Vale S.A. (VALE3) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to Vale's Second Quarter 2026 Earnings Call. This conference is being recorded, and the replay will be available on our website at vale.com [Operator Instructions] We would like to advise that forward-looking statements may be provided in this presentation, including Vale's expectations about future events or results encompassing those matters listed in the respective presentation. We caution you that forward-looking statements are not guarantees of future performance and involve risks and uncertainties. A the information on factors that may lead to results different from those forecast by Vale please consult the report to valid with the U.S. Securities and Exchange Commission, the Brazilian [ Cosadaores Mobilaris ] and in particular, and the factors discussed under forward-looking Statements and Risk Factors in Vale's annual report on Form 20-F. With us today are Mr. Gustavo Pimenta, CEO; Mr. Marcelo Bacci, Executive Vice President of Finance and Investor Relations, Mr. Rogério Nogueira, is Execute Vice President, Commercial and Development; Mr. Carlos Medeiros, Executive Vice President of Operations; and Mr. Shaun Usmar, CEO of Viva Base Metals. Now I will turn the conference over to Mr. Gustavo Pimenta. Sir, you may now begin.

Hello, everyone, and thank you for joining Vale's Second Quarter 2026 Conference Call. First, I would like to briefly reinforce our strategic direction and ambition to create superior value for our shareholders. In this context, we have been consistently focused on our key priorities of operational excellence, disciplined capital allocation and the advancement of highly accretive growth projects, particularly in copper and iron ore. Our objective is to build a business that is resilient through the cycle competitive under different market environments and well positioned to deliver sustainable returns. Despite the uncertainties that continue to shape the global landscape, I'm very confident about Vale's future. And what gives me that confidence is not only the quality of our assets, but also the consistency in each of our teams are executing and delivering results. Based on the strong performance in the first half of 2026, yesterday, our Board of Directors approved $1.7 billion in dividends and interest on capital to be paid in September. The Board also approved the extension of our share buyback program for up to 2.3% in of our outstanding shares, reflecting our positive view on Vale's long-term outlook and our continued commitment to delivering superior returns to our shareholders. Let me now turn to the highlights of the second quarter performance. We once again delivered solid year-on-year results across all commodities, reinforcing our confidence in achieving all production guidance for the year. In the particular case of BM, we have now narrowed the guidance ranges for copper and nickel, implying higher midpoints on the back of continued strong operational performance in both businesses. Starting with iron ore in Q2. Production reached the highest second quarter level since 2018, supported by the continued ramp-up of the Capanema and Varden Grande projects as well as the record output at S11D. Sales volumes also increased by 3% year-on-year. In copper, we delivered our strongest Q2 production in the last 9 years with a 6% year-on-year increase while sales volumes grew 10% in the same period. This growth was driven by record second quarter output at [ Salobo ] and a very strong performance at sustained. And Nickel, we also achieved solid results. Production increased by 4% year-on-year, while sales volume grew 7%, supported by additional volumes from [indiscernible] Looking ahead, I would like to highlight 2 important milestones at [indiscernible] that will further enhance the performance of this world-class asset. First, I'm very pleased to announce the start-up of the [indiscernible] plus 20 project with the commissioning of S11D's second long-distance conveyor belt in July. This project, which also includes mine and plant expansions will provide greater operational flexibility to the site. Second, in the fourth quarter, we expect to start commissioning the compact pressure project which is designed to address operational constraints related to just the light ore at the [indiscernible] mine, helping improve production consistency and strengthen asset reliability. Together, these projects will deliver 20 million tons of incremental capacity at [indiscernible] strengthening Vale's competitiveness and expanding our high-grade product portfolio. Turning now to our corporate growth story. Last year, we launched the new Carajas program with the vision of accelerating the development of the strategic projects in one of the world's most attractive mineral provinces. Today, I'm pleased to announce the earlier startup expected for the Bacaba project. Construction is progressing ahead of schedule. And as a result, Bacaba is now planning to begin commission in Q3 2027. Significantly ahead of the regional first half 2028 schedule with 50,000 tonnes capacity but open the first of 6 accretive growth projects that will support our ambition to double copper production to approximately 700,000 tons per year by 2035. Our second project, the Salobo course cortical flotation is expected to be formally announced soon and represents another important step in unlocking the potential of our unique endowment. As we continue to execute our project portfolio with below average capital intensity and compelling rates of returns, we believe investors will increasingly recognize the significant upside embedded in our copper platform. Before moving on to our financial performance, I would like to briefly talk about innovation, a key enabler of Vale's long-term strategy. As we discussed at the routes presentation, our operational results and growth projects are the outcome of consistent execution and a relentless focus on performance. Having said that, we continue to focus on innovation and on developing new technologies that increase our efficiency, enhance safety, reduce environmental impact and strengthen our competitiveness. This is our vision for the mining of the future, a strategic agenda built around 5 key pillars outlined here in this line that will help shape Vale's journey. To provide greater transparency on this agenda, we recently published Vale's first research developed and innovation report, showcasing several initiatives that are already transforming the way we operate. Among that, I would highlight the progress we are making with the model plant in Itabira and our autonomous mining initiatives at [indiscernible] Capanema and [indiscernible] which demonstrates how innovation is being translated into tangible operational gains. I encourage everyone to explore this report and learn more about how innovation supports our strategic agenda and creates opportunities across the businesses. With that, I'll hand over to Marcelo Bacci to discuss our financial performance. I will return later for my closing remarks before the Q&A session. Marcelo, please.

