Table of Contents

 

 

 

United States
Securities and Exchange Commission

Washington, D.C. 20549

 

FORM 6-K

 

Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
of the
Securities Exchange Act of 1934

 

For the month of

 

July 2012

 

Vale S.A.

 

Avenida Graça Aranha, No. 26
20030-900 Rio de Janeiro, RJ, Brazil

(Address of principal executive office)

 

(Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.)

 

(Check One) Form 20-F  x  Form 40-F  o

 

(Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1))

 

(Check One) Yes  o  No   x

 

(Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7))

 

(Check One) Yes  o  No   x

 

(Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.)

 

(Check One) Yes o  No  x

 

(If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b). 82-   .)

 

 

 



Table of Contents

 

Table of Contents:

 

Press Release

Signature Page

 



Table of Contents

 

A robust performance

 

 

BM&F BOVESPA: VALE3, VALE5

PERFORMANCE OF VALE IN 2Q12

NYSE: VALE, VALE.P

HKEx: 6210, 6230

EURONEXT PARIS: VALE3, VALE5

LATIBEX: XVALO, XVALP

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

www.vale.com

rio@vale.com

 

Departament of

Investor Relations

 

Roberto Castello Branco

Viktor Moszkowicz

Carla Albano Miller

Andrea Gutman

Christian Perlingiere

Marcio Loures Penna

Rafael Rondinelli

Samantha Pons

Tel: (5521) 3814-4540

 

 

Rio de Janeiro, July 25, 2012 — Vale S.A. (Vale) had a robust financial performance in spite of the challenges posed by the lower price environment and operational issues in the base metals and coal businesses.

 

Iron ore production and sales have recovered from last quarter’s weather-related low performance while some important milestones were achieved in the development of our most important projects, including Carajás S11D. Moreover, we took additional effective steps to rationalize the asset portfolio as a value creation tool.

 

Operating revenues, income and margin, as well as cash flow improved in relation to 1Q12.

 

Net earnings suffered a large accounting non-cash balance sheet impact arising from the devaluation of the Brazilian real, our functional currency for accounting purposes, against the US dollar.

 

On the other hand, the appreciation of the US dollar vis-à-vis the Brazilian real, the Canadian dollar and other currencies, which represent about 80% of our operating costs, contributed positively to the cash flow. Given that almost 100% of our debt portfolio is denominated in US dollars or converted into US dollars through swaps there is no material effect on it.

 

Asset divestiture, which improves the allocation of capital and is a source of shareholder value creation, produced non-recurring accounting losses in the quarter.

 

We continue to develop a large portfolio of projects aiming to meet the demand stemming from the long-term growth dynamics of emerging economies and with a strong focus on maximizing value creation.

 

The main highlights of Vale’s performance in 2Q12 were:

 

·      Iron ore shipments reached 63.0 Mt, 14.9% higher than 1Q12.

 

·      Record pellet sales for a quarter, 12.3 Mt, 13.1% above the previous record in 4Q11.

 

·      Operating revenues of US$ 12.2 billion, 7.2% above 1Q12.

 

·      Income from existing operations, as measured by adjusted EBIT(a) (earnings before interest and taxes), of US$ 3.9 billion. After excluding the non-recurring effect of accounting losses(1), adjusted EBIT reached US$ 4.3 billion, 11.7% higher than 1Q12.

 


(1)  Non-recurring effect of accounting losses of US$ 377 million in 2Q12 related to the divestment of the thermal coal assets in Colombia and manganese ferroalloys in Europe.

 

US GAAP

   2Q12

 

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·      Operating income margin of 36.2%, as measured by adjusted EBIT margin, after excluding non-recurring losses.

 

·      Net earnings of US$ 2.7 billion, equal to US$ 0.52 per share. If we isolate the influence of the non-cash effects, earnings before taxes would be US$ 4.0 billion, 5.7% above the US$ 3.8 billion figure in 1Q12.

 

·      Cash generation, as measured by adjusted EBITDA(b) (earnings before interest, taxes, depreciation and amortization), of US$ 5.1 billion. After excluding non-recurring accounting losses, cash generation reached US$ 5.5 billion, 10.7% over 1Q12. Over the last 12-month period ended on June 30, 2012, adjusted EBITDA was US$ 27.1 billion.

 

·      Capital expenditures, excluding acquisitions, of US$ 4.3 billion in 2Q12, 16.6% above 1Q12. In 1H12, capital expenditures reached US$ 8.0 billion, 17.5% above the US$ 6.8 billion in 1H11.

 

·      The first tranche of the minimum dividend for 2012, US$ 3.0 billion, was paid to shareholders on April 30, 2012.

 

·      Maintenance of a strong balance sheet, with low debt leverage, measured by total debt/LTM adjusted EBITDA, equal to 0.9x, long average maturity, 9.4 years, and low average cost, 4.61% per year as of June 30, 2012.

 

Table 1 - SELECTED FINANCIAL INDICATORS

 

 

 

2Q11

 

1Q12

 

2Q12

 

%

 

%

 

US$ million

 

(A)

 

(B)

 

(C)

 

(C/A)

 

(C/B)

 

Operating revenues

 

15,345

 

11,339

 

12,150

 

(20.8

)

7.2

 

Adjusted EBIT

 

7,747

 

3,850

 

3,923

 

(49.4

)

1.9

 

Adjusted EBIT excluding charges from asset sales

 

7,747

 

3,850

 

4,300

 

(44.5

)

11.7

 

Adjusted EBIT margin excluding charges from asset sales (%)

 

51.7

 

34.8

 

36.2

 

 

 

 

 

Adjusted EBITDA

 

9,069

 

4,965

 

5,119

 

(43.6

)

3.1

 

Adjusted EBITDA excluding charges from asset sales

 

9,069

 

4,965

 

5,496

 

(39.4

)

10.7

 

Net earnings

 

6,452

 

3,827

 

2,662

 

(58.7

)

(30.4

)

Earnings per share on a fully diluted basis (US$ / share)

 

1.22

 

0.74

 

0.52

 

(57.2

)

(29.6

)

Total debt/ adjusted EBITDA (x)

 

0.7

 

0.8

 

0.9

 

38.3

 

17.2

 

ROIC(1) (%)

 

34.2

 

33.5

 

33.1

 

 

 

 

 

Capex (excluding acquisitions)

 

4,036

 

3,677

 

4,287

 

6.2

 

16.6

 

 


(1) ROIC LTM=return on invested capital for the last twelve-month period.

