PT Vale Indonesia Tbk (INCO) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to Vale's conference call to discuss third quarter 2022 results. [Operator Instructions] This call is being simultaneously translated to Portuguese. [Operator Instructions] As a reminder, this conference is being recorded, and the recording will be available on the company's website at vale.com at the Investors link. This conference call is accompanied by a slide presentation, also available at 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 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 Salles Bartolomeo, Chief Executive Officer; Mr. Gustavo Pimenta, Executive Vice President, Finance and Investor Relations; Mr. Marcello Spinelli, Executive Vice President, IR; and Ms. Deshnee Naidoo, Executive Vice President, Base Metals. First, Mr. Eduardo Bartolomeo will preside the presentation on Vale's third quarter 2022 performance. And after that, he will be available for question and answers. It is now my pleasure to turn the call over to Mr. Eduardo Bartolomeo. Sir, you may now begin.

Thank you very much. Good morning, everyone. I hope you are fine. I'd like to start guiding you through our main accomplishments in the quarter. We have made significant progress with regards to operational stability. In iron ore, our production was close to 90 million tons, 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 ton. 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 megatrend. 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 CCM 1 in Sudbury. The project will nearly double our production at Copper Cliff mine. In Brazil, the reconstruction of the Onça 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 Vale 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 to substitute diesel in our operations. We just received 2 electric mining trucks, with 72 tons of capacity. We are not only cutting emission 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 San Luis. To further move our electricity consumption towards clean energy, Sol do Cerrado solar project is coming online this month, as I mentioned and will ramp up until July 2023. The project has a capacity of 766 megawatt peak and will 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 needs of society but also because sustainability is crucial for the future of mining. Our society expects the mining industry to leave a 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 technology such wind turbines, solar panel and electric vehicles will boost demand for the metals needed for these technologies. For instance, producing battery 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 1 nickel in Canada is the lowest CO2 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 BFBOF route. Our plants are under construction in Brazil, with capacity of 6 million tons per year, and the startup is expected for the first half of 2023. With those differentiators, we are a partner of 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 Minas Gerais. The structures also received declaration of stability, DCEs , which are tested 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 integral reparation 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 Vale. 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 soon to our Q&A session. Thank you. The floor is yours, Deshnee.

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 Onça Puma second furnace project this quarter, which will see our nickel production grow by 15,000 tons on average per year in South Atlantic, and are making progress at PT Vale Indonesia on the approval to establish the Pomalaa, 120,000-ton JV with Zhejiang Huayou Cobalt and Ford Motor Company. Looking at our project's delivery, we officially opened the CCM South Mine refurbishment project earlier this month and at 98% physical progress at Salobo 3. 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 plant and some corrective maintenance work in H1, specifically, the furnace 4 rebuild at PT Vale Indonesia and the SAG mill maintenance at Sossego, both safely concluded last quarter. On the nickel sales, we have an 8,000-ton difference to production this quarter. Some tons were retained to meet quarter 4 commitments given our scheduled current maintenance at Onça Puma, Long Harbour and Matsusaka. And linked to global supply chain constraints, we faced challenges to hire container ships at Onça 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 than 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 client 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 whilst we ramp up our projects. This means some portion of our production originated from processing third-party material. This quarter alone, we produced 6,000 tons of nickel from purchased feed, while in quarter 2, we had produced 3,000 tons. 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.

