Discussion with sell-side analysts. Rio de Janeiro, July 11 th 2014 Luciano Siani, Vale CFO

Transcription

1 0 Discussion with sell-side analysts Ri d J i J l 11 th 2014 Rio de Janeiro, July 11 th 2014 Luciano Siani, Vale CFO

2 1 OBJECTIVE OF THE DISCUSSION The objective of this discussion is to clarify topics that have created confusion in previous releases and address outstanding questions from sell-side analysts

3 2 DOCUMENT CONTENT Iron ore prices and margins Capex Cash Flow

4 3 DOCUMENT CONTENT Iron ore prices and margins Capex Cash Flow

5 4 TOPICS COVERED IRON ORE PRICES AND MARGINS Pricing systems Price realization EBITDA margins The transition of the benchmark to alternative pricing systems Vale's provisional pricing mechanism and its impact on prices Evolution of Vale's pricing mix The evolution of Vale's sales mix - Vale's price goals and realization vs. the implications IODEX Overview of Vale's iron ore price realization The main drivers impacting Vale's price realization Sales products impacting Vale's EBITDA per ton Projections of Vale s future margins

6 5 TOPICS COVERED IRON ORE PRICES AND MARGINS Pricing systems Price realization EBITDA margins The transition of the benchmark to alternative pricing systems Vale's provisional pricing mechanism and its impact on prices Evolution of Vale's pricing mix The evolution of Vale's sales mix - Vale's price goals and realization vs. the implications IODEX Overview of Vale's iron ore price realization The main drivers impacting Vale's price realization Sales products impacting Vale's EBITDA per ton Projections of Vale s future margins

7 Mining companies abandoned the benchmark pricing system, prevalent during periods of low price volatility, and gradually adopted alternative pricing mechanisms better suitable to customer needs HISTORIC EVOLUTION OF PRICING SYSTEMS US$/t MB 63% Fe FOB Brazil¹ Vale SF FOB Brazil to Asia² 200 Sharp spot price Sharp spot price decreases increases lead to the reduced the importance of collapse of benchmark the lagged-based pricing pricing system system Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Benchmark Lagged New Pricing Mechanisms ¹ Market index based on MB 63.5% CFR China ² Vale prices based on standard Sinter Feed Fines with Fe(%) adjusted to 63.5% for comparison with index

8 With the fall of the benchmark system, alternative pricing systems were developed to better adapt to customer needs, particularly the needs of Chinese steel mills CURRENTLY PREVAILING PRICING SYSTEMS 7 Description Trade-offs Lagged Sales based on past prices Prices calculated based on the average price of the past three-months ending one month before the current quarter, i.e., based on three month period starting ti 4 months before the relevant quarter Provides price stability and predictability Creates disconnection with the short-term prices, specially in volatile pricing i environments Provisional Customers invoiced based on provisional prices Accounting provision in the end of the quarter based on best estimate of prices on delivery Final prices settled and adjustments made in the subsequent quarter, upon delivery Reflects market prices on delivery, i.e., closer to iron ore usage Requires end of quarter pricing adjustments between initial invoice and delivery Current Sales completed and prices settled in the current quarter Prices based on methodologies such as: Monthly averages Daily aypces prices Provisional prices liquidated within the quarter Reflects average market prices of the quarter of delivery Maintains price volatility

9 Volumes subject to provisional pricing, as reported on Vale's results release, are the ones whose delivery and thus final price settlement occur after the end of the current quarter PRICE AT DELIVERY CONCEPT Conceptual 8 Q1 Q ~ 45 days Final price settled still in Q1 Adjustment of provisional price to reflect Vale s best estimates on prices at delivery Shipments before 45 days to the end of the quarter Delivery within the quarter Classified as current Provisional pricing in current quarter (Q1) ~ 45 days Final prices settled and provision reversals impacting the next quarter (Q2) prices Shipments in the later 45 days of the quarter Delivery after end of quarter Provisional pricing in current quarter (Q1) Classified as provisional