Thanks, Gustavo, and good morning, everyone. In the second quarter of 2026, our pro forma EBITDA reached $4.1 billion, representing a strong 19% increase year-on-year. despite continued pressure from external cost factors. This performance reflects another quarter of solid execution across our businesses, supported by higher volumes, improved commercial performance and better price realization. At Vale Base Metals, EBITDA totaled $1.3 billion, increasing nearly 80% year-on-year. This performance was driven by stronger realized prices and solid operational execution. In iron ore, EBITDA exceeded $3 billion, supported by higher realized prices and increased sales volumes. These positive effects more than compensated for the higher freight costs and the appreciation of the Brazilian real. Overall, this quarter's numbers demonstrate the resilience of our business and our ability to consistently deliver a solid operational performance even in a more challenging external environment. Now let me turn to the details of our cost performance. In the quarter, our C1 cash costs, excluding third-party purchases, was $24.1 per ton, an increase of 9% year-on-year. The all-in costs reached $61.6 per ton, 18% higher year-on-year. The higher costs were mainly driven by external factors. The appreciation of the BRL impacted both C1 costs and expenses, while diesel and freight costs also increased during the quarter. As I mentioned in our last call, while external variables can introduce volatility into our cost structure, they also reinforce the importance of our relentless focus on productivity and operational excellence. The results of our efficiency program, combined with higher production from low-cost assets such as S11D demonstrate that we're moving in the right direction. Together, these initiatives contributed to $0.50 per ton reduction in C1 cost year-on-year, strengthening our structural competitiveness throughout the cycle. In addition, our hedging program helped to reduce the impact of our external variables in our results. Our Brent oil hedging program resulted in approximately $100 million benefit equivalent to $1.6 per ton. Considering this effect, our all-in costs were $60 per ton. If oil price volatility persists, this strategy will continue to provide cash flow support in the second half of 2026. Given the increased volatility in external variables, we have decided to update our 2026 iron ore C1 and all-in cost guidance. The revised guidance reflects an average BRL exchange rate of 5.13 compared to 5.60 in our previous guidance as well as an average Brent oil price of $86 per barrel versus $68 previously assumed. As a result, we now expect C1 cash costs, tax third-party purchases to range between $22.5 and $23.5 per ton in 2026 compared with our previous guidance of $20 to $21.50 per ton. Roughly 70% of this increase is explained by the combined impact of external effects such as FX and diesel costs. In the same way, we're also updating the all-in cost guidance to $58 to $62 per ton. Compared with the previous range of $52 to $56 per ton with around $5 per ton related to oil, FX and iron ore premiums. That said, despite this more challenging external backdrop, we remain fully focused on the variables within our control. our teams continue to advance a robust pipeline of efficiency and productivity initiatives across the business. These efforts are targeting further gains in asset utilization maintenance optimization, supply chain efficiency and procurement. While these initiatives do not fully offset the