Thank you, Desh. Good morning, good afternoon. Good to hear you all again. I'll start my presentation, give you some colors about our production in Q3 and also Q4. We are back to 90 million tons. That's good news. After some headwinds with the heavy rainy season in the Q1 and the moisture problem in Carajas in Q2. We increased 10 million tons 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 will give you an update in some minutes. Production guidance remains 310 million to 320 million. You may notice the gap between the sales and production. It is the same pattern of previous years related to the seasonality of production and the lead time to reach China. We may expect a higher sales comparing to production in Q4. Now moving to the next slide, I'll give you now some update about the production plan, and we had some important progress. North range Gelado project, we already started the commissioning of the first phase, and we expect the ramp up next year. N3 product, we got the previous license, the LP, after some delay. We are really working close to the agents to get the 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 cave, 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 body knowledge, we addressed the small jaspilite vehicles. 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 jaspilites. Until that, we'll have the plus 10 coming online in December, and we expect to offset that problem. Plus 20 is under construction and on time. Southeastern System. First phase of Itabiruçu raising works is done, mission accomplished. That will bring flexibility to Itabira to improve the quality. It is a hybrid operation with dams and dry stacking tailing disposals. And this is a point of attention. When you have dry stacking, we need continuous expansion of area to stockpile, and that rely on continuous licensing process in Minas Gerais. In Brucutu, Torto construction is ready for now almost 3 months, but we are still waiting for the final permits. That's a new regulation that came after Brumadinho that increased a lot of steps in multiple agencies approvals related to the emergency plan. It's taken 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 assets 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 their 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, but 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 the necessity of high-grade ores. We are in a silent transformation side at Vale. 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 premiums decreased due to the negative margin in the Chinese market, driven mainly by the downstream demand, the dry steam sentiment demand. And the pellet premiums stayed in a high level, with a strong demand for the direct reduction pellets. I'll be here for further questions. Now I hand over to Gustavo.

Thanks, Marcello, and good morning, everyone. Let me start with our EBITDA performance for the quarter. As you can see, we delivered a $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 start to see the benefit of the efficiency program we launched in 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 ton, mostly driven by higher production and a positive effect from the Brazilian real depreciation. Another important component of our all-in cost structure is freight, which went up from $21.3 per ton to $22.40 per ton. This is explained by 2 factors. One is the seasonally larger spot affreightment following the strong production in the quarter as CFR shipments increased over 25%. Some of these cargoes are still in transit and should be recognized as sales in Q4. The other is the lag effect. It takes about 30 days for the bunker cost to be recognized as cost of goods sold. Therefore, 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 products also play an important role in our all-in cash cost. The average premium decreased by $0.7 per ton despite the record pellet premiums contracted in Q3, and an improved quality mix within our product portfolio. This, as Marcello explained, is a consequence of lower market premiums for low-end alumina products and the absence of seasonal dividends from JVs. All in all, our EBITDA breakeven closed at $51.20 per ton. 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 outstanding 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 and tax and by about $4 billion of cash returned to our shareholders, reinforcing our continued discipline on capital allocation. Now moving to the next slide. This quarter, we reviewed the expanded net debt concept 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 fees, tax renegotiation and the dam decharacterization program. These obligations are distributed over a longer period of time and are operational in nature as compared to the Brumadinho, the Mariana provisions and obligations. This change does not affect our targeted $10 billion to $20 billion expanded net debt, which we continue to see as a very adequate through-the-cycle leverage ratio. So before opening up for Q&A, I would like to reinforce the key takeaways from today's call. We delivered a strong operational quarter across all of our products. On derisking, we have eliminated 5 upstream dams this year, reaching to a structure of 40% since the beginning of the program. We announced the startup of the Copper Cliff Complex South Mine project in Sudbury and the approval of Onça Puma's second furnace implementation in Brazil. They are important milestones as we position base metals as a critical supplier for the energy transition. And finally, we remain highly committed to a disciplined capital allocation as advanced 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 Instructions] And our first question comes from Leonardo Correa with BTG Pactual.

So my first question on base metals. To Eduardo, the unit is posting results, which are, I mean, below what the company had been doing over the previous years, right, Eduardo, I mean. Looking at the annualized EBITDA figure for base metals, now the number is slightly above $1 billion, right, in EBITDA. So I just wanted to hear more about the -- let's say, this 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 Vale 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 tons of production now, right? Your nameplate capacity is 400 million. The market discusses whether 400 million is achievable and -- 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, right, December 7. But can you just help us understand exactly how the medium-term path on Vale is in terms of production increases? And let's say, what is the more realistic long-term targets for Vale's production?

