Vale S.a. · BMFBOVESPA:VALE3
Vale — Investor Day (September 2018)
57 slides from Vale's investor day presentation, Sep 6, 2018
Slide 1: XVIII Analyst & Investor Tour
XVIII Analyst & Investor Tour The consolidation of Vale’s differentiation strategy 1 Poppinga Peter September 6th, 2018
Slide 2: Forward-looking statements and cautionary note
“This presentation may include statements that present Vale's expectations about future events or results. All statements, when based upon expectations about the Agend future and not on historical facts, involve various risks and uncertainties. Vale cannot guarantee that such statements will prove c
Slide 3: Flight to quality is the new normal
3 “Flight to quality” is the new normal with alumina, silica and phosphorous driving market prices on top of Fe content Premiums and discounts Silica, Alumina and Phosphorous discounts US$/t MB 62% Fe Low Alumina US$/t IOCJ MB Silica (3.5-9.0%) LHS¹ Lump premium (62%Fe basis) MB Alumina (1.0-3.5%) L
Slide 4: Two mutually reinforcing macro trends
4 After investing in its competitive advantages, Vale is well positioned to benefit from two mutually reinforcing macro trends Demand: Supply Side Reform Relative gap % Capacity closures for environmental and IOCJ / MB58 IOCJ / IODEX62 competitiveness reasons 160% − Higher steel prices/margins 120%
Slide 5: Higher steel demand and supply restrictions led to higher prices
5 Higher steel demand and supply restrictions led to higher steel prices, to higher need for productivity, thus higher quality ores Historical rebar prices in China Steel industry capacity utilization in China US$/t % Yearly average prices Actual Forecast 95% 387 578 619 800 90% 85% 600 80% 75% 400
Slide 6: Investment in mining has decreased and depletion is rising
6 Investment in mining has decreased and mine depletion rate is now poised to go up FAI1 in ferrous mining industry in China Iron ore CAPEX by major Australian players RMB billion US$ billion 20 200 150 15 100 10 50 5 0 0 2010 2011 2012 2013 2014 2015 2016 2017 2018A 2010 2011 2012 2013 2014 2015 20
Slide 7: IO anchor prices defined by costs and discounts
7 IO anchor prices are defined not only by costs but also by discounts on low grade ores in scenarios of high productivity requirements 2024, Iron Cost (cash cost + sustaining) CFR China, 62% Fe normalized Premiums/discounts CFR China cash costs and sustaing (US$/dmt) Low grade High/Medium grade Sea
Slide 8: Vale optimized its portfolio and consolidated differentiation strategy
8 Vale optimized its portfolio and quality to benefit from new market dynamics and consolidated its differentiation strategy Sales composition Portfolio % Premium products¹ optimization Other products² • IOCJ: market positioning and commercial initiatives concluded 53% 66% • BRBF: market 73% 82% pos
Slide 9: BRBF has established itself as a strong brand
9 Vale’s Brazilian Blend Fines (BRBF) has established itself as a strong brand BRBF specification1 BRBF vs. Pilbara vs. Reference price US$/t BRBF PBF Reference price 62% Fe 76.0 • Fe content: 62% 74.0 72.0 • Silica: 5.0% 70.0 68.0 • Alumina: 1.5% 66.0 64.0 • Phosphorus: 0.07% 62.0 60.0 Apr-18 May-1
Slide 10: SFLA is another premium product tailored to Asia
10 Sinter Feed Low Alumina (SFLA) is another premium product which was tailored to specific clients’ needs in Asia SFLA production1 SFLA specification2 No investments, only minor changes in processes, no % complexity Low Al • Fe content: 64.5% fines Blending at • Lead time of 1 month Tubarão Port fr
Slide 11: Initiatives to maximize value from Vale's unique position
11 Initiatives to maximize value from Vale’s unique position in the market were delivered, with yet more to come Examples Delivered initiatives Ongoing initiatives ✓ Increase of market capillarity and customer • Expand market capillarity and customer base base • Expose and capture the value of ore
