Vale - Q2 2024

Transcript

Operator (participant)

Good morning, ladies and gentlemen. Welcome to Vale's second quarter 2024 earnings call. This conference is being recorded, and the replay will be available on our website at vale.com. The presentation is also available for download in English and Portuguese from our website. To listen to the call in Portuguese, please press the globe icon on the lower right side of your Zoom screen, and then choose to enter the Portuguese room. Then select "Mute Original Audio" so that you won't hear the English version in the background. We would like to inform that all participants are currently in a listen-only mode for the presentations. Further instructions will be provided before we begin the question-and-answer section of our call. 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.

Amos Fletcher (Head of Mining Equity Research)

We caution you that forward-looking statements are not guarantees of future performance and involve risks and uncertainties. To obtain information on factors that may lead to results different from those forecast by Vale, please consult the reports Vale files with the U.S. Securities and Exchange Commission, the Brazilian Comissão de Valores Mobiliários, and in particular, the factors discussed under forward-looking statements and risk factors in Vale's annual report on Form 20-F. With us today are Mr. Eduardo de Salles Bartolomeo, CEO; Mr. Gustavo Pimenta, Executive Vice President of Finance and Investor Relations; Mr. Marcelo Spinelli, Executive Vice President, Iron Ore Solutions; Mr. Carlos Medeiros, Executive Vice President of Operations; and Mr. Mark Cutifani, Chairman of Vale Base Metals. Now, I will turn the conference over to Mr. Eduardo Bartolomeo. Sir, you may now begin.

Eduardo de Salles Bartolomeo (Member of Board of Directors)

Okay, thank you, and good morning, everyone. Here we are at the halfway mark of 2024. So let's take a look at the progress we've made on our key levers to unlock value at Vale. Starting with our safety journey, we are very pleased to inform that we have eliminated the B3/B4, and we were able to achieve this one year ahead of the original schedule. We are working on two additional structures to be eliminated in 2024. By the end of this year, we will have completed more than 50% of our de-characterization program, a significant milestone. On our second lever, we continue to see progress on iron ore operational stability, with consistent performance and the third consecutive quarter of year-over-year increase in production.

Amos Fletcher (Head of Mining Equity Research)

Our C1 cost that was seasonally higher in the second quarter is on track to reach our guidance of $21.5-$23 per ton for the year, especially as our product mix and fixed cost dilution improves in the second half. On iron ore growth and quality, Vargem Grande is on its way to start up in the next months, and the Capanema project is on track for the middle of next year for a combined capacity addition of 30 million tons. We approved the Sohar Concentration Plant. This will serve as a pilot project of our mega hub strategy, which will redefine industry supply chains, foster additional demand for high-quality pellet feeds, and position Vale as the world's most competitive direct reduction concentrate supplier. In energy transition metals, our Onça Puma, Sossego, and Salobo plants have also resumed operations, with no impact on our guidance for the year.

We recently announced the new CEO of Vale Base Metals, Shaun Usmar, who brings his extensive mining experience and his strategic vision to lead the company throughout its value creation pathway. In our pursuit towards ESG leadership in mining, we are reinforcing our commitment to transparent disclosure with the adoption of TNFD and ISSB. On capital allocation, we recycle capital, increasing the maturity of our debt. Yesterday, we announced an interest on capital of $1.6 billion related to our first half of 2024 performance, according to our dividend policy. Now, let's go into the details of these highlights. Next slide. On dam safety, we concluded the de-characterization of B3/B4, one of the dams that was put at the highest emergency level in 2019.

Dykes 1A and 1B are the other two structures to be eliminated this year, after which we will have completed 53% of our de-characterization program. This is a pioneer process, and we are gaining experience and expertise, which is helping us to advance well. We remain committed to the elimination of all upstream dams in Brazil in a safe and conservative manner. Next slide, please. On iron ore production, we delivered robust operational performance once again, the third consecutive quarter of year-over-year increase in production. This is a direct result of our efforts to improve the reliability and stability of our assets and processes as per our management model. S11D achieved a historical production record for our second quarter, and the asset is a fundamental piece of our strategy for growing high-quality products in our portfolio.

The S11D plus 20 million tons expansion project is scheduled to start up in 2026 and will support production growth. Finally, I would like to highlight our sales, which grew 7% year-over-year, reflecting our strong performance. The result of the first semester reinforces our confidence and commitment to meet the top end of our 2024 guidance. This demonstrates that Vale now has a business with much greater predictability, providing a solid foundation for the future. Next slide. Our key iron ore projects are underway to increase capacity. In the next 12 months, we have two main projects coming online. The Vargem Grande project, to start up in the coming months, will add 15 million tons per year of high-quality iron ore capacity with a very low CapEx investment.