 

 

 

1S11

 

1S12

 

%

 

US$ million

 

(A)

 

(B)

 

(B/A)

 

Operating revenues

 

28,893

 

23,489

 

(18.7

)

Adjusted EBIT

 

15,716

 

7,773

 

(50.5

)

Adjusted EBIT excluding the charges from asset sales

 

14,203

 

8,150

 

(42.6

)

Adjusted EBIT margin excluding charges from asset sales (%)

 

50.4

 

35.5

 

 

 

Adjusted EBITDA

 

18,245

 

10,084

 

(44.7

)

Adjusted EBITDA excluding charges from asset sales

 

16,732

 

10,461

 

(37.5

)

Net earnings

 

13,278

 

6,489

 

(51.1

)

Capex (excluding acquisitions)

 

6,779

 

7,964

 

17.5

 

Acquisitions

 

221

 

648

 

193.2

 

 

Except where otherwise indicated the operational and financial information in this release is based on the consolidated figures in accordance with US GAAP and, with the exception of information on investments and behavior of markets, quarterly financial

 

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statements are reviewed by the company’s independent auditors. The main subsidiaries that are consolidated are the following: Compañia Minera Miski Mayo S.A.C., Ferrovia Centro-Atlântica S.A.(FCA), Ferrovia Norte Sul S.A, Mineração Corumbaense Reunida S.A., PT Vale Indonesia Tbk (formerly International Nickel Indonesia Tbk), Sociedad Contractual Minera Tres Valles, Vale Australia Pty Ltd., Vale International Holdings GMBH, Vale Canada Limited (formerly Vale Inco Limited), Vale Coal Colombia Ltd., Vale Fertilizantes S.A., Vale International S.A., Vale Manganês S.A., Vale Mina do Azul S.A., Vale Moçambique S.A., Vale Nouvelle-Calédonie SAS, Vale Oman Pelletizing Company LLC and Vale Shipping Holding PTE Ltd..

 

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INDEX

 

A ROBUST PERFORMANCE

1

Table 1 - SELECTED FINANCIAL INDICATORS

2

BUSINESS OUTLOOK

5

REVENUES

9

Table 2 – OPERATING REVENUE BY BUSINESS AREAS

9

Table 3 – OPERATING REVENUE BY DESTINATION

10

COSTS AND EXPENSES

10

Table 4 - COGS AND EXPENSES

12

OPERATING INCOME

13

NET EARNINGS

13

CASH GENERATION

14

Table 5 - ADJUSTED EBITDA

14

Table 6 - ADJUSTED EBITDA BY BUSINESS AREA

15

INVESTMENTS

15

Table 7 – TOTAL INVESTMENT BY CATEGORY

18

Table 8 – TOTAL INVESTMENT BY BUSINESS AREA

18

DEBT INDICATORS

22

Table 9 - DEBT INDICATORS

23

FUND RAISING

24

PERFORMANCE OF THE BUSINESS SEGMENTS

24

Table 10 – FERROUS MINERALS BUSINESS PERFORMANCE

27

Table 11 – COAL BUSINESS PERFORMANCE

30

Table 12 - BULK MATERIALS: SELECTED FINANCIAL INDICATORS

30

Table 13 – BASE METALS BUSINESS PERFORMANCE

31

Table 14 – FERTILIZER NUTRIENTS BUSINESS PERFORMANCE

32

Table 15 – LOGISTICS BUSINESS PERFORMANCE

34

FINANCIAL INDICATORS OF NON-CONSOLIDATED COMPANIES

35

CONFERENCE CALL AND WEBCAST

35

BOX – IFRS RECONCILIATION WITH USGAAP

36

ANNEX 1 – FINANCIAL STATEMENTS

37

Table 16 - INCOME STATEMENTS

37

Table 17 - FINANCIAL RESULTS

37

Table 18 - EQUITY INCOME BY BUSINESS SEGMENT

37

Table 19 - BALANCE SHEET

38

Table 20 – CASH FLOW

39

ANNEX 2 – VOLUMES SOLD, PRICES , MARGINS AND CASH FLOWS

40

Table 21 - VOLUMES SOLD - MINERALS AND METALS

40

Table 22 - AVERAGE SALE PRICES

40

Table 23 - OPERATING MARGINS BY SEGMENT

40

ANNEX 3 – RECONCILIATION OF US GAAP and “NON-GAAP” INFORMATION

41

 

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BUSINESS OUTLOOK

 

The global financial shock of 2008 produced a deep recession, with one of the very few episodes of global GDP contraction in modern economic history. The policy reaction to the shock entailed a V-shaped recovery, led by emerging economies and industrial production growth, which caused the sharpest metals price recovery from a recession in more than four decades.

 

Two years after the beginning of the financial stress in the Euro area the scenario still remains uncertain. The bank and sovereign debt crisis did not produce a global recession but there are no prospects for a strong recovery in the short-term.

 

Unlike in 2008/2009, metal price volatility has been more limited, and despite the fall from the post-crisis peaks, current price levels are much higher than those reached during the Great Recession. On the other hand, similarly to 2008/2009, the currencies of mineral rich countries depreciated against the US dollar, helping to reduce mining companies’ costs.

 

After a good performance in the first quarter of the year, world economy growth has been downtrending due to reasons that differ across regions.

 

The debt-fueled growth model adopted by developed economies has reached a point of exhaustion. The US recovery moves ahead at below-trend pace, in line with the standard typically followed by recoveries after recessions resulting from financial crises, and the Euro area is under recession.

 

Growth momentum in major emerging economies, such as Brazil, India and China, has slowed. This reflects not only a weaker external environment but mostly the deceleration of domestic demand caused by macroeconomic policy tightening last year and the effect of capacity constraints.

 

Following the surge in 1Q12 associated to the restoration of the global supply chain, in response to the disruption caused by the Thai floods, global industrial production slowed significantly in recent months, mostly due to the contraction in developed economies and Latin America. The signals given by the global manufacturing PMI point to further slowing of global industrial output in 3Q12.

 

On the positive side, global inflation has been falling, reflecting the effects of monetary tightening in emerging economies and widespread declines in energy prices. Lower inflation has two important implications for short-term growth: (i) a lift to household purchasing power to boost spending; (ii) more room for Central banks to shift their focus to the downside risks of growth and are effectively ease monetary policy. The policy stimulus is likely to gain traction over the next few months.

 

As a matter of fact, sequential GDP growth in China showed a slight improvement in 2Q12 and the data released so far show the first sign of recovery in infrastructure investment and housing, two important sectors for the demand for metals, particularly iron ore and copper.