Slide 12: Price realization boosted to a new sustainable level
12 Vale’s ability to adapt and position its products like no other player has boosted price realization to a new sustainable level Vale’s average price premium¹ Price Realization US$/t Pellets Adjustment 10.0 - 10.5 3.0 5.4 3.2 1.9 7.0 – 7.5 1.5 3.5 1.7 2016 2017 2018E The Differentiation Strategy i
Slide 13: The unique product portfolio
XVIII Analyst & Investor Tour The unique product portfolio Rogério 13 Carneiro September 6th, 2018
Slide 14: Contents
14 Contents Vale’s Ferrous Technology Center (CTF) Main iron ore quality attributes and impacts in iron and steelmaking The distinctiveness of Vale’s products 14
Slide 15: Vale leverages know-how through the CTF
15 Vale leverages its know-how in Iron Ore and Coal into the steelmaking production chain through the CTF Agglomeration Ironmaking Refining Lumps Lumps Blast BF and Furnace Converter STEELMAKING DR CHAIN Sinter Sintering Sinter Hot feed Pellets Metal Pellet DR Steel Pelletizing feed Reactor Coke Coa
Slide 16: Attributes to be taken into account in steelmaking
16 Attributes to be taken into account in the steelmaking process Main iron ore quality attributes and impacts in iron and steelmaking Reducibility (RI) Loss on ignition (LOI) Phosphorous (P) Silica (SiO2) Alumina (Al2O3) Al2O3 / SiO2 16
Slide 17: Higher reducibility improves efficiency of Fe formation
17 Higher reducibility in the blast furnace improves efficiency of Fe formation, measured by metallization degree Efficiency of Fe formation vs. crystal Series 1 size Fuel consumption vs. reducibility1 98 (directly correlated with metallization degree) 495 96 Increase in Metallization degree (%) cry
Slide 18: Loss on ignition increases fuel consumption during sintering
18 Loss on ignition (LOI) increases fuel consumption during sintering Fuel consumption vs. LOI 70 Coke breeze consumption (kg/t sinter) 68 66 Australian hydrated ores 64 62 60 Brazilian ores 58 0 1 2 3 4 5 6 7 8 9 10 Loss on ignition (%) Vale’s ores have lower LOI, which lowers sinter plant fuel con
Slide 19: Phosphorous worsens steel mechanical properties
19 Phosphorous (P) worsens steel mechanical properties, leading to steel failures and cracking Costs vs. P content Single basic oxygen furnace Furnace with advanced de-phosphorization1 Iron ore sintering P content (%) 0.010 0.020 0.030 0.040 0.050 0.060 0.070 0.080 0.090 14 12 Steel cost variation (
Slide 20: Silica impacts operational stability and permeability
20 Silica (SiO2) impacts operational stability/permeability, affecting sintering and blast furnace performance Sinter plant Blast furnace 501 Brittle 500 sinter 499 BF fuel-rate (kg/t) 498 <4.5% 497 S iO2 (%) Optimum 496 range 495 494 >6.0% Sinter with 493 too much 492 slag and 491 low 230 240 250 2
Slide 21: Alumina impacts slag quality and viscosity
21 Alumina (Al2O3) impacts slag quality and viscosity Impact of Al 2 O3 in the slag °C Melting temperature - LHS 1 Viscosity - RHS 1 Poise 1390 4.2 1385 4.1 1380 1375 4 1370 3.9 1365 1360 3.8 1355 3.7 1350 1345 3.6 15 15.5 16 17 18 % Al2O3 Upper limit – risk of high viscosity in the slag To keep sla
Slide 22: Optimum Al2O3/SiO2 relation for ironmaking
22 Considering slag volume and quality, an optimum Al2O3/SiO2 relation exists for ironmaking operations % Al2O3 calcined 3.5 High alumina & low silica High alumina High silica & alumina 3.2 FMG SS 2.9 FMG FB 2.6 Jimblebar Pilbara Fines 2.3 MAC Newman Fines High silica 2.0 FMG King Fines 1.7 Yandi BH
Slide 23: CTF simulations emphasize superior performance of Vale's ores