The Capanema project is progressing well with the pre-commissioning activities initiated, and we will also bring an additional 15 million tons per year of high-quality ore capacity after the first half of 2025. Next slide. Advancing on our long-term strategy, we signed an important agreement to develop the concentration plant in Sohar, a project presented during Vale Day in December. The Sohar concentration plant will significantly increase the availability of high-quality pellet feed by 12 million tons per year. This will enable us to produce feed for direct reduction agglomerates, enhancing our operational capabilities and product offerings. This asset-light business model has a low investment obligation from Vale and an internal rate of return exceeding 30%, making it a highly accretive investment.

This partnership will serve as a model for future mega hubs in the region and pave the way for a more sustainable future, allowing the production of metallics through low CO2 emission routes. It marks the first significant step towards new developments to come. Next, please. Now, moving to the energy transition metals business. Looking at our copper performance, despite the headwinds in the quarter, we had a 5% increase in production in our plants in Brazil. On nickel, production reflected our plant maintenance strategy, and we are on track to deliver the production guidance for 2024. In Sudbury, improved mine performance resulted in reduced consumption of third-party feed and lower costs. We are confident that we are putting together a great team, as seen on the appointment of Shaun as CEO, and taking the right steps to transform the energy transition metals business. Next slide.

On our ESG strategy, we want to reduce our impacts, generating positive outcomes for nature and people. For that, we have three main pillars to support our nature actions. First, keep the forest that we have standing. At Vale, we protect 11 hectares for every 1 hectare affected by our activities. In 2019, we committed to increasing protected areas by 500,000 hectares, and we are already at 35% of this target. The second pillar is bioeconomy and create a business environment favorable to the conservation of native forests. Our third pillar is to fight extreme poverty, which will help avoid the illegal exploitation of land. Our strategy led us to prioritize the adoption of TNFD and ISSB. We believe this will help all stakeholders to better understand and assess companies on their ESG progress.

Before we move to our financial results, I would like to comment that we are delivering on our commitments. Our strong operational performance continues quarter after quarter, and we are in very good shape for the second half of 2024. Now, I'll pass the floor to Gustavo to comment on the financial performance, and I'll get back to you on the Q&A. Thank you.

Gustavo Pimenta (CEO)

Thank you, Eduardo, and good morning, everyone. Let me start with our EBITDA performance in the quarter. As you can see, our pro forma EBITDA reached $4 billion in Q2, driven by strong operational performance across all commodities. This is a result of our continued focus on operational excellence and asset reliability, and the record iron ore production in Q2 since 2018 is a testament to that. As part of our asset integrity program, we had a concentration of maintenance activities in Q2, particularly in April, which, together with inventory turnover effect and higher freight rates, more than offset higher iron ore sales in the quarter. The good news is that our C1 significantly declined by the end of Q2, while rising volumes in the north, coupled with reduced maintenance works in the second half, provided us with a solid runway to deliver strong operational performance in the coming quarters.

Amos Fletcher (Head of Mining Equity Research)

I will go into the details of our C1 dynamics in the next slides. On a sequential basis, our pro forma EBITDA increased 15%, driven by 25% higher shipments, partially offset by higher operating costs and lower realized iron ore prices. Now, I would like to provide more color on our realized all-in premiums for the quarter. Vale has many sites and a broad product portfolio ranging from high silica products that trade at discounts compared to the benchmark to direct reduction pellets with a 67% iron ore content. Typically, high silica products from the southern and southeastern systems are blended with Carajás to create our main product, BRBF. This is a premium product with low alumina and 5% silica content.

As the average silica content naturally increases in the southern and southeastern systems, we have been using a higher proportion of Carajás in the blend, implying increased availability of high silica products to be sold directly in the market. This higher availability is even more pronounced in the first half of the year due to the production seasonality in the northern system. On top of that, based on product availability, we evaluate commercial options cargo by cargo, aiming to maximize value, either by concentrating these products in China, selling them directly, or holding them as inventory. In Q2, with quality discounts below historical levels, direct sales were the most attractive option, with an EBITDA per ton of around $20. As a consequence, our realized all-in was actually $0.1 per ton negative, despite 70% of the portfolio being sold with premiums above the benchmark.

In the second half of 2024, we anticipate a reduction in the share of high silica products in our mix due to the increased production in the north, supporting better premiums. More importantly, looking into the coming years, the share of high silica products in the sales mix should gradually decline with the startup of growth projects like Vargem Grande, Capanema, and particularly the S11D expansion. In addition, the development of concentration plants like the one in Sohar will also contribute to structurally reduce our share of high silica products. Now, let me turn to our cost performance. In iron ore, our C1 cash cost, excluding third-party purchases, was $24.9 per ton in the quarter, mainly impacted by an inventory turnover effect, as expected for a second quarter. This is how the inventory effect works.