impact of FX and oil prices in the short term, they are essential to improving our structural cost position over time. combined with the ramp-up of our low-cost assets, they will continue to strengthen our competitiveness throughout the cycle and support long-term value creation for our shareholders. Turning now to value-based metals, both copper and nickel delivered another quarter of strong cost performance, reflecting solid operational execution across our assets and a more supportive market environment. In copper, hauling costs reached a negative $300 per ton, an improvement of $1,700 per ton year-on-year, once again in negative territory. And nickel holding costs declined 17% year-on-year, reaching $10.30 per ton. Looking ahead, we expect Vale Base metals to continue delivering operational improvements beyond the contribution from byproduct prices. As a result, we are lowering our cost guidance for the year. For copper, we now expect all-in cost to range between $0 and $500 per ton compared to our previous guidance of $1,000 to $1,500 per ton. For nickel, we now expect all-in cost to range between $10,000 and $11,500 per ton compared to our previous guidance of $12,000 to $13,500 per ton. This revised range reflects the operational progress we continue to deliver and reinforce the value creation potential for value-based metals. With that, let me move on to our cash generation. Our free cash flow totaled $1.5 billion in the quarter, supported by our strong EBITDA performance and by the settlement of our currency and oil hedging programs which contributed a positive cash impact of $337 million. CapEx totaled $1.1 billion, reflecting our continued capital discipline and the benefits of the efficiency initiatives we have implemented across the business. As Gustavo mentioned, consistent with our commitment to shareholder returns, our Board of Directors approved $1.7 billion in dividends and interest on capital to be paid in September. In addition, we bought back $140 million in shares during the quarter, bringing total repurchases to $214 million year-to-date. Building on this track record, our Board also approved a new share buyback program of up to 100 million shares over the next 18 months, equivalent to 2.3% of our outstanding shares. These decisions reflect our confidence in the strength of our business, our ability to generate cash throughout the cycle and our continued commitment to creating value for shareholders. With that, let's move to the next slide. driven by our solid cash flow generation, expanded net debt closed the quarter at $16.7 billion, a reduction of over $1.1 billion from the previous quarter. We expect expanded net debt to continue converging towards our reference level of $15 billion over the coming quarters. As we approach that level, we create additional flexibility for shareholder remuneration, while maintaining the financial discipline and balance sheet strength. Before handing back the call to Gustavo, I would like to reinforce that we remain focused on strengthening our competitiveness across all of our businesses. despite the external headwinds facing the industry, our priorities remain unchanged. We continue to advance productivity and efficiency initiatives, improve asset performance, optimize our cost structure and maintain a disciplined approach to capital allocation. Together, these actions are strengthening Vale's position through the cycle, supporting consistent cash generation and reinforcing our ambition to lead value creation in the mining industry. Gustavo, please.