Thanks, Leo. Thanks for the question. I think I'll try to separate. Maybe I'll bring Deshnee to help as well. But anyhow, let's put this way. It's not fair to analyze a quarter like that because, as Deshnee mentioned, there was 1 -- like some carry from 1 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 or largely hangover from COVID, a lot of maintenance 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 production. We've just reached, I think, the highest quarter since I was there, I think, since '19. So pretty well. Pretty comfortable with the nickel. Within the guidance, I don't see issues there. As Deshnee say, we have to replace the feed. We're doing that very well in Voisey's Bay. So that's not for me a question. On the copper, yes, more challenges than we expected in Salobo, but Sossego is back on track after the long -- the very long maintenance 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 needs 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-world jurisdiction like Canada. Brazil, in there, we know the whereabouts and Carajas with the growth projects. Salobo, I've been there last month. It is 98% complete, Salobo 3. So our growth plan is there. And people that has understanding of value know where the value is. So I don't think it changes perspective. Then they're not buying past performance. They're buying reserves and resource and future performance. And by the way, that's why we believe the ring-fencing the business, bringing a partner. We will speed up this performance that you were asking us to deliver, and we are 100% with you on that sense. But the value is above and beyond that. So -- and by the way, of course, you cannot annualize 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're very, very, 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 and unique ones in the world. I'll pass it to Spinelli to go over the iron ore.

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 System. 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 the 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 gradually this volume. So we'll give you some numbers and colors in the Vale Day.

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

Yes. 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 [indiscernible] from the market to try and protect prices.

Caio, thanks for your question. 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, it's 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 path goes back to the execution of our operating assets, the execution of our growth plan. Within that, we could see a partnership being 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 the 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're not selling base metals. Base metals is the best assets in the world. Vale will 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 investors -- Portuguese. I feel it's an optionality. It's not the one that we believe that's going to be [ happy ] now because of the previous question. 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 course, 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 comment on the value over volume question.

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 we 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 specifics there.

Caio, thank you for the question. And I'll split this -- the answer in 2 parts. So the first one, Canada is also true to Leo from BTG. Value over 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 this is 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 the -- to our production plan is related to quality. So we need to address that mid- to long term. Long term, we have a high demand for high-grade ores, even agglomerated products with pellets or briquette. That's a trend -- that's the volume we want focus on. And every day, Caio, we assess our supply chain. We have the flexibility to hold low-grade ores, concentrate later in China, concentrate 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, blend it or concentrate. We are not selling in negative margins.

Our next question comes from Amos Fletcher with Barclays.

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 Onça Puma. The CapEx for the second furnace seems to have gone up quite a bit to $555 million against $320 million you spoke about previously. Can I again ask why is that?

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. $200 million of 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 ton, and that led to a very high price. So when we consumed that material, about 60,000 tons 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 tons 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 a number of fuel that came into my ops services. So on the go forward, Amos, definitely not seeing those numbers. And we should see the numbers from quarter 1, quarter 2 somewhere around the middle of that materializing. On the next question on Onça 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 finalized the estimates, we had a very high inflationary ticket coming into these costs. And we approved it with -- in parallel team working towards relooking at some of those estimates. So inflation is a big factor there. In addition, I mean we 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 40,000-odd tons. So returning the complex to 40,000 gives us a significant cost benefit, and we've seen that at least a 15% reduction in unit cost once the project ramps up. I hope that gives you sufficient color. Thank you, Amos.

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

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 were a little bit surprised at least relative 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 iron ore unit 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, obviously, tremendous efforts as well done by your partner, Samarco, in Mariana. But to finally really move ahead from the situation, I think the Mariana situation needs to end. So if you can share any colors there will also be very useful.

Thanks, Carlos. So I'll take both. On cost, yes, we've shown some improvement quarter-over-quarter $1.5 per ton. 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 come in 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 reduce. 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 costs, being this -- and bunkers. So we are seeing some impact on it. But we'll share with more details, during 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 the $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 reengaging and reaching an agreement. I think for all parties here, including ourselves, a solution makes sense, and a 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.

Our next question comes from Rafael Barcellos with Banco Santander.

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?

Thank you, Rafael, for the question. Well, let's talk about S11D. The nameplate for S11D is 90 million tons. 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 stage here, we have the small jaspilites already done. So midterm, we expect to solve the problem only by 2025. But we have coming online the plus 10, so plus 10 can offset this nameplate difference between what we are producing today and the nameplate. So that will bring a 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 still there, we have an improve coming from the plus 10. And the -- in 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 licenses. It is delaying, so it forces us to move more waste, so increase your cost and you decrease your production volume. So what we have to do there, keep the path to reach the license to bring the license. And three, it's a body, not a big one, but it will be important. We already got now the LP, the previous license. So we expect to have the final license by the end of next year. So we bring volumes in 2024. And we called it -- this is a small license. So every time we need to have a suppression in the mine or to reduce the radius close to a cavity that we redesigned the cave that we have, we'll have to keep the [ IC and BBU and the Berma ] agents together to speed up this. So we've been doing this, but it is 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. Bring Gelado now this year, N3 and this small license, try to be as fast as we can, but in the right planning.