23 Simulations1 realized in the CTF emphasize the superior performance of Vale’s ores in the steelmaking process Zero IOCJ level BRBF =NEWMAN specsPBIODEX62 YANDI BHP FMG BLEND IOC J B R B F NEWMA N P B YA NDI B HP FMG B LEND IOC J B R B F NEWMA N P B YA NDI B HP FMG B LEND Fe SiO2+Al2O3 SiO 2 + Al2
Slide 24: Simulations demonstrate superior performance in steelmaking
24 Simulations¹ realized in the CTF demonstrate the superior performance of Vale’s ores in steelmaking Sum of previously presented effects IOCJ BRBF Newman PB YANDI BHP FMG SS Blend PREMIUM Specs IODEX62 (zero level) PENALTIES 24 1 At current steel margins and coke prices
Slide 25: Capturing the intrinsic value of Vale's ore
XVIII Analyst & Investor Tour Capturing the intrinsic value of Vale’s ore Rogério 25 Nogueira September 6th, 2018
Slide 26: Iron ore is not a commodity
26 Iron ore is not a commodity, bringing many opportunities for Vale Establishing the relative economic value of high grade ores Capturing intrinsic value of Vale’s ore in product pricing Monitoring and anticipating global market trends Managing product portfolio actively 26
Slide 27: Iron ore is not a commodity
27 Iron ore is not a commodity, bringing many opportunities for Vale Establishing the relative economic value of high grade ores Capturing intrinsic value of Vale’s ore in product pricing Monitoring and anticipating global market trends Managing product portfolio actively 27
Slide 28: Cost reduction from high grade ores is significant
28 The cost reduction associated with the use of high grade ores is significant Impact on hot metal costs¹ (high x low grade ores²) US$/t ▪ Slag rate ▪ RDI (Reduction $/dmt of iron ▪ Flux and burnt lime degradation index) ore consumption ▪ Coke breeze consumption ▪ BF metallic burden consumption 14.
Slide 29: High grade ores increase blast furnace productivity
29 Additionally, the use of high grade ores increases blast furnace productivity Schematics of a blast furnace Impact on productivity¹ Slag rate 25% reduction COKE SINTER COHESIVE ZONE 8% Volume effect x + HEATED AIR Increase in Slag volumetric ~20% blast furnace 30% share in BF productivity burden
Slide 30: High grade ores have significant financial impact
30 High grade ores have a significant financial impact even in scenarios of more stringent steel margins Productivity value of high vs low-grade ores1 US$/dmt of high grade iron ore 27.8 19.7 11.7 50 100 150 Steel margin ranges (US$/t) 30 1 High grade ore: Fe: 65%; Low grade ore: Fe: 56.6%.
Slide 31: Combined benefits across coke prices and steel margins
31 Leading to combined benefits of using higher x lower grade ores in every scenario of coke prices and steel margins Relative values of high to low grade ores Assumptions US$/dmt of iron ore Low demand scenarios ▪ Blast furnace capacity as the High demand scenarios bottleneck for the calculation of
Slide 32: Iron ore is not a commodity
32 Iron ore is not a commodity, bringing many opportunities for Vale Establishing the relative economic value of high grade ores Capturing intrinsic value of Vale’s ore in product pricing Monitoring and anticipating global market trends Managing product portfolio actively 32
Slide 33: Market opportunity to improve pricing of Vale's blend
33 There was a clear market opportunity to improve pricing of Vale’s blended product Main market indexes and products Products pricing the 62% Fe reference¹ Product PBF NEW MAC Others BRBF Aussie Index share 2.5 2Q18 74% 3% 22% 77% PBF IODEX MAC 1Q18 83% 17% 100% Argus Newman 0.4 2017 78% 5% 95% 12%
Slide 34: BRBF pricing strategy improved value perception vs PBF
34 BRBF pricing strategy improved its value perception relative to the Pilbara Blend Fines (PBF) BRBF vs. PBF differential US$/t 12.0 10.0 8.0 6.0 4.0 2.0 - 3-Apr-18 18-Apr-18 3-May-18 18-May-18 2-Jun-18 17-Jun-18 2-Jul-18 17-Jul-18 1-Aug-18 16-Aug-18 34 Source: Vale and PRAs (Price Reporting Agency