Thanks, Marcelo. Before we move to the Q&A session, let me go over the key takeaway from today's call. First, we continue to deliver strong operational performance across our businesses, achieving record production and higher sales volumes, we forcing our confidence in meeting our guidance for the year. Second, we are accelerating our pipeline of high-return growth projects with the startup of [indiscernible] plus 20 project and the earlier a start-up expected for [indiscernible] this demonstrates our ability to advance initiatives that will support valid growth and generate significant value to our shareholders. Third, we remain focused on enhancing cost competitiveness across the company by improving operational reliability, increasing efficiency and strengthening resilience through the cycle. At value-based metals, we continue to capture the benefits of the curve out. Operational performance is improving consistently delivering gains not only in production, but also in costs. I'm very confident that we will continue to make meaningful progress over the coming quarters as we build a leading global energy transition metals business. Fourth, we continue to advance our mining of the Future agenda, leveraging innovation and technology to improve safety, productivity and sustainability while creating new opportunities across the businesses. And finally, our commitment to shareholder returns remain unchanged, supported by solid operational results and a strong balance sheet -- we continue to allocate capital responsibly through dividends and share buybacks while also investing in Vale's future. Now let's open for the Q&A session.

[Operator Instructions] Our first question is from Rodolfo De Angele from JPMorgan.

Okay. Thank you very much for the presentation. So my 2 questions are the following. First, on the iron ore business, we noticed that the company was very successful in its [indiscernible] strategy. Being able to perform and pay less than -- more than $10 lower than the benchmark right rate to China. So I wanted to hear from you what you expect looking forward because that's a substantial per gain. So that's my first question. And the second we are more and more talking about these metals when we discuss file, and there is, of course, a lot of questions around the growth profile. So it's very interesting to hear that you have been able to anticipate Bacaba the first of 6. So I just wanted to ask if you could comment a little bit on what was learned, what was the reason for that? And what does that mean for the other 5? Should we expect a similar performance. So if you could comment on how much urge the key projects on that front are that will be very helpful. So those are my 2 questions.

Rodolfo we will start with Rogerio and then Shaun can contribute with the VBM question.

Thank you, Gustavo. Thank you, Rodolfo. Obviously, what we expect looking forward will depend a lot on oil prices, but we do have a hedge program also in place. But let me I give you a little bit of a background on our freight strategy and why we've been successful, okay? In general, we have about 75% of our freight portfolio secured under long-term prime charter contracts, which gives us a stable cost base. But for example, in 2026, we have been reducing our spot exposure effectively through mini COAs, which are short-term contract of [indiscernible] and also using derivatives market for freights. The freight forward agreements. So with those 2 instruments, we've been able to decrease the exposure that we have of 25% to about 10%, actually less than 10%. And this is also what we're doing for the years ahead for 2027, 2028, we're seeking opportunities to get into the market and reduce that exposure, okay? So this is on the time charter. And also on the oil, on the brand, we have a hedge program in place to reduce the volatility and the impact of freight in our costs.

Yes, Rodolfo, it's Shaun. On your Bacaba and projects question, if I take you back on our journey, I think very simply, the restructure of we're setting us up for execution. So if you remember [ Lay24, ] we moved to the centralized organizational model, really simplified a completely changed approach to capital allocation project studies and project execution. And so what that has meant and I'll direct you to both some of our Bacaba presentations and indeed, the Values Metals Day that we did a few months ago where we've got some materials there to just show the evolution on the approach. The rates of return and hopefully, the market is going to appreciate. I think every quarter, I've been with this team -- this team has excelled and has delivered on operating guidance or exceeded it. This is, I think, our 78th consecutive quarter, both the table states and then on the projects, it's earning the credibility which hopefully has led us to announce enhances in order to ensure that we can start seeing this being captured by the market because it simply is not. So on Bacaba, we started that project in, I'd say, roughly a mid-teen return before a restructure with the difference in approach, both in terms of breaking down sellers, simplifying and focusing on our execution model. What we found there was we were able to, as you saw in [indiscernible] materials a while ago, substantially reduce the capital, a couple of hundred million dollars, nearly 50% reduction. And as you're seeing now, we're able to accelerate this now in actual execution. We're nearly 40% progressed already. So we're able to move that forward. And the returns that we had previously at about 50% are now closer to 70%. And so the point is, it's 1 thing for mining companies to talk about it, but the question is what can we make happen and so when you look at Bacaba is the first cable for the rank, the real focus has been on what are the things that we can intelligently do to identify bottlenecks, accelerate our execution, do so safety, which we've been doing and indeed continue to deploy that model in a very direct way to the other 5 as Gustavo has shown. I'll direct you to a few quick things just as you look to the future and the material that I've mentioned for you. This is a fundamental change in our complete regional focus on copper growth in that area. We will update the market again later as we've advanced in our life of business planning. That is started with everything from capital allocation on our drilling, our project execution and our operational delivery where again, we've hit some new records at [ Susego. ] And obviously, [indiscernible] continued its good performance. So very quickly, we went from 30,000 meters of drilling to 60 last year. We've guided to 120,000 meters this year. We're already at 140,000 meters that we're targeting and Bacaba specifically, around the pit, we're seeing extension potential tirade at bit and at the side. We were targeting 10,000 meters already at 22,000. So I give you that context because there's value beyond not just on this project, I think we guided to about a 30% capital reduction, well below industry capital intensity. And at some point, I would like to think that the analysts and investment community would look at our materials and start actually building some of this in, just given our footprint and our established track record in the area. This approach does translate across to, I think, the risk and the confidence in our ability to deliver on our pipeline is over mentioned.