Vale has an extensive supply chain, and around 30% of our sales in the quarter are composed by inventories from the previous quarter. Also, we note that production costs in Q1 are usually the highest in the year, given lower fixed cost dilution. As a result, in Q2, the difference in inventory costs impacted C1 by $1.8 per ton sequentially. In this quarter's financial report, we have started to disclose our production costs per ton in order to provide a better view on our C1 cash cost trends. We remain highly confident in achieving our guidance for 2024 of $21.5-$23 per ton. Our production cost in June, excluding inventory effects, was already significantly down, reaching $22 per ton.

This is a solid indicator of our potential in the second half of the year, with benefits from greater cost dilution, increased production in the northern system, and reduced maintenance activities during the dry season. Now, moving to our energy transition metals business, we were pleased to have another quarter of significant year-on-year reduction in our all-in costs in nickel, which were down 12% to $15,000 per ton. This is mostly due to lower third-party feed purchases, as well as by a reduction in expenses, as we wrote down some high-cost inventories in Q2 2023. With Q1 and Q2 all-in cost averaging less than $15,000 per ton, we are well-positioned to reach our 2024 all-in guidance of $14,500-$16,000 per ton this year. In copper, all-in costs increased 18% year-on-year to about $3,600 per ton, driven by increased unit COGS due to maintenance at Salobo and Sossego.

All-in costs averaged about $3,500 per ton in the first half of 2024, below our 2024 all-in guidance range of $4,000-$4,500 per ton. Now, moving on to cash generation. Free cash flow generation was -$0.2 billion in Q2, impacted by a higher concentration of payment to suppliers, high execution of concession contract obligations, and lower accounts receivable following the 4.3 million tons of iron ore sales accrued at the end of the quarter. We expect working capital to positively reverse in the second half. Still, our cash and cash equivalents increased by $3.1 billion in Q2. This increase was primarily driven by the $2.5 billion proceeds received following the Vale-Base Metals partnership, as well as by the issuance of $1 billion in bonds in June, mostly used for liability management in July.

Our capital expenditures were flat quarter-over-quarter at $1.3 billion and were on track to meet our CapEx guidance of around $6.5 billion for the year. Also, yesterday, our board of directors approved a distribution of $1.6 billion in interest on capital to be paid in September this year, reinforcing our continued commitment to return value to our shareholders. Before moving on to the Q&A session, I would like to reinforce the key messages from today's call. Safety and dam management continue to be a key priority for Vale, and we are encouraged by the progress in our de-characterization program, having fully de-characterized the B3/B4 dam. Our strong operational performance continues to be seen quarter after quarter, and we are on track to deliver our production and cost guidance for the year.

In fact, on iron ore, we are now very confident in reaching the top end of the 310-320 million tons production guidance range. On our strategic objective to be the supplier of choice for low-carbon steel production, we are very pleased with the advancement of Sohar Concentration Partnership in Oman, which will serve as a pilot for the upcoming mega hub projects with very attractive returns. At VBM, our cost performance has been solid so far in the year, and we see room for continued improvement, particularly as the asset review plan is gradually executed. Lastly, we remain highly committed to disciplined capital allocation, controlling expanded net debt within our target, taking advantage of asset-light growth opportunities, and rewarding shareholders with solid remuneration through dividends and buybacks. Now, I would like to open the call for questions. Thank you.

Operator (participant)

We are going to start the question and answer section of the call. If you have a question, please click on the raise hand button. If your question has already been answered, you can leave the queue by clicking on the lower hand button. Please ask your question in English and limit your questions to two at a time. Our first question comes from Daniel Sasson with Itaú BBA. You can open your microphone.

Daniel Sasson (Equity Research Analyst)

Hi, everyone. Good morning. Thank you so much for taking my questions. My first question, maybe to Gustavo, if you could please provide us an update on the ongoing negotiations with the government regarding the resettlement for Samarco, where we are right now, the back and forth with the government. Where do you think the most important points of this agreement are that would help us? I mean, I think it could be an important catalyst for stock price performance once this gets solved. And my second question is regarding your portfolio mix. You mentioned that you expect 65% of high-quality products in your portfolio in the second half versus 59% in the first half, with high silica declining to 10% of sales.

Amos Fletcher (Head of Mining Equity Research)

Regarding specifically your strategy for the high silica portion, do you, did the decline expected ahead come on the back of reduced inventories of that type of product, or do you see maybe discounts increasing for that portion? My point is, is that a matter of what you have of high silica products to be sold being lower or less volumes than you had in the beginning of the year, or that reflects your view that high silica products should demand a higher discount in the second half of this year versus the first half? Thank you so much.

