margin of safety. Finally, I would like to reinforce, as I said, that we keep working quickly and with quality in the reparation of Lumagini and to reduce the uncertainties regarding the COVID-19 impacts. With that, I believe that we will have better conditions to restore our dividend policy. Next slide, please. Well, to conclude, in this context, I'm sure that Vale is in a solid position to face this critical scenario. Iron ore is one of the least impacted commodities to date. Our main market, China, is already recovering, although we can expect reduction in Europe or in some other countries as well. Moreover, Bali has already proven that it is capable of resisting and recovering. The commitment of the executive board and our broader directors is to continue to do everything in our power to ensure the safety of our employees and our operations. Finally, I want to thank very much our employees and partners for their efforts over the past weeks. I now pass the floor to Luciano so that he can detail the results of the first quarter 2020. And thank you all for your attention. I'll be back for the Q&A. Thank you.

Good morning. Good afternoon. I'm going to address five items here today. First item, costs. As you saw, Costs were high in Iron War in the first quarter, $16.2 per ton. It's seasonally high because of low volumes, but we had even lower volumes this quarter. And we also had some additional impacts like demurrage in the north, the lineup of vessels waiting for it to be charged because of problems with moisture and for the excessive rains in the north. And we had also problems with maintenance. We had a fatal accident in Mozambique. Thank you very much. Thank you very much. And because we are resuming operations in Timbopebo, for example, which is higher cost, because it's not going to be a blasting operation. We're not going to use explosives. We're going to use mechanical dismantling of the ore. So it's going to be high cost. And also because of the mix, we're going to have more ore being sold from the south and the southeast. We're also undergoing the scheduled 10-day maintenance of the long conveyor belt in S11D as we speak. So many also small effects that will add up and will not allow us to see the major impact of the currency devaluation on costs on the second quarter. However, on the third quarter, we're very confident that with cost dilution, with no maintenance, we're going to run certainly below $14 per ton. And if the exchange rate continue at current levels, certainly maybe even at $13 per ton. The second topic is freight. You also saw sharp declines in spot freight rates and in the oil price. So how's the outlook for freight within Vale given that the decline was very small this quarter, just $1 per ton to $17 per ton? Well, the spot freight rates will not influence also freight in the second quarter because Vale uses mostly the spot market when it produces more. So Because the production in the second quarter is not as high as in the third and the fourth quarter, the use of the spot freightments will be naturally smaller. So we will use more of our own fleet. But in the third and fourth quarter, if the spot rates continue to be lower, we're also going to go more to the spot market, and we'll take advantage of that. But the oil prices, you will see a significant impact already in the second quarter. Vessels are refueling. Actually, we even had a small increase in fuel costs this quarter because of the IMO regulations and because we fueled part of our fleet with the low sulfur oil, which is more expensive. But starting from next quarter, you will see the impact, and we are forecasting a decrease of at least $3 per ton in freight rates next quarter. The third aspect is foreign exchange. We had a 29% devaluation of the Brazilian Real in the quarter, end-to-end, very unusual, compares only to what happened in the third quarter of 2015. And as the balance sheet of value officially, everything is measured in Brazilian Real, there are all sorts of impacts from such a devaluation in our accounts. And I would like you to pass on to the first slide after Eduardo's presentation. where we show a number of balance sheet accounts that were heavily impacted by the devaluation in this quarter. So on the right-hand side, you see in blue commitments of Vale, Brumadinho, Refis, Samarco and Renova, and our gross debt. And the numbers you see already translated in U.S. dollars are the declines in those liabilities given the devaluation. So those liabilities are originally measured in reais, but when you translate them back to U.S. dollars to present the accounts for you, they have a much smaller value. So almost 3 billion U.S. of declines in the value of commitments, which is very good for value. But on the asset side, we do hold balances in cash in Brazilian reais. Actually, we were holding a lot of Brazilian reais when the devaluation came. So those same balances, when translated to To U.S. dollars, they lost $914 million in value. And then you have the losses on the swaps because we have so many commitments in Brazilian reais and we see ourselves as a company. We manage the company in U.S. dollars. We hedge part of those commitments in Brazilian reais back into U.S. dollars. And this $1 billion U.S. is the offsetting effect of some of the declines you see in blue. So some of the declines were actually not naked. They were hedged. And this is the offsetting effect. And that flows through our income statement because this is a derivative instrument. So that flows into the financial results. But net-net, as you can see, there's a positive gain. And also because Vale has paid amounts related to Brumadinho and to Refiz, the expanded net debt, when you add on top of Vale's net debt all those commitments, The fourth item is cash flow generation. You saw that the cash flow generation in the quarter was relatively small compared to past first quarters. It's naturally also seasonally lower. And the biggest impacts were from inventories and working capital, accounts payable. The inventories were part decision of Vale. For example, we decided not to sell nickel at those depressed prices. We also sold less copper than we produced. We sold slightly, but less iron ore than we produced. So we have a 200 million U.S. buildup in inventories, mostly explained in base metals. On the accounts payable, we had some important payments on the quarter. The first one is the take or pay in the self-system of MRS. So because we're not transporting enough ore through the railway, which is jointly owned with other companies, we had to pay the top up for the take or pay in this quarter of $120 million. You should not expect this, obviously, to repeat itself in the second, third, and fourth. That's a yearly expense. And we also had a $200 million payment of profit sharing for our frontline employees. So a number of one-off expenditures, some of them unique, some not so one-off like the profit sharing, but that affected cash flow generation in a quarter. But looking forward, we expect cash flow generation to again be robust as the working capital accounts, they recover themselves. So to boost cash flow. Finally, COVID. Some highlights on the financial impacts. I'm not going to discuss volumes because volumes were already considered on the guidance that we made public last week on the production report. Not going to discuss prices. We may speculate here in the Q&A session, but I'm focusing here just on costs and expenses, out-of-pocket expenses because of COVID. And the The ballpark number that we see so far, including not only what we already spent, but what we look forward over the next few months, is 500 million U.S. And they will appear in many different accounts, including the most part of this is expenditure with the stoppage of projects. For example, it's costing us 55 million U.S. to stop the project in Canada, in Boise Bay. Stoppage of projects in Brazil is costing about $50 million per month, and this will not flow through EBITDA or income statement. This will accrue to the project costs, but it is an economic impact. We will spend about $100 million in humanitarian aid. We have also capital injections in our steel subsidiary in the north of Brazil that need to be made. We had some benefits for employees. About 50 million each of those accounts. So when you put this all together, the estimate is about 500 million of out-of-pocket additional costs and expenses for value. And finally, if you think about other impacts on cash flow, you're seeing that we're supporting our value chain. We're supporting suppliers with advanced payments. We may support clients. But this will be mostly offset by the savings, the temporary savings on CAPEX because the stoppage of projects, although they're costing us economically, we're spending less than if they were at full steam and the works were ongoing. So therefore, as you saw, CAPEX guidance was revised downwards and should basically be offsetting the working capital deterioration because of the support to the value chain. With this, we can open for questions and answers.