Slide 1: Discussion with sell-side analysts
0 Discussion with sell-side analysts Rio de Ri d JJaneiro, J l 11th 2014 i July Luciano Siani, Vale CFO
Slide 2: Objective of the discussion
1 OBJECTIVE OF THE DISCUSSION The objective of this discussion is to clarify topics that have created confusion in previous releases and address outstanding questions from sell-side analysts
Slide 3: Document content
2 DOCUMENT CONTENT Iron ore prices and margins Capex Cash Flow
Slide 4: Document content
3 DOCUMENT CONTENT Iron ore prices and margins Capex Cash Flow
Slide 5: Topics covered – iron ore prices and margins
4 TOPICS COVERED – IRON ORE PRICES AND MARGINS Pricing systems Price realization EBITDA margins • The transition of the • The evolution of • Vale's sales mix - benchmark to Vale's price goals and alternative pricing realization vs. the implications systems IODEX • Sales products • Vale's provisional
Slide 6: Topics covered – iron ore prices and margins
5 TOPICS COVERED – IRON ORE PRICES AND MARGINS Pricing systems Price realization EBITDA margins • The transition of the • The evolution of • Vale's sales mix - benchmark to Vale's price goals and alternative pricing realization vs. the implications systems IODEX • Sales products • Vale's provisional
Slide 7: Historic evolution of pricing systems
Mining companies abandoned the benchmark pricing system, prevalent during periods of low price volatility, and gradually 6 adopted alternative pricing mechanisms better suitable to customer needs HISTORIC EVOLUTION OF PRICING SYSTEMS US$/t 240 MB 63% Fe FOB Brazil¹ Vale SF FOB Brazil to Asia² 200 Sh
Slide 8: Currently prevailing pricing systems
With the fall of the benchmark system, alternative pricing systems were developed to better adapt to customer 7 needs, particularly the needs of Chinese steel mills CURRENTLY PREVAILING PRICING SYSTEMS Description Trade-offs • Sales based on past prices • Provides price stability and predictability
Slide 9: Price at delivery concept
Volumes subject to provisional pricing, as reported on Vale's results release, are the ones whose delivery and thus final 8 price settlement occur after the end of the current quarter PRICE AT DELIVERY CONCEPT Conceptual Q1 Q2 0 15 30 45 60 75 90 105 120 135 150 165 180 Final price settled Adjustmen
Slide 10: Hypothetical impact of provisional pricing
Price adjustments can be estimated based on the hypothetical realized prices in the first 45 days following the quarter 9 ended compared to the prices provisioned by the end of the quarter HYPOTHETICAL IMPACT OF PROVISIONAL PRICING Hypothetical 2Q14 Impact Provisional Pro isional sales Quarter 1Q US
Slide 11: Evolution of Vale's pricing mix
10 Vale’s sales mix is mostly concentrated in current and provisional pricing mechanisms EVOLUTION OF VALE’S PRICING MIX Lagged Current Provisional • Provisional pricing Benchmark has increased gradually 8% 15% • Provisional sales are 31% concentrated in the Chinese market and close to its sales 73%
Slide 12: Comparison Platts 62% and the 45-day forward index
11 Despite short term differences, over the medium term, the Platts 62% and its forward index net-off COMPARISON PLATTS 62% AND THE 45-DAY FOWARD INDEX US$/dmt Pl 62 Platts Platts 62 160,00 Average Platts Média Platts 62 todo o período 62 em Platts62 Platts 62, 45asado def days em forward 45 dias 15
Slide 13: Topics covered – iron ore prices and margins
12 TOPICS COVERED – IRON ORE PRICES AND MARGINS Pricing systems Price realization EBITDA margins • The transition of the • The evolution of • Vale's sales mix - benchmark to Vale's price goals and alternative pricing realization vs. the implications systems IODEX • Sales products • Vale's provisiona
Slide 14: IODEX vs Vale realized prices
There has been fluctuations in the difference between the IODEX and Vale's realized prices, primarily because of price 13 volatility and the existing price mechanisms that do not correlate directly with the IODEX average IODEX VS VALE REALIZED PRICES Difference between the average IODEX¹ and Vale re
Slide 15: Price realization – iron ore
14 Vale’s iron ore price realization is impacted not only by key drivers such as freight, quality and pricing systems but also by the sale of ROM - an intermediate product PRICE REALIZATION – IRON ORE US$/t US$/t, 1Q14 29.9 120.4 9.8 Lower prices on intermediate products p 12.1 1.9 1.6 26 2.6 64 6.4
Slide 16: Drivers impacting price realization
15 All drivers impacting price realization have improvement trends or will have no negative impact on future price realization DRIVERS IMPACTING PRICE REALIZATION Drivers Comments Impact Trends and ongoing actions • Fe content decreased as mines • Conclusion of the Itabiritos and the got deeper S11D
Slide 17: Evolution of product quality
The expected increase in Vale's product quality will bring additional value which will vary depending of the price premium 16 associated with the Fe content EVOLUTION OF PRODUCT QUALITY Production and quality evolution Hypothetical EBITDA impact of increased Fe content¹ Delta Fe (2014-2018) % 10 1.0