Slide 35: New index better captures the value of BRBF
35 The recently launched index better captures the intrinsic value of Vale’s BRBF 5-Month Comparison MBIOI-62 to MBIOI-62-LA US$/t MBIOI-62 MBIOI-62-LA 76 74 72 70 68 66 64 62 60 Apr/18 May/18 Jun/18 Jul/18 Aug/18 35 Source: Metal Bulletin
Slide 36: Iron ore is not a commodity
36 Iron ore is not a commodity, bringing many opportunities for Vale Establishing the relative economic value of high grade ores Capturing intrinsic value of Vale’s ore in product pricing Monitoring and anticipating global market trends Managing product portfolio actively 36
Slide 37: Long term supply quality trends reaffirm uniqueness of Vale's products
37 Long term trends for supply quality reaffirm the uniqueness of Vale’s iron ore products Al/Si P % Seaborne average¹ Seaborne average¹ Vale average Vale average 0.44 0.41 0.42 0.08 0.36 0.37 0.07 0.07 0.32 0.07 0.07 0.06 2018 2020 2025 2018 2020 2025 Vale’s average Al/Si is below the seaborne Vale
Slide 38: Incoming supply will not replace quality being depleted
38 Incoming supply from peers will not replace the quality of current production which is presently being depleted Supply profile¹ 2018 vs. 2025 Mtpy Higher contaminants Lower contaminants 71 251 72 Al/Si: 0.51% Al/Si: 0.41% P: 0.095% P: 0.075% 45 180 32 30 55 15 14 80 63 24 24 South Flank Koodaider
Slide 39: Iron ore is not a commodity
39 Iron ore is not a commodity, bringing many opportunities for Vale Establishing the relative economic value of high grade ores Capturing intrinsic value of Vale’s ore in product pricing Monitoring and anticipating global market trends Managing product portfolio actively 39
Slide 40: Vale will leverage its product portfolio dynamically
40 Vale will dynamically leverage its product portfolio in order to respond to clients’ requirements and market conditions Profile of Vale’s iron ore products1 Seaborne average2 Al Si % % 4.95 2.04 6.3 5.7 2.1 5.0 5.0 1.8 1.5 0.9 1.0 2.1 2.4 0.5 IOCJ BRBF SFLA PFFT SSFT SSFG IOCJ BRBF SFLA PFFT SSFT
Slide 41: Supply chain management
XVIII Analyst & Investor Tour Supply chain management Vagner 41 Loyola September 6th, 2018
Slide 42: Extensive, flexible and dynamically managed supply chain
42 An extensive, flexible and dynamically managed supply chain results in higher competitiveness and margin optimization Extensive Flexible Dynamic product portfolio Markets 4 Integrated Production • Pellets (Blast furnace • Europe Systems in Brazil (mine- and Direct reduction) Distribution Centers
Slide 43: Value over volume is a new management model
43 Value over volume is more than words, it is a new management model Process Strategic instrument Maximize margins through decisions based on Integrated Operations Center (COI) is a key market conditions instead of production volume lever for supply chain management goals COI Global COI System COI
Slide 44: New model allows dynamic response to market demand
44 This new management model allows Vale to respond dynamically to developments in market demand Example Reduction of ~20Mtpy of high silica fines from 3Q17 onwards 2017 Mine Plant Logistics inBrazil Offshore May 2nd half of Discussions begin on trends towards high silica discounts the month June Mi
Slide 45: Shipping initiatives offsetting the impact of IMO 2020
45 Shipping initiatives are offsetting the impact of IMO 2020 US$/t Combined effect of more efficient engines Theoretical impact of and competitive market US$ 200/t spread for conditions Net effect of scrubbers replacing HSFO with on costs and savings Marine Diesel at the from use of HSFO entire fle
Slide 46: Supply chain management captured US$ 3 billion until 2018