 

Global auto sales are rebounding, increasing in June for the second consecutive month. It is also a positive event for the mining industry, as cars are the most metals intensive consumer durable.

 

US households and banks have already deleveraged and earnings and cash flow of nonfinancial corporations have been growing since mid-2009. At the same time, there are signs of improvement in housing. However, a stronger recovery is deterred by fiscal and regulatory uncertainty.

 

Europe has suffered an ongoing loss of importance over recent years as a market for metals. European share in the global seaborne iron ore market dropped continuously to 11% in 2011 from 37% in 1990. A similar but less pronounced decline is shown by its participation in the global consumption of nickel, 20% in 2011 against 31% in 2000.

 

However, the financial crisis in the Euro area affects indirectly the demand for metals primarily through financial channels, as higher asset price volatility implies negative expectations, thus

 

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lessening investors’ appetites and affecting growth in the rest of the world.

 

European authorities have responded to the recent intensification of financial stress announcing a number of measures, including funding for the recapitalization of Spanish banks, greater flexibility in the use of financial backstops and a movement toward the unified supervision of Euro area banks. Although a financial meltdown has been avoided, financial market participants still have doubts about the ability of some of the Euro area economies to deliver the badly needed fiscal adjustment to improve debt sustainability.

 

Europe has a large pool of wealth, more than sufficient to deal with the debt challenge, and there is strong political support for the preservation of the Euro, two critical conditions that will help to find a solution to the Euro area crisis.

 

The recession in the Euro area is expected to be prolonged: there is a long journey for European banks to deleveraging and the rigidity in labor markets contributes to deepen the effects of fiscal tightening. However, the avoidance of a major financial crisis will limit the negative spillover on the rest of the global economy.

 

China’s real GDP growth slowed to 7.6% y/y in 2Q12, but at the margin it rebounded to 7.0% q/q from 6.7% in 1Q12(2), suggesting that it may have bottomed out last quarter.

 

Simultaneously to the slide in inflation, expected to converge to 2%, retail sales have remained firm, expanding 13.7% y/y, and fixed asset investment grew 20.4 % y/y in line with the last few months. While property investment continued to slow, growth of infrastructure investment has accelerated through 2Q12 to reach 18.5% y/y in June, bouncing back from the continued decline since mid-2009.

 

Given the reluctance of the Chinese authorities to expand fiscal spending, policy support for economic activity will be funded by a credit increase. New bank lending reached RMB920 billion in June, growing by 45.1% y/y and 16.6% ytd y/y. The increase in bank lending reflects the shift in macro policy, through bank reserve required ratios and interest rate cuts, the loosening of credit restrictions and the acceleration of infrastructure projects. Credit demand is expected to continue to recover as more infrastructure projects are approved and implemented.

 

For the first time since October 2011, the 70-city house price index released by the National Bureau of Statistics (NBS) showed that in June the number of cities with house price increases was superior to the number of cities with price decreases. By the same token, according to Soufun, a private real estate statistics provider, there was an increase in national house prices in June for the first month since September last year. These early indications of stabilization were accompanied by a recovery in transaction volumes, which rose by 6.9% y/y, also the first increase since September 2011.

 

It is very likely that the housing market is beginning to respond to the recent incentives, particularly to first home-buyers and buyers of small apartments.

 

While we do not expect the government to relax the restrictions on the investment demand for housing, the property sector is likely to gradually bottom out in the second half of the year. Our view is based on the investment in social housing and the improvement in housing affordability, stemming from disposable household income growth, slightly lower house prices, cuts in interest rates and the various incentives given by the central and local governments.

 

Social housing is one of the priorities of the 12th five-year plan, given the substantial housing deficit and its role in the mitigation of social tension, particularly in tier-1 cities where housing prices are too high and will continue to be unaffordable to low and middle income households. Moreover, social housing provides a cushion to the negative impact on the economy from the tightening on private housing.  The property sector represents about 12% of China´s GDP, and property investment represents 25% of total fixed asset investment, which has been the main driver of Chinese economic growth.

 

Moving forward, the demand for housing will continue to be strong in the foreseeable future in the face of rapid economic growth and the

 


(2) Quarterly growth rates on a seasonally adjusted annualized basis.

 

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urbanization process. China has a very high savings rate, which facilitates housing investment with a much lower level of leverage than in developed economies, a factor that mitigates the risks of a financial crisis.

 

Furthermore, local governments see real estate as an important source of economic growth as land sales contribute to increase their revenues. The improvement in infrastructure financed by these revenues supports house prices and ultimately feedback into land sales.

 

Iron ore imports from China increased 9.7% in 1H12, reaching 367 Mt and implying substitution of domestic iron ore.

 

Declining quality and rising costs have been constraining Chinese iron ore domestic output. Producers play the role of swing producers being highly price sensitive. As prices have been range bound between US$ 130-US$ 150 per metric ton since the lows of last October, high cost marginal suppliers have been offline thus setting a floor to prices.

 

As a result of the weakening of global steel consumption, the price premium for 1% Fe content decreased from the highs of 2011, at about US$ 5.50/6.00 per ton, to levels between US$ 3.00/3.50 per metric ton.

 

Given the flexibility allowed by our global distribution network, we have been able to increase iron ore sales in line with production, benefiting from our low cost base.

 

Looking forward, we expect prices to remain high in face of the recovery in global steel consumption, high operating and capex costs and continued supply growth constraints.

 

After the supply shock of 2011, caused by the floods in Queensland and the resulting disruption of the Australian production, metallurgical coal prices returned to levels in line with steel demand conditions.

 

China is surpassing India as the second largest met coal importer and is likely that it will be the largest in a couple of years, thus surpassing Japan. Imports are expected to feed about one third of the expected increase in Chinese consumption over the next five years.

 

In a similar way to iron ore, it is also likely that due to rising costs China will become the marginal supplier of coal. As the seaborne market is small relative to the Chinese market, any disequilibrium in this market could produce large swings in seaborne trade.

 

Rising capex costs are likely to set a high floor for the high quality hard coking coal price premium. In a world with increasing scarcity of met coal reserves, Vale is very well positioned in Moatize, one of the richest coking coal provinces. Moatize I, a low cost open pit mining operation, is ramping up successfully, delivering two types of HCC — Chipanga premium and typical. Moatize II is under construction and we are taking active steps to start building the logistics infrastructure, which encompasses a railroad and a deep water maritime terminal in the north of Mozambique.