10 Price adjustments can be estimated based on the hypothetical realized prices in the first 45 days following the quarter ended compared to the prices provisioned by the end of the quarter HYPOTHETICAL IMPACT OF PROVISIONAL PRICING 9 Hypothetical 2Q14 Quarter Impact US$t Provisional sales 1Q 4Q Q14 (6.4) 2Q14 (2.0) Volumes under provisional ii sales (Mt) 23.7 X (%) 41% Sales volumes 1Q, ex-pellets Hypothetical Adjustment X (Mt) 57.8 (US$Mi) (142) Hypothetical 2Q price impact Realized less (US$/t) provisioned price (2.0) _ Hypothetical ti IODEX realized prices¹ 111 Hypothetical 2Q sales volume, ex-pellets (Mt) 70 (US$/t) (6) Hypothetical provisioned² prices (US$/t) 117 ¹ Average of first 45 days of 2Q14 ² Hypothetical price provisioned at the end of the quarter (1Q) estimated based on IODEX of last day of the quarter (1Q)

11 Vale s sales mix is mostly concentrated in current and provisional pricing mechanisms EVOLUTION OF VALE S PRICING MIX 10 93% 7% 8% 92% 73% 27% 15% 64% 21% Lagged Current Provisional Benchmark 31% 53% 16% Provisional pricing has increased gradually Provisional sales are concentrated in the Chinese market and close to its sales distribution limit Mix may vary with changes in the geographical distribution of sales and the ramp-up p of the distribution center in Malaysia

12 Despite short term differences, over the medium term, the Platts 62% and its forward index net-off COMPARISON PLATTS 62% AND THE 45-DAY FOWARD INDEX 11 US$/dmt 160,00 150,00 Platts62 62 Média Average Platts Platts 62 em 62 todo o período Platts Platts62 62, defasado 45 days em forward 45 dias Média Average Platts Platts 62 defasado 62, 45 days em forward todo o período 140,00 130,00 Avg = Avg = ,00 110,00 100,00 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 Quarter adjustments will net off over the long term despite short term volatility

13 12 TOPICS COVERED IRON ORE PRICES AND MARGINS Pricing systems Price realization EBITDA margins The transition of the benchmark to alternative pricing systems Vale's provisional pricing mechanism and its impact on prices Evolution of Vale's pricing mix The evolution of Vale's sales mix - Vale's price goals and realization vs. the implications IODEX Overview of Vale's iron ore price realization The main drivers impacting Vale's price realization Sales products impacting Vale's EBITDA per ton Projections of Vale's future margins

14 There has been fluctuations in the difference between the IODEX and Vale's realized prices, primarily because of price volatility and the existing price mechanisms that do not correlate directly with the IODEX average IODEX VS VALE REALIZED PRICES 13 Vale realized prices vs. IODEX Difference between the average IODEX¹ and Vale's realized price US$/t 180 Iron Ore Price (IODEX) US$/dmt Realized Price US$/wmt 54 Average Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 ¹ Platts assessmet of daily transaction value for the seaborne iron ore imported and sold into China on a 62% Fe Content

15 Vale s iron ore price realization is impacted not only by key drivers such as freight, quality and pricing systems but also by the sale of ROM - an intermediate product PRICE REALIZATION IRON ORE US$/t, 1Q14 US$/t Lower prices on intermediate products Average Platts 1Q14 Humidity Freight Quality Lagged prices Current Impact prior quarter¹ ROM Other Vale price 1Q14 Pricing system ¹ Adjustment as a result of provisional prices booked in the previous quarter

16 All drivers impacting price realization have improvement trends or will have no negative impact on future price realization DRIVERS IMPACTING PRICE REALIZATION 15 Drivers Comments Impact Trends and ongoing actions Quality Fe content decreased as mines got deeper Quality premiums declined as a result of lower coking coal prices and lower productivity requirements Conclusion of the Itabiritos and the S11D project will increase quality Closure of inefficient steel capacity in China, fight against pollution and gradual increase in coking coal prices will increase quality premium Creation of the IOCJ 65% Index will help capture the VIU of high quality ores Freight Freight Brazil-China varied based on supply-demand, having reached very high levels prior to 2009 Increase in the Valemax fleet and long term shipping contracts will further reduce and provide stability to freight costs Pricing system Pricing systems affected price realization, particularly in times of high volatility Evolution of sales mix reflecting customer needs and Vale s logistic strategies ROM sales Sales of ROM (Run of Mine) products brought average realized price down Maintenance of current sales volumes of ROM as a result of its positive contribution Fonte: Vale

17 The expected increase in Vale's product quality will bring additional value which will vary depending of the price premium associated with the Fe content EVOLUTION OF PRODUCT QUALITY 16 Production and quality evolution Hypothetical EBITDA impact of increased Fe content¹ Delta Fe ( ) Value, % Fe % Production (Mt) Fe EBITDA Impact US$ Bi 1-2 $/t 2-5 Hypothetical Fe VIU Range $ / %Fe.t 2-5 SiO 2 + Al 2 O P Production volume 2018 Mt 450 ¹ Based on 2018 production volumes