46 Supply chain management captured US$ 3 billion1 until 2018 by adjusting to customer demands and market conditions Vale’s average price premium2 Main accomplishments US$/t ✓ Adjustment of product portfolio by reducing Price realization high silica products Pellets adjustment ✓ Development of a new
Slide 47: Supply chain management will further contribute to margins
47 Supply chain management will further contribute to margins Examples Opportunities Benefits • Further improve sales and operations planning • Reduce demurrage costs and freight costs process • Increase productivity through synchronism / • Increase value chain productivity stability and optimize co
Slide 48: Closing remarks
XVIII Analyst & Investor Tour Closing remarks Luciano 48 Siani Pires September 6th, 2018
Slide 49: Premium portfolio boosted cash flow generation in 2018
49 Premium product portfolio, flexibility and predictability boosted cash flow generation in 2018 % FCF Yield US$ billion 16.2 0.8 19.9% 1.2 1.0 4.2 13.9 3.6 12.8% 0.6 0.7 8.9 Analysts' Working Interest on Income tax Investment Others² Free cash Cobalt Net Free cash average Capital loans & REFIS flo
Slide 50: Nickel business initiatives to improve operational efficiency
50 The nickel business will implement several initiatives to improve operational efficiency 2Q18 EBITDA Breakeven 2019 EBITDA Breakeven levers US$/t 13,139 6,958 • Operational stability • Digital transformation program • Portfolio simplification (e.g. closure of Thompson smelter and refinery in 535
Slide 51: Copper operations in Brazil a cash cow for Base Metals
51 Copper operations in Brazil will continue to be a cash cow for our Base Metals division in 2019 2Q18 EBITDA Breakeven – Salobo 2Q18 EBITDA Breakeven – Sossego US$/t US$/t 4,069 857 483 3,861 166 3,605 2,669 3,378 3,212 769 1,722 17 936 953 COGS By-product COGS Expenses Premium / EBITDA COGS By-pr
Slide 52: Coal priority was stabilization of Moatize
52 In the coal business, the priority was the stabilization of Moatize in 2018 to guarantee a sustainable ramp-up 2Q18 Pro-forma C1 Cash Cost Full ramp-up pro-forma C1 Cash Cost Guidance US$/t US$/t 4 128 12 125 117 117 45 25-30 0 85-95 3- 6 82-89 79 60-65 Pro-forma Pro-forma Nacala non- Nacala Othe
Slide 53: Robust cash flow in 2019 despite current breakeven levels
53 In 2019, robust cash flow can be generated even considering current breakeven levels Breakeven Price1 - EBITDA2 X Volume3 - Investment - Others5 = FCF Iron Ore & 62 28.8 393 Mt4 Pellets Nickel 15,000 6,408 262 Kt Copper Brazil 7,000 2,404 288 Kt ~US$ 4.5 bi ~US$ 3.4 bi ~US$ 8.1 bi Coal 1656 116.8
Slide 54: Strong balance sheet sets basis for new era of shareholder remuneration
54 Strong balance sheet set the basis for starting a new era of shareholder remuneration Net Debt Shareholder remuneration US$ billion US$ billion Buyback New Remuneration Policy Former Remuneration Policy 22.1 4.5 1.0 14.9 2.1 11.5 10.0 1.5 1.4 0.3 2Q17 1Q18 2Q18 Target 2016 2017 2018 2019 54
Slide 55: Rigorous capital allocation will pave the way for growth
55 Rigorous capital allocation will pave the way for future growth Engineering, economics and funding solved Study phase São Luís, Tubarão I and II VBME Salobo III Optionality pellet plants • Up to 13.7 Mtpy of • Cobalt stream is • FEL 3 to be concluded • Oman pellet pellet capacity equivalent to 40
Slide 56: Minimum dividend plus options for shareholder return
56 On top of minimum dividend Vale will explore options for shareholder return in a disciplined way Minimum Dividend • Equivalent to ~50% of FCF1 (30% of EBITDA - Sust.)1 Extraordinary Dividends • Additional return to shareholders or • Upside for share appreciation Buybacks • Salobo III ~8,000 US$/t
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