 

Nickel prices declined from the peak reached in February this year arising from the commodity price rally influenced by the positive expectations generated by the € 1 trillion LTRO launched by the European Central Bank. Over recent weeks prices have been hovering around US$ 16,000 per metric ton, influenced by the weakness of stainless steel demand and negative expectations about global economic growth.

 

The demand for nickel from non-stainless steel applications has been holding firm, influenced by the steadiness in the consumption of the energy and aerospace industries. Rising global auto sales are also expected to have a positive impact on nickel demand in the near term.

 

The nickel-in-pig-iron industry (NPI) is being challenged by the lower nickel prices, forcing some of the marginal suppliers to shutdown operations, which contributes to setting a price floor.

 

As commented in 1Q12, the Indonesian government’s imposition of a 20% export tax on nickel ores and volume quotas may put additional pressure on the NPI industry, which depends critically on the ore supply from Indonesia and the Philippines. Japan, the second largest nickel importer in the world, also depends on ore imports to feed its ferronickel plants. In the short-term, Chinese NPI producers are holding large ore inventories built up in anticipation of the new Indonesian regulations.

 

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For the longer term, we believe that restrictions to nickel ore exports will cause additional pressures on NPI producers. Although there is some replacement of the higher cost blast furnaces by electric arc furnace (EAF) plants, the move will offset cost pressures only partially, given the large weight of nickel ores in the operating costs of EAF plants.

 

The worst US Midwest droughts in more than 50 years is pushing agricultural commodities prices to record highs, particularly grain prices, which are intensive in the use of fertilizers. Prices of soybeans and corn have already overtaken the peak levels of 2007/2008. The increase in food prices is a leading indicator of the demand for fertilizers as farmers seek more productivity to expand supply in response to the price incentive.

 

Growing resource constraints, as 25% of the world’s agricultural land is highly degraded(3) and lacking in soil organic matter and nutrients, and environmental pressures — agriculture is a large net contributor of greenhouse gases — require sustainable productivity growth in order to meet an increasing global demand for food. Rising per capita incomes and urbanization in emerging economies are leading to changes in diets that shift consumption to more processed foods, fats and animal protein, which drive the demand for grains and oilseeds, ultimately boosting the demand for fertilizers.

 

Vale is positioned to supply an increasing volume of fertilizers in the medium-term through the development of its portfolio of potash and phosphates projects.

 

Despite the recession in Europe and the debt sustainability challenge faced by the largest developed economies, we strongly believe that the expansion of the global economy will gradually accelerate through the next few quarters. Although global GDP and industrial production are expected to grow in the next five years at a slower pace than we saw in the five-year period before the Great Recession of 2008/2009, global economic activity will remain robust.

 

In this scenario, global growth led by emerging markets global growth will support a robust demand for minerals and metals which, combined with the increasing scarcity of natural resources, will maintain their prices at relatively high levels.

 

Over the next twenty years, it is estimated that more than two billion people will move upwards to the middle income classes, requiring housing, infrastructure services, consumer durables and proteins, which will demand an increasing supply of metals and fertilizers, among other products.

 

Vale is investing in a diversified portfolio of investment and consumption demand-driven products to meet and to benefit from the long-term growth dynamics of emerging economies.

 


(3)  According to the OECD-FAO Agricultural Outlook 2012-2021.

 

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REVENUES

 

Operating revenues totaled US$ 12.150 billion in 2Q12, 7.2% higher than the US$ 11.339 billion in 1Q12. The increase was determined by the greater volumes of sales, particularly iron ore and pellets, which added US$ 1.199 billion to our revenues. On the other hand, the decline in bulk materials and base metals prices reduced revenues by US$ 611 million in comparison with 1Q12.

 

Revenues generated from the sales of bulk materials — iron ore, pellets, manganese ore, ferroalloys, metallurgical and thermal coal — were 73.5% of operating revenues in 2Q12, increasing from 72.7% in 1Q12. The share of base metals fell to 14.7% from 15.7% in the previous quarter, while fertilizers were responsible for 7.6% slightly higher than the 7.3% in 1Q12. Logistics services contributed 3.4% to total revenues and other products, 0.9%.

 

Shipments to Asia represented 51.3% of total revenues, in line with 51.4% in the last quarter, while the Americas lost some ground, with 26.4% in 2Q12 against 28.7% in 1Q12. Europe showed a relative improvement, with its share increasing to 19.1% from 16.7% in 1Q12, despite the worsening of the economic environment. Revenues from shipments to the Middle East were 2.2% in 2Q12 from 2.4% in the previous quarter, while the rest of the world contributed with 1.0%.

 

On a country basis, the share of sales to China of total revenues amounted to 31.3% in 2Q12, Brazil 19.0%, Japan 10.5%, Germany 6.1%, South Korea 4.9% and Italy 4.1%.

 

Table 2 - OPERATING REVENUE BY BUSINESS AREAS

 

US$ million 

 

2Q11

 

%

 

1Q12

 

%

 

2Q12

 

%

 

Bulk materials

 

11,681

 

76.1

 

8,240

 

72.7

 

8,934

 

73.5

 

Ferrous minerals

 

11,425

 

74.5

 

7,851

 

69.2

 

8,658

 

71.3

 

Iron ore

 

9,102

 

59.3

 

5,987

 

52.8

 

6,505

 

53.5

 

Pellets

 

2,113

 

13.8

 

1,688

 

14.9

 

1,952

 

16.1

 

Manganese ore

 

51

 

0.3

 

42

 

0.4

 

63

 

0.5

 

Ferroalloys

 

150

 

1.0

 

124

 

1.1

 

129

 

1.1

 

Pellet plant operation services

 

9

 

0.1

 

10

 

0.1

 

9

 

0.1

 

Coal

 

256

 

1.7

 

389

 

3.4

 

276

 

2.3

 

Thermal coal

 

139

 

0.9

 

137

 

1.2

 

79

 

0.6

 

Metallurgical coal

 

117

 

0.8

 

251

 

2.2

 

197

 

1.6

 

Base metals

 

2,225

 

14.5

 

1,775

 

15.7

 

1,781

 

14.7

 

Nickel

 

1,461

 

9.5

 

1,103

 

9.7

 

1,119

 

9.2

 

Copper

 

491

 

3.2

 

467

 

4.1

 

458

 

3.8

 

PGMs

 

159

 

1.0

 

105

 

0.9

 

115

 

0.9

 

Precious metals

 

90

 

0.6

 

83

 

0.7

 

73

 

0.6

 

Cobalt

 

23

 

0.1

 

17

 

0.1

 

16

 

0.1

 

Fertilizer nutrients

 

867

 

5.7

 