So Rafael, Gustavo here. Just to close on your second question. Look, I think the objectives were, one, 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 to 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 were 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 and focused on cash return to shareholders.

Our next question comes from Rodolfo Angele with JPMorgan.

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. You 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 -- or tougher? Or what exactly is the issue? And how is it that it's going to be overcome?

Thank you, Rodolfo. Well, 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 they 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, hence, to help them to speed up the process to define the license as a whole. So the mine plan considered that, but your mine plan -- if your mine plan considered 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, consider that it's tougher. Yes, it's one point. it's after Brumadinho, definitely yes. And don't forget that it's a common, I can say, wave of the environmental props in every place in every world, is getting more sophisticated. We bring -- we need to bring more studies. And this is 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.

Our next question comes from Daniel Sasson with Itaú BBA.

My first question, maybe to Eduardo. If you could comment a bit, Eduardo, on how you think the entrance of Cosan into your 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 Cosan, 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 Gustavo or Spinelli, if you could comment a bit on your expectations for China now that the Party Congress has finished, and Xi 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.

Thanks, Daniel. Great question because I think we see Cosan moves as a validation of our investment thesis, right? When you look at Cosan with their record -- their solid track record that they have on creating growth, people that have 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 sense that -- as I mentioned in the beginning of my speech, we are 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, within 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 then Gustavo, right, you want to comment a little bit because what's about confirmation, right?

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 importantly, giving us an upgrade on the ESG stats. So I think this is one external -- very important external validator seeing all the progress that we've done over the last couple of years, and you've seen Cosan 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.

Okay, Daniel. Well, now about China. So let's split this in short term and mid- to long term. So best phrase for that is cautiously optimist. Every time, Gustavo says that. And coming from the Party Congress, we have some mixed fillings. 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 declining is at least being well controlled. And the good side for that of the Party Congress is the infrastructure and manufacturing, or you can see the FAI. So they are betting 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 expect. We expect a 5% growth for the GDP next year. We see a decline for properties in an upside for infra. And as a whole, we see this year, the CSP, the electricity production in [ 1.020 billion tons ] 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 party said stability, we -- it means for at least 4% to 4.5% GDP growth in the coming years, CSP around 1 billion. It's 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 thesis remains intact.

Our next question comes from Tyler Broda with RBC.

I just had a question. The West III project, you mentioned that that's been halted now. That was the blending facilities in China. I guess on a wider basis, you're at -- according to our analysis, you'd be at record levels of inventory at the moment. I mean how does that -- does canceling the West III 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 a 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?

Thank you, Tyler. Well, we -- if you see the numbers of inventory in China, actually, it is low. So we're hitting now 130 million tons as a whole in China, and our inventory is in the low level also. So we are confident that we don't have any problem to raise any inventory even for our operations in 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 III project, that's an expansion in Shulanghu Port and the main entrance of the Yellow Delta River. So this is it's more related to a Chinese strategy to reorganize their -- the establishment of the CMR, the china Mineral Resources. 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 totally 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.

Thanks, Spinelli. Tyler, I think I'll ask Gustavo help me. He is 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 perceives -- we want partners, not selling. We want people that perceives the same value that we do perceive in the asset. 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.

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. They are very well positioned for 2 of the most relevant macro trends of our generation, right, the mobility/EV, 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 we 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.

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

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. It was a solid one. In terms of production, costs came in line. Freight, as Gustavo mentioned, eventually disappointed a little bit, but not because it is fact-based, is a question. It's just a moving area. 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 much better, but I think we're in the right path. 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 rate is another 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 3. We started Onça Puma, Voisey's, Carajas, as Spinelli went on discussing how we can improve and accelerate that. But the assets, the resources 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 are. Humanity has to face the climate change challenge. And Vale, I believe, without any doubt, is one of the best miners and the best-positioned miners in the world because we're 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 Brumadinho, it's not a sprint. It's a marathon, but it's a marathon that we still have a lot of gas to get it to the final land. And I think 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.