Gustavo Pimenta (CEO)

Good morning, Sasson. Gustavo here. So I'll take the first one, and then Spinelli will cover your second question. So, regarding Mariana, we continue to be optimistic about the ability and the possibility to settle the agreement. All parties are highly engaged. The view is that in the next, you'll continue to have a view that in the next couple of months, we'll be able to reach a resolution, both in terms of the actual agreement, the text associated with the agreement, and also the key financial terms. So this is important for the company, and we see a momentum from all parties to be able to sit down and settle this. So we are optimistic, and our expectation is that in the next couple of months, we'll be able to resolve this. So I'll pass the second question to Spinelli.

Marcello Spinelli (Former EVP of Iron Ore Solutions)

Thank you, Daniel. Structurally, we have the high silica in our portfolio. After Brumadinho, we have this imbalance in our mix. So after, as you saw in the initial remarks, after the ramp-up of S11D, we'll have the main component of the BRBF, that's IOCJ. So we can reduce, minimize this kind of product standalone. So you asked me what is the reason we are doing this. So as we saw in the initial remarks, we don't just sell it, but we have a market for that. So until May, we sell directly. The gap was really wide when you compare the high-grade and the low-grade. Since the end of May, we start to concentrate the most we can. So we have a capacity to produce 18-20 million tons in China. We have a remaining high silica to handle.

Amos Fletcher (Head of Mining Equity Research)

So that's the reason why we expect to have 10% in our portfolio. That's the same level we expect for next year. And with always saying that depends on market conditions, if we have a better discount for high silica, we can sell directly. That's the influence. So just to set your model, you may consider this 10%. And gradually, in 2026 and 2027, we must go to zero.

Operator (participant)

Next question from Rodolfo Angele with J.P. Morgan. You can open your microphone.

Rodolfo de Angele (Equity Research Analyst)

Okay. Hi, good morning. My two questions are the following. First, it's really good to see management positive on the evolution of costs and making sure guidance is reached. But this is a theme that's been more and more recurring when we speak to investors. And I just wanted to hear from you, aside from things such as higher volume, which is seasonally the rule in the second half of the year, particularly in the third quarter, what is structural? What can be done? What's in your hands that we can see to make the path of costs coming down as expected, and we hope eventually even lowering into 2025 and onwards? So that's question number one. The second is a bit more about where we stand in prices versus the successful strategy on the stabilization of the iron ore business.

Amos Fletcher (Head of Mining Equity Research)

Of course, as per Spinelli's answer right now, the commercial strategy will follow market conditions, right? So what we've been seeing is an effort to lower, to fight back seasonality. And we saw since fourth quarter, very strong production reports. And of course, we're entering the period of even higher volumes. But how should we think about volumes in a scenario where prices, as today, are slightly below $100 per ton? Does that change anything? And how do you think about it? What can we expect if prices continue for a while as soft as they are right now? Thank you very much.

Gustavo Pimenta (CEO)

So Rodolfo, Gustavo, good morning. Gustavo here. So I'll do the first one again, and Spinelli will cover the second one. So certainly, I think we've been the last, call it, two years looking structurally at our cost base and implementing a series of initiatives, being new technologies in the field, revisiting process, increasing the share of preventive maintenance as compared to corrective maintenances. All of that over time should make our costs more efficient. And so we are seeing this already as we look into the numbers. Certainly, the dilution effect for Vale, given the expanded fleet that we have, it's super helpful, right? The ability for us to bring volume with very limited capital helps a lot. But we are not just counting on that. We are also looking structurally in areas where we think we can extract more value from the business.

Amos Fletcher (Head of Mining Equity Research)

We are seeing results already as we're looking to the business. I'll pass the second question to Spinelli.

Marcello Spinelli (Former EVP of Iron Ore Solutions)

Go forward. Thank you for a question. So we don't see a support in the cost curve for major decline at this moment. Definitely, we have a pressure of inflation, freight, and now we see starting the impact coming from the green world. That's the pattern we have. We have our long-term price of around $90. So this is the first direct answer for your question. But one thing you should pay attention to, so we see a balanced market at this moment. One of the micro indicators that everybody asks us about is the iron ore inventory in the port side. I want to draw your attention for some extra information about this. Firstly, Vale and not only Vale, our competitors are also changing the way we are doing business. So we are improving the production of BRBF. So we have a non-operational or a non-sale inventory.

Amos Fletcher (Head of Mining Equity Research)

Our competitors are screening the products, so increasing the blending. We are increasing the concentration now in the second half. So this 160, when you compare to last year, is like 145. And there's another point that most of the increase came from low-grade ores, as you mentioned. We have the mantra of margin over volume. But if you pay attention in the lower level of IOCJ, and that's the reason the gap is widening, the low-grade ore and high-grade ore, the premium Carajás is higher now. So again, that's the balance. As a whole, we see the market balance. Pay attention that the port inventory is not approximate directly at this moment with the demand. And we should track this instability or we feel in China all the time.