829

 

7.3

 

923

 

7.6

 

Potash

 

68

 

0.4

 

70

 

0.6

 

81

 

0.7

 

Phosphates

 

584

 

3.8

 

548

 

4.8

 

630

 

5.2

 

Nitrogen

 

194

 

1.3

 

192

 

1.7

 

193

 

1.6

 

Others

 

21

 

0.1

 

19

 

0.2

 

19

 

0.2

 

Logistics services

 

476

 

3.1

 

403

 

3.6

 

408

 

3.4

 

Railroads

 

357

 

2.3

 

265

 

2.3

 

294

 

2.4

 

Ports

 

119

 

0.8

 

138

 

1.2

 

114

 

0.9

 

Others

 

96

 

0.6

 

92

 

0.8

 

104

 

0.9

 

Total

 

15,345

 

100.0

 

11,339

 

100.0

 

12,150

 

100.0

 

 

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Table 3 - OPERATING REVENUE BY DESTINATION

 

US$ million 

 

2Q11

 

%

 

1Q12

 

%

 

2Q12

 

%

 

North America

 

679

 

4.4

 

678

 

6.0

 

686

 

5.6

 

USA

 

406

 

2.6

 

408

 

3.6

 

410

 

3.4

 

Canada

 

254

 

1.7

 

265

 

2.3

 

265

 

2.2

 

Mexico

 

19

 

0.1

 

5

 

 

11

 

0.1

 

South America

 

3,189

 

20.8

 

2,578

 

22.7

 

2,521

 

20.7

 

Brazil

 

2,904

 

18.9

 

2,351

 

20.7

 

2,312

 

19.0

 

Others

 

285

 

1.9

 

227

 

2.0

 

209

 

1.7

 

Asia

 

7,993

 

52.1

 

5,828

 

51.4

 

6,230

 

51.3

 

China

 

5,005

 

32.6

 

3,551

 

31.3

 

3,802

 

31.3

 

Japan

 

1,790

 

11.7

 

1,335

 

11.8

 

1,273

 

10.5

 

South Korea

 

626

 

4.1

 

532

 

4.7

 

591

 

4.9

 

Taiwan

 

299

 

1.9

 

170

 

1.5

 

356

 

2.9

 

Others

 

273

 

1.8

 

240

 

2.1

 

208

 

1.7

 

Europe

 

3,067

 

20.0

 

1,889

 

16.7

 

2,321

 

19.1

 

Germany

 

985

 

6.4

 

672

 

5.9

 

738

 

6.1

 

France

 

258

 

1.7

 

105

 

0.9

 

149

 

1.2

 

Netherlands

 

192

 

1.3

 

115

 

1.0

 

73

 

0.6

 

UK

 

395

 

2.6

 

237

 

2.1

 

214

 

1.8

 

Italy

 

546

 

3.6

 

315

 

2.8

 

498

 

4.1

 

Turkey

 

84

 

0.5

 

66

 

0.6

 

124

 

1.0

 

Spain

 

129

 

0.8

 

106

 

0.9

 

108

 

0.9

 

Others

 

478

 

3.1

 

272

 

2.4

 

418

 

3.4

 

Middle East

 

255

 

1.7

 

274

 

2.4

 

268

 

2.2

 

Rest of the World

 

162

 

1.1

 

93

 

0.8

 

125

 

1.0

 

Total

 

15,345

 

100.0

 

11,339

 

100.0

 

12,150

 

100.0

 

 

COSTS AND EXPENSES

 

In 2Q12, cost of goods sold (COGS) increased US$ 325 million on a quarter-on-quarter basis, amounting to US$ 6.015 billion. Adjusting for the effects of higher volumes (US$ 599 million) and exchange rate variation(4) (-US$ 394 million), COGS was up US$ 120 million when compared to 1Q12.

 

After excluding the effects of volumes and currency prices, the main reasons for the cost increase were the more intense use of outsourced services (US$ 128 million) for equipment maintenance and actions to enhance operations, higher prices of materials (US$ 46 million) and the rise in expenses with personnel (US$ 42 million), which were partially offset by acquisition of products (-US$ 59 million).

 

Costs with outsourced services totaled US$ 1.285 billion — 21.4% of COGS — against US$ 1.096 billion in 1Q12. Adjusting for higher volumes (US$ 145 million) and currency price changes (-US$ 84 million), costs with outsourced services showed a US$ 128 million increase vis-à-vis 1Q12, mainly reflecting higher maintenance services in: (i) nickel operations, including a six-week maintenance period at Clydach (US$ 15 million), (ii) the maintenance of iron ore equipment in the aftermath of the abnormally heavy rainfall in 1Q12 (US$ 34 million), (iii) fertilizer operations in Brazil (US$ 28 million) and (iv) our pelletizing plants in Tubarão (US$ 4 million).

 

Cost of materials — 18.1% of COGS — was US$ 1.091 billion, up 7.6% against 1Q12. Adjusting for the effects of volumes (US$ 99 million) and exchange rates (-US$ 79 million), costs of materials increased by US$ 57 million

 


(4)  COGS currency exposure in 2Q12 was made up as follows: 60% Brazilian reais, 20% US dollars, 15% Canadian dollars, 2% Australian dollars, 1% Indonesian rupiah and 2% other currencies.

 

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vis-à-vis 1Q12, mainly reflecting the effect of higher phosphates costs (US$ 46 million). Sulphur, ammonia, natural gas and oil are the core inputs in the production of fertilizers. Thus, the costs involved in producing phosphates rose as a consequence of the increase in ammonia and oil products prices.

 

In 2Q12, personnel costs amounted to US$ 909 million, representing 15.1% of COGS, against US$ 828 million in 1Q12. Our headcount increased to 85,072 employees in June 2012 from 82,895 in March 2012 and 74,076 in June 2011, raising costs by US$ 19 million on a quarter-on-quarter basis.

 

In addition, employees working in remote areas in Brazil (Carajás, Sossego and Onça Puma) earn semi-annual bonuses, paid in June and December. In June 2012, this bonus amounted to US$ 34 million, contributing to raise personnel costs.

 

In 2Q12, expenditures with energy  consumption accounted for 12.3% of COGS, reaching US$ 741 million, equal to a 5.7% quarter-on-quarter increase.

 

Costs of electricity consumption were US$ 213 million, slightly lower than 1Q12, driven by the appreciation of the US dollar (-US$ 16 million).