Our next question is from Daniel Sasson from Itau BBA.

My first question is actually a follow-up on Rodolfo's question. Shaun, if you could -- I mean, the 6 months you are basically being for Bacaba 6 months ahead of the regional schedule that pretty significant. Can you -- is it already possible for you to the differences that you made on the planning of this project that likely to be brought forward could actually be replicated to similar projects that you have in your pipeline or your ambition to WR copper position by 2035. I mean is it just seem to sell? Or do you think that value reaching its goals ahead of what you've communicated to the market in other occasions. And my second question, maybe to Bacci. Marcelo could walk us through your thought process in regards to if the EPA revisions in your cost guidance is still high gear-related cash outflows over the next couple of years. How do you think about the trade-off right, between shareholders' return and balance sheet resilience right? So what are you tracking to decide on executing your buyback program maybe more aggressively or paying bills at some point in the second half of this year. Versus choosing to be more cautious due to the volatile operating environment and maybe that could change your focus from shareholders remuneration to preserving the -- your balance sheet position, the healthy balance sheet position you have, that would be great.

I think to your question, the short answer is yes. I think we're not assuming that any 2 projects are the same because they're not, but we are looking at each of these projects on their distinctive attributes and again, I'll direct you to some of those materials from our base metals Investor Day some months ago, where we've also published some technical studies to panelist investors to start really having the tools to appreciate what we're talking about here. We should, in the next number of weeks publish the rotation cost-particles announcement, which is the next cable for the ramp, which will increase throughput and substant at a very high rate of return at Saliva brownfield, of course, and that will be the next manifestation that's sort of the 2029 time frame. And again, we've targeted improvements. You'll see them there when we make our announcement. The really big one, the first one towards the end of the decade is [ Olman ] we're on track for that. So I don't want to at this stage suggest that, that is going to happen earlier. But what we're doing is we've taken $0.5 billion of capital out, we substantially boosted the return. And as part of our life of business planning, I suspect for the foreseeable future because of what we're finding in our drilling in the region and our life of business planning evolution, even the sequencing of some of these projects with an either execution, the real focus is on [indiscernible] that 2020 to 2035 time frame and beyond what can we do to go perhaps beyond the 700 because the rocks are there, the metal is there and to ensure we can actually execute that. So we'll continue to provide I think at the next validate some more information. We'll continue to make sure that you can watch our quarterly and indeed our other execution on these projects. I'm confident this team is really delivering. And I don't know what it takes to convince the market beyond that quarterly performance, really high rates of return and then of course, being able to do so on budget and early. So that's the real focus for us with all these projects.