Slide 18: The new IOCJ pricing index
Vale expects to capture the real value of its high quality ores through the introduction of a transparent and liquid 17 index to price its 65% Fe ore from Carajás THE NEW IOCJ PRICING INDEX The value of Vale's high quality ores has not been As result, Vale decided to introduce the IOCJ 65% fully cap
Slide 19: Freight rates and iron ore prices
18 Vale's freight strategy brought stability and predictability to freight costs, reducing volatility to Vale's realized prices FREIGHT RATES AND IRON ORE PRICES US$/dmt 240 IODEX 62% Freight 200 160 120 80 40 0 2008 2009 2010 2011 2012 2013 2014 New Freight Strategy
Slide 20: Impact of run of mine (ROM) sales on realized prices
19 In 2013, the sales of run of mine (ROM) reduced Vale's realized price by about US$6/t IMPACT OF RUN OF MINE (ROM) SALES ON REALIZED PRICES 2013 Fines sales (ex-ROM¹) Mt 249.4 Iron ore Total Volume Revenues (Iron Ore+ROM) X Reported price US$ bi 28.2 FOB fines price Mt 264.6 ÷ 2013 (ex-ROM) US$/t
Slide 21: Topics covered – iron ore prices and margins
20 TOPICS COVERED – IRON ORE PRICES AND MARGINS Pricing systems Price realization EBITDA margins • The transition of the • The evolution of • Vale's sales mix - benchmark to Vale's price goals and alternative pricing realization vs. the implications systems IODEX • Sales products • Vale's provisiona
Slide 22: Vale's sales mix – goals and implications
The additional production increases total cash generation by leveraging non-utilized installed capacity despite negatively 21 impacting unit margins VALE'S SALES MIX – GOALS AND IMPLICATIONS Current Situation Implications Goal • Increase total Vale currently has EBITDA some opportunistic Optimize to
Slide 23: Vale's EBITDA and EBITDA margins
Vale has some opportunistic operations which have a positive EBITDA contribution but bring unit margins 22 (EBITDA/t) down VALE'S EBITDA AND EBITDA MARGINS US$ bi, 1Q14 EBITDA US$/t • Third party ore • ROM • Corumbá operation • High Silica • Miniminas operation • Tailing dam fines 1.3 4.1 0.3 2.8 2.
Slide 24: Considerations for projecting future margins
23 Vale's price realization will increase with some ongoing initiatives CONSIDERATIONS FOR PROJECTING FUTURE MARGINS Not Exhaustive • Low margin operations are in most cases opportunistic and will not be expanded • Future expansions will be low cost – S11D expansion at US$15/t • Production increase
Slide 25: Document content
24 DOCUMENT CONTENT Iron ore prices and margins Capex Cash Flow
Slide 26: Capex profile
25 Vale's CAPEX will reduce with the conclusion of ongoing projects CAPEX PROFILE US$ bi Project execution Sustaining capex 16.3 16.2 Approved projects only 14.2 13 8 13.8 4.6 4.6 12.5 4.6 4.5 4.5 9.5 8.1 4.5 5.8 11.7 11.6 4.9 9.6 9.3 8.0 5.1 5.0 3.2 0.7 2011 2012 2013 2014 2015 2016 2017 2018
Slide 27: Capex profile – sustaining capex
26 Sustaining capex has been rationalized and will only increase marginally driven by the completion of new projects CAPEX PROFILE – SUSTAINING CAPEX US$ bi Iron ore Base metals Coal Fertilizers 5.1 4.9 4.5 4.5 4.5 2014 2015 2016 2017 2018
Slide 28: Capex profile – project execution
27 S11D investments will peak in 2015, reducing sharply by 2018 CAPEX PROFILE – PROJECT EXECUTION US$ bi Carajas expansion ex S11D S11D Moatize II/ Nacala Itabiritos 9.3 Salobo II Others 80 8.0 5.0 32 3.2 07 0.7 2014 2015 2016 2017 2018
Slide 29: Perspective on Vale's future capex (post-2018)
28 The capex post-2018 is expected to be in the range of US$ 8 to 10 billion PERSPECTIVE ON VALE'S FUTURE CAPEX (POST-2018) US$ bi 1.5 - 3.0 8.0 - 10.0 1.5 - 2.0 5.0 Sustaining Replacement Discretionary Total Projects
Slide 30: Overview of Vale's Itabiritos projects under study
29 Other Itabiritos projects are under study OVERVIEW OF VALE'S ITABIRITOS PROJECTS UNDER STUDY Itabiritos projects under study Capacity Projects Status Mtpy Fáb i Fábrica FEL 2 26 Jangada FEL 2 15 Mariana FEL 2 27 ITM S Pico FEL 3 27
Slide 31: Document content
30 DOCUMENT CONTENT Iron ore prices and margins Capex Cash Flow
Slide 32: Assessment of Vale's cash flows
There has been common mistakes, some conservative projections and other opportunities not considered 31 in most analyst reports ASSESSMENT OF VALE'S CASH FLOWS Topics Comments • Divestitures • Disregard of R$ 1.5 billion received in April 2014 – R$ 709 million from sales proceeds and R$ 803 million
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Slide 34: IO price indexes
33 IO PRICE INDEXES 62% Fe INDEXES 2014 $/dmt LAST YTD Q3 JUL Q2 JUN MAY APR Q1 MAR FEB JAN PLATTS 62% Fe IODEX 96,00 110,75 95,58 95,58 102,60 92,67 100,80 114,24 120,38 111,79 121,24 128,15 TSI 62% Fe 96,50 110,81 95,72 95,72 102,66 92,74 100,56 114,58 120,43 111,83 121,37 128,12 TSI 62% Fe LOW AL