18 Vale expects to capture the real value of its high quality ores through the introduction of a transparent and liquid index to price its 65% Fe ore from Carajás THE NEW IOCJ PRICING INDEX 17 The value of Vale's high quality ores has not been fully captured by the formula with the decrease in value of the 1% Fe differential As result, Vale decided to introduce the IOCJ 65% index and develop a better reference to price its high quality ores 6 1% Fe Value % Fe Index 65% Fe price (62% Index + US$/t of Fe spread) $/dmt /dmt $/ Oct-10 Aug-11 Jun-12 Apr-13 Feb Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 1% Fe value decreased with coal oversupply and steel overcapacity Increasing supply of low grade ore (58%) and environmental pressures will drive premiums for higher grade ore The IOCJ Index will allow for value to be captured beyond the 1% Fe formula Vale expects to provide liquidity to the IOCJ 65% index to generate credible and transparent price references

19 Vale's freight strategy brought stability and predictability to freight costs, reducing volatility to Vale's realized prices FREIGHT RATES AND IRON ORE PRICES US$/dmt IODEX 62% Freight New Freight Strategy

20 In 2013, the sales of run of mine (ROM) reduced Vale's realized price by about US$6/t IMPACT OF RUN OF MINE (ROM) SALES ON REALIZED PRICES Fines sales (ex-rom¹) Reported price 2013 US$/t Total Volume (Iron Ore+ROM) Mt Total Revenues (Iron Ore+ROM) US$ Bi Iron ore Revenues US$ bi ROM 28.2 X Mt FOB fines price (ex-rom) US$ ROM¹ Volume Product Price US$/t Fines (ex-rom) ROM Revenues US$ Mi X Mt ROM Price 15.2 Fines (with ROM) Delta (ROM impact) 6.1 US$/t 16.0 ¹ ROM sales includes volumes of tailing dams fines processed externally

21 20 TOPICS COVERED IRON ORE PRICES AND MARGINS Pricing systems Price realization EBITDA margins The transition of the benchmark to alternative pricing systems Vale's provisional pricing mechanism and its impact on prices Evolution of Vale's pricing mix The evolution of Vale's sales mix - Vale's price goals and realization vs. the implications IODEX Overview of Vale's iron ore price realization The main drivers impacting Vale's price realization Sales products impacting Vale's EBITDA per ton Projections of Vale's future margins

22 The additional production increases total cash generation by leveraging non-utilized installed capacity despite negatively impacting unit margins VALE'S SALES MIX GOALS AND IMPLICATIONS 21 Current Situation Implications Goal Increase total Vale currently has EBITDA some opportunistic Optimize total sales of lower Deliver lower unit cash generation margin products, margins (EBITDA/t) by leveraging leveraging its nonutilized logistics in standard operations, Blur margins of installed capacity the Southern and making it difficult to Southeastern forecast future Systems results

23 Vale has some opportunistic operations which have a positive EBITDA contribution but bring unit margins (EBITDA/t) down VALE'S EBITDA AND EBITDA MARGINS US$ bi, 1Q14 EBITDA US$/t 22 Third party ore Corumbá operation Miniminas operation ROM High Silica Tailing dam fines Iron ore adjusted EBITDA (ex-lower margin operations) Lower margin Iron ore Other Vale operations EBITDA¹ businesses² EBITDA ¹ Considers 57.8 Mt of iron ore Volume ² Includes Ferroalloys, Coal, Base Metals, Fertilizer and Pellets

24 Vale's price realization will increase with some ongoing initiatives CONSIDERATIONS FOR PROJECTING FUTURE MARGINS 23 Not Exhaustive Low margin operations are in most cases opportunistic and will not be expanded Future expansions will be low cost S11D expansion at US$15/t Production increase will be of higher quality products, improving price realization S11D, Itabiritos and other potential new mines will increase product quality Additional environmental licenses will support quality increases Pollution trends may increase Fe content premiums Malaysia distribution center will allow for additional optionality in price realization

25 24 DOCUMENT CONTENT Iron ore prices and margins Capex Cash Flow

26 Vale's CAPEX will reduce with the conclusion of ongoing projects CAPEX PROFILE US$ bi 25 Project execution Sustaining capex Approved projects only