We like to pray for extra stimulus, but we have a very strong new normal in China that is supported by manufacturing. Exports is something every time we are worried about because we don't see yet the countries fighting against some product. But it's something that is structural. We have a new global, new ties in this geopolitics. So for this year, so far so good. We see China with this level of production. For next year, we see stability in terms of demand. But obviously, we need some more figures about how can we reduce our concerns about the decline of properties in China. But so far so good for 2024 and 2025, we are in a good shape in the balanced market.

Operator (participant)

Next question from Myles Allsop with UBS. You can open your microphone.

Myles Allsop (Mining Research Analyst)

Great. Thank you very much for the question. So a couple of things. First of all, on M&A, obviously, there are some assets available, nickel assets available in Brazil. Just wondering how you're thinking about M&As. Is this the right point to be sort of right point in the cycle to be picking up assets in that commodity? And then secondly, could you talk a bit more about value over volume? So if China is softened, you expect from a demand perspective, what price point do you expect the majors, including yourself, to start curtailing production to support pricing? Thank you.

Gustavo Pimenta (CEO)

Myles, Gustavo here. So for that particular question on nickel in Brazil, we are not looking at those. And I think the way we always articulate and this is the way we think about M&As, as you know, we have a very large endowment at Vale. So our preference has been to develop our own endowment in the commodities that we like and the ones that we operate well. And looking at opportunities that are win-win type opportunities. You've seen us doing a deal last year, buying 15% of Minas-Rio with the possibility to go to 30%. So those are the things we like. It's highly accretive, and it's right there at what we want to do long-term in terms of a strategic position. But for those particular assets that we just mentioned, we are not looking at that. So I'll turn to Spinelli for the second question.

Marcello Spinelli (Former EVP of Iron Ore Solutions)

Thank you, Miles, for your question. So two sides here. The first, the cost curve. If you move lower than $100-$90, we see 100 million tons outside of market. So we really see a support. We don't see a support in the balance to the market below that. On the other hand, in the demand side, you mentioned China. We have a positive eye on China when we see this new normal that we call the Chinese economy resiliency. Again, the new normal is based on manufacturing. It's based on export. We see infrastructure playing an important role offsetting the decline of properties. Obviously, we may pay attention for two main points. That's our concern and probably your concern, that is the level of export. Mainly the steel goods, the steel directly. For us, we see as a temporary part, but today is reaching almost 100 million tons.

Amos Fletcher (Head of Mining Equity Research)

On the other hand, we have a new geopolitical tie. So we don't see the same ties as we've been seeing the last years. Now, we have other players, big players that can support demand from China. And we need to remind that ex-China is growing this year 4%. Emerging markets, including Southeast Asia, India, Middle East, is growing really high. So all of this together, we have to pay attention in terms of inflation, how the countries are accepting these new products from China. And it's so far so good. But we don't see domestic markets declining due to the properties. But all this mix is supporting this high demand, at least for this year, next year in our analysis.

Operator (participant)

Next question from Carlos De Alba with Morgan Stanley. You can open your microphone.

Carlos de Alba (Managing Director and Senior Equity Research Analyst)

Hello, good morning, everyone. Thank you very much. Just a couple of questions on my end. One is, Gustavo, any updates on the railway concession agreement similar to Mariana? That is a very important driver, potential catalyst for the stock to move higher. So any update will be very good. And also, you mentioned in your prepared remarks that the iron ore cash costs declined significantly or did much better in June or towards the end of the quarter. Can you share with us what was the level of cash costs in June? Just to have a sense of the pace in order to model the trend in the second half of the year.

Gustavo Pimenta (CEO)

Carlos, let me do the second one, and then Spinelli will cover the concession revenue discussion. So it was $22 per ton in June. So April, for us, we had some higher maintenance costs, which has impacted our performance in the quarter overall. But looking into June, the performance improved substantially. It was down to 22. That's what makes us feel highly confident in our ability to deliver within the guidance range of 21.5-23 with a strong performance in the second half of the year.

Marcello Spinelli (Former EVP of Iron Ore Solutions)

Hi, Carlos. Thank you for.

Gustavo Pimenta (CEO)

I'm going to take here because I think he lost his mic. So Carlos, we continue to evolve. We don't have yet a final resolution to it. The conversations are, as we've mentioned in some of our market communications, highly advanced. There are certain regulatory procedures that need to be followed. So we are waiting for those to be able to settle. We appreciate it's an important topic for our shareholders. Similar to Mariana, we think it's going to get resolved within the next couple of months.

Operator (participant)

Next question comes from Leonardo Correa with BTG. You can open your microphone.