 

There was a US$ 44 million rise in expenses with fuel and gas to US$ 527 million from US$ 483 million in 1Q12. This was caused mainly by the effect of higher volumes (US$ 64 million), prices of HSFO (high sulphur fuel oil), mostly consumed by the Indonesian operations, (US$ 4 million), which were partially offset by exchange rate variation (-US$ 39 million).

 

The cost of purchasing products from third parties amounted to US$ 377 million — 6.3% of COGS — against US$ 398 million in 1Q12.

 

The purchase of iron ore and pellets amounted to US$ 221 million, against US$ 228 million in the previous quarter. The volume of iron ore bought from smaller miners was 2.6 Mt in 2Q12 compared to 1.8 Mt in 1Q12, which was offset by a 13.5% fall in price. In 2Q12, the acquisition of pellets from Hispanobrás amounted to 753,000 t against 703,000 t in 1Q12.

 

Expenses with the purchase of base metals products decreased to US$ 85 million from US$ 93 million in 1Q12 reflecting lower prices - nickel and copper ores prices were down 13.0% and 4.0%, respectively. We purchased the same volume of feed as in the previous quarter, 1,700 t of nickel intermediates while reducing the volume of copper ores to 7,500 t in 1Q12.

 

Costs with shared services stayed at US$ 76 million in 2Q12, in line with the previous quarter.

 

Other operational costs reached US$ 559 million against US$ 664 million in 1Q12 mainly due to: (i) decrease in the accrual of profit sharing, US$ 55 million, and (ii) demurrage charges down by US$ 54 million, reflecting better operational and weather conditions in 2Q12. On the other hand, there were higher expenses with royalties (US$ 18 million) that vary in tandem with sales.

 

Depreciation and amortization — 16.2% of COGS — amounted to US$ 977 million, against US$ 913 million in 1Q12.

 

Sales, general and administrative expenses (SG&A) totaled US$ 615 million in 2Q12, US$ 86 million above 1Q12. Higher SG&A expenses were driven by an increase in sales (US$ 81 million), mainly due to nickel and copper receivable adjustment (US$ 35 million) and administrative expenses (US$ 5 million).

 

In 2Q12, research and development (R&D) expenditures(5), which reflect our investment in creating long-term growth opportunities, increased to US$ 359 million vis-à-vis US$ 299 million invested in 1Q12.

 


(5)  This is an accounting figure. In the Investment section of this press release we disclose the amount of US$ 396 million for research and development, computed in accordance with the financial disbursement in 2Q12.

 

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Other operational expenses dropped by US$ 82 million to US$ 604 million, from US$ 686 million in 1Q12, mainly caused by the decrease in the provisions for profit sharing (US$ 110 million) related to corporate center personnel and contingencies (US$ 34 million), partially offset by higher damage costs (US$ 65 million) due to the operational issues at VNC (US$ 41 million) and at Carborough Downs (US$ 24 million), and higher pre-operating and start-up expenses (US$ 5 million).

 

As we are developing a large portfolio of projects scheduled to start-up between 2012 and 2016, some of the expenditures related to their implementation are classified as pre-operating and start-up expenses. These expenses occur since the beginning of the project and are crucial for ensuring compliance with scope, time and quality. The items include environmental studies, recruiting, training, travel, administrative services, shared services, procurement and general expenses with operational staff until initial production, among others.

 

Pre-operating, idle capacity and start-up expenses were US$ 324 million, including VNC start-up (US$ 129 million), Onça Puma pre-operating (US$ 78 million) and non-scheduled maintenance of fertilizer assets, which led to charges to idle capacity of US$ 13 million. Additionally, there were inventory adjustments of US$ 49 million at VNC, against US$ 77 million in 1Q12.

 

Table 4 - COGS AND EXPENSES COGS

 

US$ million 

 

2Q11

 

%

 

1Q12

 

%

 

2Q12

 

%

 

Outsourced services

 

1,088

 

19.0

 

1,096

 

19.3

 

1,285

 

21.4

 

Cargo freight

 

333

 

5.8

 

278

 

4.9

 

323

 

5.4

 

Maintenance of equipments and facilities

 

193

 

3.4

 

196

 

3.4

 

215

 

3.6

 

Operational Services

 

210

 

3.7

 

215

 

3.8

 

281

 

4.7

 

Others

 

352

 

6.2

 

407

 

7.2

 

466

 

7.7

 

Material

 

909

 

15.9

 

1,014

 

17.8

 

1,091

 

18.1

 

Spare parts and maintenance equipment

 

381

 

6.7

 

365

 

6.4

 

357

 

5.9

 

Inputs

 

338

 

5.9

 

442

 

7.8

 

524

 

8.7

 

Tires and conveyor belts

 

61

 

1.1

 

60

 

1.1

 

55

 

0.9

 

Others

 

129

 

2.3

 

147

 

2.6

 

154

 

2.6

 

Energy

 

719

 

12.6

 

701

 

12.3

 

741

 

12.3

 

Fuel and gases

 

510

 

8.9

 

483

 

8.5

 

527

 

8.8

 

Electric energy

 

209

 

3.6

 

217

 

3.8

 

213

 

3.5

 

Acquisition of products

 

555

 

9.7

 

398

 

7.0

 

377

 

6.3

 

Iron ore and pellets

 

319

 

5.6

 

228

 

4.0

 

221

 

3.7

 

Nickel products

 

178

 

3.1

 

93

 

1.6

 

85

 

1.4

 

Other products

 

58

 

1.0

 

77

 

1.4

 

72

 

1.2

 

Personnel

 

741

 

13.0

 

828

 

14.6

 

909

 

15.1

 

Depreciation and exhaustion

 

890

 

15.6

 

913

 

16.0

 

977

 

16.2

 

Shared services

 

107

 

1.9

 

76

 

1.3

 

76

 

1.3

 

Others

 

712

 

12.5

 

664

 

11.7

 

559

 

9.3

 

Total

 

5,721

 

100.0

 

5,690

 

100.0

 

6,015

 

100.0

 

 

SG&A, R&D and other expenses

 

US$ million 

 

2Q11

 

%

 

1Q12

 

%

 

2Q12

 

%

 

Total administrative

 

391

 

25.7

 

478

 

31.6

 

483

 

30.6

 

Personnel

 

165

 

10.8

 

202

 

13.3

 

193

 

12.2

 

Services

 

87

 

5.7

 

109

 

7.2

 

118

 

7.5

 

Depreciation

 

51

 

3.4

 

56

 

3.7

 

52

 

3.3

 

Others

 

88

 

5.8

 

111

 

7.3

 

120

 

7.6

 

Selling

 

43

 

2.8

 

51

 

3.4

 

132

 

8.4

 

Research and development

 

363

 

23.9

 

299

 

19.7

 

359

 

22.8

 

Others

 

724

 

47.6

 

686

 

45.3

 

604

 

38.3

 

Total (1)

 

1,521

 

100.0

 

1,514

 

100.0

 

1,578

 

100.0

 

 

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(1) Does not include gain/loss on assets sale.