27 Sustaining capex has been rationalized and will only increase marginally driven by the completion of new projects CAPEX PROFILE SUSTAINING CAPEX US$ bi 26 Iron ore Base metals Coal Fertilizers

28 S11D investments will peak in 2015, reducing sharply by 2018 CAPEX PROFILE PROJECT EXECUTION 27 US$ bi Carajas expansion ex S11D S11D Moatize II/ Nacala Itabiritos Salobo II Others

29 The capex post-2018 is expected to be in the range of US$ 8 to 10 billion PERSPECTIVE ON VALE'S FUTURE CAPEX (POST-2018) US$ bi Sustaining Replacement Projects Discretionary Total

30 Other Itabiritos projects are under study OVERVIEW OF VALE'S ITABIRITOS PROJECTS UNDER STUDY 29 Itabiritos projects under study Projects Status Capacity Mtpy Fábrica FEL 2 26 Jangada FEL 2 15 Mariana FEL 2 27 ITM S Pico FEL 3 27

31 30 DOCUMENT CONTENT Iron ore prices and margins Capex Cash Flow

32 There has been common mistakes, some conservative projections and other opportunities not considered in most analyst reports ASSESSMENT OF VALE'S CASH FLOWS 31 Topics Comments Common mistakes Divestitures Disregard of R$ 1.5 billion received in April 2014 R$ 709 million from sales proceeds and R$ 803 million from the settlement of an intercompany loan with VLI Additional R$ 2 bi yet to be received Fiscal credits Outstanding tax credits close to US$ 1.5 billion from the REFIS settlement by the end of 1Q14 Conservative projections Capex No material decrease in capex in the years following the completion of ongoing projects Costs Unit costs not trending significantly down with the completion and start-up of S11D Volume Conservative projection of volumes for the coming years Working capital Potential ti for reductions in working capital not considered d Opportunities Trapped Inventory Ability to haul about 10Mt of iron ore stranded in the Southeastern System with the conclusion of the Pico- Fabrica road Further Divestitures Potential cash generation with additional divestments

33 32

34 33 IO PRICE INDEXES 62% Fe INDEXES 2014 $/dmt LAST YTD Q3 JUL Q2 JUN MAY APR Q1 MAR FEB JAN PLATTS 62% Fe IODEX 96,00 110,75 95,58 95,58 102,60 92,67 100,80 114,24 120,38 111,79 121,24 128,15 TSI 62% Fe 96,50 110,81 95,72 95,72 102,66 92,74 100,56 114,58 120,43 111,83 121,37 128,12 TSI 62% Fe LOW ALUMINA 97,20 111,83 96,62 96,62 103,71 93,78 101,64 115,60 121,42 112,73 122,42 129,14 METAL BULLETIN 96,51 111,04 95,55 95,55 103,02 92,98 101,09 114,90 120,55 111,55 121,41 128,73 ARGUS 62% ICX 95,25 109,31 77,44 77,44 101,36 91,46 99,45 113,08 118,72 110,00 119,71 126,50 65% FE INDEXES - ALL ORES 2014 $/dmt LAST YTD Q3 JUL Q2 JUN MAY APR Q1 MAR FEB JAN PLATTS 65% 105,25 119,75 104,79 104,79 110,04 100,73 107,53 121,74 130,91 119,61 132,38 140,81 TSI 65% 104,40 120,47 103,68 103,68 111,96 100,78 109,89 125,10 130,60 122,10 131,61 138,14 ARGUS 65% 103,80 119,46 102,73 102,73 109,22 99,39 107,19 120,99 131,32 118,15 134,35 141,60 65% FE INDEXES - IOCJ ONLY 2014 $/dmt LAST YTD Q3 JUL Q2 JUN MAY APR Q1 MAR FEB JAN Metal Bulletin 65% index¹ 105, ,72 104,39 104,39 111,02 101, ,89 123,94 131,57 120,46 133,63 141,69 FORMULA² 101,10 116,82 100,68 100,68 108,19 97,88 106,28 120,31 127,02 118,31 127,84 134,94 ¹ Metal Bulletin: 62% Fe MBIO Index + 65% Fe IOCJ premium ² 62% Fe INDEX + Fe spread (IOCJ Fe-62) x 1% Fe value for the indicated period Sources: From Platts: Steel Markets Daily and Metal Alerts From TSI: The Steel Index Daily Report From MB: MBIO daily index Bloomberg