Leonardo Correa (Associate Partner)

Hello, everyone. Good morning. Yeah, so a couple of questions on my side. The first one on volumes, right? So there has been relevant progress, right, on iron ore production over the past quarters. 2024 seems to be in the bag, right? As Eduardo mentioned in the introduction, it's, I mean, at the upper range of the guidance, which is welcome, right? Looking out to 2025, I understand that you guys can't give precise guidance yet. We're going to have to wait for Vale Day. But given that you have Vargem Grande, which is progressing well, it's supposed to add 15 million tons of additional capacity. And also Capanema, which is also another 15 million tons of capacity. Just wanted to hear you on how you think production can shape up 2025, if you have any information I think can help.

Amos Fletcher (Head of Mining Equity Research)

Because everything of the story, at least in my view, depends on how production can evolve from here. And obviously, that's going to have a big impact on fixed cost dilution, right? So trying to understand the direction of volumes is, I think, essential. The second point for Gustavo, still on the cash return topic, right, Gustavo, we still haven't spoken about the theme yet in the conversation. Or I think we spoke less than we have in the past. I mean, it was a good surprise to see net debt levels reduce this quarter given the proceeds from base metals.

We're now under $15 billion of expanded net debt, which from hearing you over the past several quarters and years, it seems that close to $20 billion you were uncomfortable and Vale was deviating a bit from the average of the industry, right, which was running below Vale on net debt to EBITDA. Now you're getting closer. You're at the low of the range in terms of target for you. So my question is, what needs to happen for Vale to move back to paying extraordinary dividends from here? I mean, what do you need to see? You need to see iron ore prices rebound, or would you eventually be looking to increase leverage maybe to the middle of the range? Do you still need some marker? What exactly is weighing on the decision process of Vale not paying the extraordinary? Those are the questions. Thank you very much, guys.

Gustavo Pimenta (CEO)

Thanks, Leo. So I'll cover both. Yeah, look, I think it's fair to say that the trend is upwards, right? So we are bringing those projects online. I mean, we've talked about that at Vale Day, almost 50 million tons. If you sum the three of them, they are progressing super well within the timeline that we had defined. So you should expect us to be able to continue to post a positive trend towards that long-term goal of being between 340-360 by 2026, right? So that's fair to assume that. And certainly, the details, as we usually do, will provide at Vale Day. But the trend is certainly positive in that regard, in addition to the positive trend in the stability of our own operations, right, which have been performing well lately. So that's a positive news, we think.

Amos Fletcher (Head of Mining Equity Research)

In terms of the dividend extraordinary capital allocation, look, you know the way we think about it, and we are always looking for ways to remunerate our shareholders within a very disciplined capital allocation framework. Certainly, there are a few things we want to see first. One is how the second half performs in terms of prices. That's important to see where we're going to land by year-end. And also see how, especially Mariana, evolves. And as we settle, we want to have that clarity first before making any further commitments. So those are important topics as part of our overall capital allocation framework that we want to see before we commit eventually incremental remuneration to our shareholders.

Operator (participant)

Okay, our next question comes from Caio Ribeiro with Bank of America. Caio, you can open your microphone.

Caio Ribeiro (Managing Director)

Hey, good morning. Thank you for the opportunity. So my first question on going back to your production guidance for the year. Second quarter numbers were quite strong. As you mentioned earlier in the call, you're concerned of attaining that upper end of the guidance, but it even seems feasible that you could surpass that upper end of the guidance, right? So my question is, could you revise that guidance up eventually this year? And what are you looking for in terms of factors, events that would give you that confidence to do so, right? And are these factors, events more market-related or operational in nature? And is there a particular timing that you would see as more likely to take this decision or not? And then my second question is a follow-up on the ongoing railroad concession renewal negotiations.

Amos Fletcher (Head of Mining Equity Research)

The concession renewal process generally involves an upfront payment followed by some commitments to deliver investments in the railroad over time. So I just wanted to see whether you can provide any color once this agreement is struck, if that initial payment would be a single installment or several installments, right, followed by a CapEx commitment on the railroads over time, or how we should think about this? Thank you.

Gustavo Pimenta (CEO)

So Caio, thanks for your question, Gustavo here. Yes, I mean, if you look at year to date, we are performing well and better than last year, in fact. But we want to see how the next couple of months evolve. And then if there's an opportunity for us to do better, we'll do, and we'll certainly update the market as we feel comfortable to update those numbers. But for now, the team is highly focused on delivering what we committed. And given everything we've seen, performance is super strong. Certainly, the top end of the guidance is highly achievable for us. And if there's an opportunity to revisit, we'll do it, of course. I think in terms of the details of the concession, I think it's early to say. Those are confidential conversations. We want to keep it within those dialogues.

Amos Fletcher (Head of Mining Equity Research)

Certainly, we're looking at how any settlement fits into our cash flow projections and having the ability to honor those commitments, right? That's super important in our conversations. It is something we are still keeping within the negotiation team.

Operator (participant)

Next question from Marcio Farid with Goldman Sachs. You can open your microphone.