 

OPERATING INCOME

 

Operating income, as measured by adjusted EBIT, was US$ 3.923 billion in 2Q12, a slight increase from US$ 3.850 billion in 1Q12. Without the non-recurring effect of accounting losses of US$ 377 million related to the divestment of the thermal coal assets in Colombia and manganese ferroalloys in Europe, operating income was US$ 4.300 billion, 11.7% higher than 1Q12.

 

The increase of US$ 450 million relative to 1Q12 was mainly due to the effects of higher sales volumes, US$ 870 million, and currency price changes caused by the appreciation of the US dollar, US$ 394 million. This was partly offset by the slide in sales prices, US$ 658 million, and the rise in COGS(6), US$ 120 million.

 

The adjusted EBIT margin, excluding the non-recurring loss, came to 36.2% in 2Q12, up from 34.8% in 1Q12.

 

NET EARNINGS

 

Net earnings in 2Q12 were US$ 2.662 billion, equal to US$ 0.52 per share, being 30.4% lower than the US$ 3.827 billion in 1Q12. The large decline in net earnings was determined by accounting effects with no impact on cash flow.

 

If we isolate the influence of the non-cash effects(7), earnings before taxes would be US$ 3.971 billion against US$ 3.757 billion in 1Q12.

 

By far the most important non-cash accounting effect was derived from the strong appreciation of the US dollar (USD) against the Brazilian real (BRL) in 2Q12 — 11.0% comparing prices at the end of 2Q12 and 1Q12. Foreign exchange and monetary variations reduced earnings by US$ 1.693 billion, against a positive impact of US$ 427 million in 1Q12, thus producing a negative swing of US$ 2.120 billion, which is US$ 955 million more than the decrease in net earnings.

 

Although we report our financial performance in USD, the functional currency for accounting purposes of our parent company, Vale S.A., is the BRL. A depreciation of the BRL against the USD produces a non-cash accounting effect on earnings before taxes through its impact on net financial liabilities — USD-denominated debt minus cash availabilities in USD and accounts receivable in USD(8). This is recorded in the financial statements as “exchange and monetary losses” in 2Q12 of US$ 1.693 billion, reducing earnings by the same amount but with no effect on the cash flow.

 

Exchange and monetary losses are part of the net financial result, which includes also the effects of financial revenues and expenses, mark-to-market of shareholders’ debentures and derivatives. The net financial result reduced earnings before taxes by US$ 2.548 billion.

 

Financial revenues were US$ 120 million, in line with US$ 119 million in 1Q12, and financial expenses decreased to US$ 559 million from US$ 613 million in the previous quarter.

 


(6)  Excluding the effect of the US dollar appreciation and volumes.

(7)  Equity income, exchange and monetary losses, non-recurring losses from the divestment of assets, mark-to-market of shareholders’ debentures and non-cash effects of derivatives.

(8)  For a detailed description of effects of currency price changes on our financial performance please see the box “Effects of currency price volatility on Vale’s financial performance”, pg. 15,  Continuing to create value, Performance of Vale in 3Q11, October 26, 2011, available in our website, www.vale.com on the Investors section, under Press Releases.

 

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Table of Contents

 

Non-cash charges determined by the mark-to-market of shareholders’ debentures were US$ 67 million, against US$ 101 million in the previous quarter, contributing to increase financial expenses but with no impact on cash flow.

 

Mark-to-market of derivatives showed a non-cash loss of US$ 416 million compared to a gain of US$ 296 million in 1Q12. There was a positive cash effect of US$ 226 million against US$ 182 million in 1Q12.

 

Breakdown of the effect of derivatives:

 

·             Currency and interest rate swaps resulted in a negative non-cash effect of US$ 459 million. There was a positive impact on cash flow of US$ 185 million.

 

·             Nickel derivatives produced a positive non-cash charge of US$ 43 million. There was a positive cash flow impact of US$ 41 million.

 

·             Derivative transactions related to bunker oil did not have any impact.

 

Equity income from affiliated companies totaled US$ 158 million in 2Q12, against US$ 243 million in the previous quarter. The major contributors were the non-consolidated affiliates in the bulk materials business with US$ 186 million and in logistics with US$ 15 million.

 

Individually, the greatest contributors to equity income were Samarco (US$ 140 million), Hispanobras (US$ 29 million) and MRS (US$ 19 million).

 

CASH GENERATION

 

Cash generation, as measured by adjusted EBITDA, totaled US$ 5.119 billion in 2Q12, US$ 154 million above the 1Q12 figure. If we exclude the non-recurring accounting losses caused by asset divestitures, adjusted EBITDA was US$ 5.496 billion, 10.7% higher than 1Q12.

 

Excluding this non-cash effect, the main factors underlying the increase of US$ 531 million were the higher volumes sold and the positive effect on COGS of the USD appreciation, which were partly offset by lower realized prices and higher COGS(9). Over the last 12-month period ended June 30, 2012, adjusted EBITDA was US$ 27.111 billion.

 

In 2Q12, dividends received from non-consolidated affiliates totaled US$ 112 million, against US$ 60 million in 1Q12. The major contributors were Norsk Hydro, US$ 47 million, Nibrasco, US$ 26 million, and Itabrasco, US$ 18 million.

 

Disregarding R&D expenditures and miscellaneous items - which reduced adjusted EBITDA — and the non-recurring losses, the share of bulk materials in cash generation increased to 92.4% in 2Q12 from 89.4% in 1Q12, while base metals tumbled to 4.3% from 7.7%. The share of fertilizers was 3.1%, and logistics contributed with 0.2%.

 

Table 5 - ADJUSTED EBITDA

 

US$ million 

 

2Q11

 

1Q12

 

2Q12

 

Net operating revenues

 

14,989

 

11,054

 

11,893

 

COGS

 

(5,721

)

(5,690

)

(6,015

)

SG&A

 

(434

)

(529

)

(615

)

Research and development

 

(363

)

(299

)

(359

)

Other operational expenses

 

(724

)

(686

)

(604

)

Gain (loss) on sale of assets

 

 

 

(377

)

Adjusted EBIT

 

7,747

 

3,850

 

3,923

 

Depreciation, amortization  & exhaustion

 

979

 

1,055

 

1,084

 

Dividends received

 

343

 

60

 

112

 

Adjusted EBITDA

 

9,069

 

4,965

 

5,119

 

 


(9)  Excluding the effect of the US dollar appreciation and volumes.