Daniel, this is Marcelo speaking. On your second question, we believe that, first, you know that most of our cash flow generation comes in the second half of the year. So the performance in the second half is going to be key to determine capital allocation for that period. The new cost guidance is they don't materially change our potential for cash flow generation in the second half. the cash outflows related to reparation and other things are already provided for and considered in the expanded net debt so we are confident that we should be approaching close to $15 billion of expanded net debt at year-end. And that number, where we're going to land at year-end will determine capital allocation for the second half. We decided to reestablish the share buyback program to leave that option open. So the decision about the total level of shareholder remuneration will depend on cash flow generation. And if that's the case, the decision between share buybacks and dividends, we will take into consideration, of course, where the share price is and the aspect of it. But this will come later in the third quarter, beginning of the fourth quarter.

The next question is from Carlos De Alba from Morgan Stanley.

I wanted to just follow up on some of the questions on freight. I understand that the exposure was reduced -- but is that also the case for the second half of the year? Typically, you have more volumes in the last semester and therefore, more exposed -- typically more exposure to freight. So I just wanted to make sure that, that 10% already includes this increased exposure in the second quarter. And then the second question is on the iron ore and pellet operations. Any updates on [indiscernible] when are those spectrum maybe to come back as well as the progress of the ramp-up at Oman given that the conflict in the Middle East sort of reinitiated or escalated again? And any color on San Luis given that we saw a big reduction in the second quarter production Okay.

You're right. Generally, we have more exposure in the second semester. The 10% number is a flat number, but we average for the year, but we do have a low exposure also for the second semester, okay. I also would like to highlight another point which is important, I didn't mention in my first answer is that differently from the seaborne, the spot market on seaborne, we have vessels which are scrubber fitted. . So generally, when you're talking about the spot prices, you're talking about low sulfur oil, which currently is scaling a very high spread to the low-sulfur oil. So generally, we're paying about $250 per ton lower than the spot prices on banker, okay? So the exposure for the second semester is also low.

[indiscernible] store on your second question, both [indiscernible] and Vega from an operational standpoint ready to be resumed. We've got the authorizations from the municipalities, and we are now working with the state and federal authorities to resume operations. We are optimistic we'll be able to do that in the near future. and we are not expecting to have any impact in our guidance for the year.

Oman is actually in operation and operations core. I think one important point is it actually supplies the reproduction to the Middle East. Important to notice that Bahrain pelletizing plant, which is one of the main producers of direct production in the region has stopped. So the demand for DR pellets is high in the region, and we are arranging different logistics to get to our clients. So Oman is operational. We'll have a stoppage in October to do a tie-in for the new concentration plant that we're building in Oman. But other than that, the plant is operating quite well.

So our next question is from Rafael Barcellos Bradesco BBI.

So the first question, looking at your new OEM cost guidance for iron ore, and given what you delivered in the first half of the year, it seems that your guidance implies an OE, which is sort of flattish with the first half. While when we look at your C1 guidance, it implies a more significant decline over the course of the second half. So I just wanted to better understand what drives the difference between your expectations for C1 and all-in trends into the second half? And as a second question, in your new R&D and innovation report, you mentioned a very interesting initiative at the [indiscernible] operation, delivering a 25% increase in productivity, right? And on top of that, you also mentioned other cost savings from AI applications, right? So firstly, congratulations for this report, very informative. And secondly, to what extent you believe it has potential to be something more significant for Vale and whether these initiatives make you more confident in lower cost going forward.

This is Marcelo. And I'm going to take the first question on cost. We have -- you have to remember that if you look at the all-in the relative weight of the oil prices is a lot higher than on -- that's why you see this difference the C1 reducing in the second half of the year, whereas we only intend to be flattish. And also on top of that, remember that the oil price effect was basically concentrated in the second quarter. not on the first quarter, where prices were a lot lower than they are today. And also, we have a lagging effect with some of the realized cost of the first half of the year, especially in the first quarter where it was actually based on the costs formed at the end of last year. So those accounting effects also play a role here. This is basically what explains that the all mean for the second half is going to be even -- is going to be flattish when compared to the first half, but lower than the second quarter. thanks for the question.