Marcio Farid (VP)

Hi, good morning, everyone. Thanks for the time. I have a quick follow-up here. Firstly, I think Spinelli talked a lot about the current situation in China in terms of where premiums and discounts are. But I was trying to understand how should we think about it in the long term. There is a clearly upward trend in terms of demand for high-grade products and agglomerates as well. And obviously, Vale is definitely going to increase it towards that direction as well, right? I'm just trying to understand from you, thinking longer term, obviously, S11D coming online. And our numbers, full capacity, potentially only 27, 28, but still significant high-grade volumes. There's obviously a push from the Australians to also develop their own agglomerate with their own fines as well.

Amos Fletcher (Head of Mining Equity Research)

So how should we think about the balance for premiums in the long term, even in a scenario of growing demand? And maybe on the base metal sides, obviously, nickel, better quarter from a cost perspective, copper not so much. How should we think about it? I think it's been volatile from our sourcing perspective and how much third parties are being used or not, especially in Canada. But now with Sossego, also Puma back online, Salobo, how should we think about the momentum for costs on the base metal side, please? Thank you very much.

Marcello Spinelli (Former EVP of Iron Ore Solutions)

Thank you, Marcio, for your question. So our long-term strategy remains intact. We strongly believe that you're starting to face segmentation of the market, as you mentioned, with high-grade ores, agglomerated products. If you see today, the pellet feed for high-grade ores or direct reduction is. We may consider that a very strategic material in the world. It's not only about copper, but high-grade ore is very rare. And we still see a gap in demand and production in the following years. You mentioned our competitors. They don't have ores that can be concentrated to reach these high-quality ores. So direct reduction is a trend. Natural gas is a trend. So following this, we see our mega hub strategy going forward. This announcement today about the mega hub in Sohar actually is the first mega hub, full mega hub already done.

Amos Fletcher (Head of Mining Equity Research)

We now have to build this capacity to concentrate. But there we have the port, and we can handle the products, and we can produce the agglomerate. That's the first mega hub. In the U.S., it's moving fast after the grant that we got in the first half. So far, other regions like Oman or Abu Dhabi and Saudi are moving really fast. Actually, in a few hours, we're going to receive here the Minister of Saudi to talk about this, Minister of Industry and Mining. We're really confident about this trend and remain intact in our strategy.

Operator (participant)

Next question from Yuri Pereira with Santander.

Marcello Spinelli (Former EVP of Iron Ore Solutions)

No, no, no, no, no. We still have to answer the question. Mark Pinto is going to take the question. Mark's taking it, right? Go ahead, Mark, please.

Mark Cutifani (Nonresident Senior Technical Expert)

Yes. He got me now. So thanks for the question. On nickel, the trend should continue to improve with Sudbury mine values continuing to improve. In fact, we're up near 20% increase as we tracked into June. So the good news in Sudbury is we've got a lot more mine feed. So that's a real positive. Just come back from Voisey's Bay. The trends there are very good. We should continue to improve with also Onça Puma getting the second furnace up. So I think the trends are all positive on the nickel front. We've got to keep working hard at Manitoba, getting the place settled, and looking at what we can do to reduce the services that we could probably do from other places. So we're working on all of those fronts. On the copper side, Salobo is the key. It is impacted by grades.

Amos Fletcher (Head of Mining Equity Research)

If we can open the pit up a bit more and continue to improve our pit productivities, we can probably do a little bit more on the grade front, but that'll take a little bit of time, and we'll depend on our in-pit productivities during the year. And Sossego is about settling post the restart and making sure that we got the feed mix right during the course of the next 18 months. Thanks.

Operator (participant)

Okay, now next question from Yuri Pereira with Santander.

Yuri Pereira (Research Analyst)

Hi guys, thanks for having my question. Could you talk about depletion, not only for Vale, but also for the industry? I mean, how many tons you think are out of the market per year only from depletion? Thank you very much.

Marcello Spinelli (Former EVP of Iron Ore Solutions)

Thank you, Yuri, for your questions. It's a tough question because this is the business. I can give you in colors that globally, we have a decrease of quality. Mainly in our competitors, they are facing the increase of alumina. That's a huge impact that will come to the market. In Brazil, I can say from Vale, the depletion is something that we had to overcome after Brumadinho. We had to improve our capacity, not only to support this decline of the mines, that's a natural thing, but even grow the capacity to reestablish our level. Globally, if I can give you a number, it's 300-400 million tons until 2030. Again, the difficulties to bring back quality puts Vale on a very good level to compete in this new world of green energy. Thank you.

Operator (participant)

Next question from Ricardo Monegaglia with Safra. You can open your microphone.

Ricardo Monegaglia (Lead Equity Analyst)

Hello everyone. Good morning. I have a couple of quick questions. First, in regards to the lawsuits in the UK and Netherlands, are there any discussions to include such in some sort of the final agreement from Mariana? Is that a possibility? The second question is, how much could Vale produce in 2024, and how does grade in that operation compare with your most recent figures on quality FE content? And maybe if Mark could just give a quick outlook or his latest impressions on nickel and copper markets. Thank you.

Gustavo Pimenta (CEO)

Ricardo, Gustavo here. So I'll do the first one, then Carlos will go over the second, and then we can have Mark complementing. So look, on the lawsuit, they are different, right? So those are different jurisdictions in the U.K. and the Netherlands as compared to Brazil. We continue to believe that the right jurisdiction for this decision to be handled, settled, and resolved is Brazil. And we are working towards that outcome. As I mentioned in my first answer today, we continue to be optimistic that we'll be able to resolve those conversations and discussions here in Brazil.

Carlos Medeiros (EVP of Operations)

Hello, Ricardo. This is Carlos Medeiros speaking. On Vargem Grande, we expect to produce 1 million tons in the remainder part of the year and should be a normal concentrated product, 62% iron.

Gustavo Pimenta (CEO)

Mark?

Mark Cutifani (Nonresident Senior Technical Expert)

All good. Look, I think the world, as we know, is short. Copper demand still looks pretty strong. A little bit of a slowing of EV demand, but I don't think that's significant in the scheme of things. I think all other markets are pretty strong. So we believe copper will continue to play strongly. And I think the activity we're seeing across the industry in terms of interest in copper assets is really confirming how strong I think the producers are. We're the same. We've got some opportunities to improve. North Atlantic should also do a little bit better on copper next year, but I think pretty positive. And I think the risk is to the upside. Next.

Operator (participant)

Next question from Amos Fletcher with Barclays. You can open your microphone.

Amos Fletcher (Head of Mining Equity Research)

Yeah, morning, guys. Thanks for the opportunity. My first question was just on working capital. I was just wanting to ask about how big of a release we can potentially expect in terms of working capital in H2, as Gustavo was mentioning. And then the second question was on nickel production and the guidance. The bottom end of the guidance implies 40% higher production in H2 versus H1. Just wanted to ask what are the main drivers for delivering that big recovery that we should be expecting. All right. Thanks very much.

Gustavo Pimenta (CEO)

So Amos, this is Gustavo. Look, on working capital, I think there is a possibility to revert, if not all of it, but most of it, as we highlighted in that chart. So I think we are looking for a stronger Q3. I think that's what you should be seeing.

Mark Cutifani (Nonresident Senior Technical Expert)

On nickel production, the good news, Amos, is that Sudbury has got quite a bit of ore in front of the mill, something we haven't had for a long time. So that's positive in terms of coming out of the maintenance. So probably 10,000-15,000-ton pickup there. Thompson should do better with a bit of production held back through Long Harbour maintenance. There's probably 3,000 there. Voisey's Bay, again, impacted by Long Harbour maintenance. So there's probably another 3,000 or 4,000 there. And we've got a little bit more that we can squeeze through on the third parties because of the other maintenance that we've had in smelters. So I think overall, pretty strong. And obviously, on Onça Puma, should be a stronger contributor, probably at least 10,000, based on the bringing up of the furnace rebuild. So quite a few positives there.

Amos Fletcher (Head of Mining Equity Research)

The only negative might be, well, will be the deconsolidation of PTVI. I think there's about 2 there. So net, net, we should go from about, what was it, 67 to probably a pickup of around 30 in the second half. That's what we're assuming at the moment. That's how it looks. We're pretty comfortable with that at the moment.

Operator (participant)

Thank you. This concludes today's question and answer session. We would like to hand the floor back to Mr. Eduardo Bartolomeo for the company's final remarks.

Eduardo de Salles Bartolomeo (Member of Board of Directors)

Okay, thank you. Well, as I mentioned in my initial remarks, the first half of the year is over. The best is yet to come. I think we're really confident on delivering on our strategic guidance. I think safety is one of the things we're most proud of, and we are truly extremely well on that, as I mentioned before. I think on iron ore, cost is going to come to its place where Gustavo mentioned, and production for sure, it's on our hands. The things on direct reduction, as Gustavo mentioned, as a key takeaway, is coming to reality. As Mnade mentioned, we announced the Oman concentration plant. One thing that makes me very happy is the contract of our new CEO at Base Metals. Shaun is going to do a great job, help Mark do the transformation that is needed there.

Amos Fletcher (Head of Mining Equity Research)

As you say, Gustavo, as mentioned in his final remarks, we are always committed to create value. I will end, like always, I have never been so optimistic, and that's why I'm optimistic. We are delivering on what we are, how can I say that, promising to the market, and that makes us happy. And of course, I'd like to thank our employees, our team for that. Okay, and you, of course, for having the interest and talking to us. Until the next call.

Operator (participant)

Vale's conference is now concluded. We thank you for your participation and wish you a nice day.