 

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Table 6 - ADJUSTED EBITDA BY BUSINESS AREA

 

US$ million 

 

2Q11

 

1Q12

 

2Q12

 

Bulk materials

 

8,524

 

4,845

 

5,490

 

Ferrous minerals

 

8,500

 

4,774

 

5,597

 

Coal

 

24

 

71

 

(107

)

Base metals

 

754

 

416

 

255

 

Fertilizer nutrients

 

209

 

169

 

183

 

Logistics

 

80

 

(8

)

14

 

Gain (loss) on sale of assets

 

 

 

(377

)

Others

 

(498

)

(457

)

(446

)

Total

 

9,069

 

4,965

 

5,119

 

 

INVESTMENTS

 

Our long-term strategy prioritizes organic growth as the main source of value creation through the investment in long-life, low-cost, world-class assets, in accordance  with principles of discipline in capital allocation. Given the strategic priorities for the allocation of the cash flow, investment planning aims to both maintain a sound balance sheet while satisfying of shareholders’ aspirations for dividends.

 

Investments amounted to US$ 4.287 billion in 2Q12. US$ 2.864 billion was spent on project execution, US$ 396 million on research and development (R&D), and US$ 1.027 billion on the maintenance of existing operations.

 

Capex — excluding acquisitions — in the first half of the year totaled US$ 7.964 billion, with an increase of US$ 1.185 billion over the US$ 6.779 billion invested in the same period of 2011. Our investments reflect the focus on organic growth as the key strategic priority. Of the total expenditures, 76 % was allocated to finance growth, involving project execution and R&D.

 

The sustaining capex of US$ 1.027 billion in 2Q12 was concentrated in iron ore and base metals. The maintenance investments in iron ore included: (i) the replacement and acquisition of new equipment (US$ 140.6 million), (ii) the expansion of tailing dams and residual stockpiles (US$ 50.1 million), (iii) infrastructure enhancement (US$ 32.8 million) and (iv) initiatives to enhance the current standards of health and safety and environmental initiatives (US$ 34.3 million). Furthermore, there were investments to  develop the ore bodies, increase recovery rate levels and improve grades in the nickel mines (US$  81.6 million), the Clean AER (atmospheric emission reduction) project to significantly reduce air pollution in Canada (US$ 28.8 million) and for the acquisition of equipment related to the improvement of production processes in the copper mines (US$ 39.0 million).

 

In 2Q12, R&D investments comprised expenditures of US$ 146 million in mineral exploration, US$ 167 million in conceptual, pre-feasibility and feasibility studies for projects, and US$ 82 million to develop new processes and for technological innovations and adaptation of technologies.

 

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Investments of US$ 2.390 billion were made in the bulk materials business, US$ 1.038 billion in base metals, US$ 516 million in fertilizer nutrients, US$ 130 million in logistics services for general cargo, US$ 71 million in power generation, US$ 37 million in steel projects and US$ 105 million in corporate activities and other business segments.

 

Important milestones were reached in relation to the implementation of the two largest projects in our portfolio: Carajás S11D, and Moatize II/Nacala.

 

We obtained the preliminary environmental license (LP) for the iron ore project Carajás S11D (S11D). The LP is part of the project’s first phase of licensing and attests to its environmental feasibility. S11D is the largest project in Vale’s history and also in the iron ore industry, being our major lever for production capacity growth and for maintaining Vale’s undisputed leadership in the global market in terms of volume, cost and quality.

 

Located in the Southern Range of Carajás, in the state of Pará, Brazil, with an estimated capex of US$ 8.039 billion for the development of the mine and processing plant, the project has a nominal capacity of 90 million metric tons per year (Mtpy) of iron ore with an average ferrous content of 66.48% and low concentration of impurities. Operations are expected to start in the second half of 2016.

 

Some innovative features are embedded in S11D, such as truckless mining, dry ore processing and modular assembling of the processing facilities, entailing lower operating and capex costs, more efficient use of the reserves, water saving, reduction in the consumption of electricity and a 50% cut in the emission of greenhouse gases.

 

As a huge greenfield project, S11D demands a high capex per ton, US$ 216, which is mostly due to the need to make large investments — estimated to reach US$ 11.4 billion - in the extension of the existing logistics infrastructure - the Carajás railroad and the Ponta da Madeira maritime terminal — which will allow for the handling of 230 Mtpy of iron ore.

 

On the other hand, the project will contribute to improve the average quality of our iron ore production, to lower average operating costs and to create a new platform for low capex cost brownfield projects given the very large resources existing in the iron ore deposits located in the Southern Range of Carajás.

 

This month we signed this month 30-year concession agreements with the government of Mozambique(10) comprising the greenfield railway stretches connecting Moatize to the border of Malawi, and the current end of the existing railway in northern Mozambique to Nacala-à-Velha, as well as the building and operation of the Nacala-à-Velha coal maritime terminal, on the northeastern coast of Mozambique.

 

The agreements with the governments of Mozambique and Malawi(11) open the door for the acceleration of the construction of the Nacala corridor, which will enable the transportation of up to 18 Mtpy of coal.

 

Also in July, Vale signed with the government of Argentina a memorandum of intentions (Acta Acuerdo), which is a fundamental step towards the agreements that will provide a regulatory roadmap to facilitate the project development.

 

The rise in engineering and construction costs caused by the significant increase in global mining capex, delays in project execution and commissioning, and additional efforts to keep the implementation schedule, are causing a number of cost pressures on our investments. As a consequence, our Board of Directors approved capex budget increases for four projects: (a) Salobo, to US$ 2.507 billion from US$ 2.337 billion; (b) Salobo II, to US$ 1.707 billion from US$ 1.427 billion; (c) CLN 150, to US$ 4.114 billion from US$ 3.477 billion;

 


(10)  The concessions are renewable for an additional 10-year term.

(11)  The concession agreement with the government of Malawi was signed in 1Q12.

 

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and (d) Tubarão VIII, to US$ 1.088 billion from US$ 968 million. The changes resulted from the continuous risk analysis performed by Vale’s PMO team.

 

In 2Q12, the Board of Directors approved the Itabiritos Cauê iron ore project, which consists of the adaptation of the plant to process low-grade hard itabirites from Minas do Meio, located in the Southeastern System, Minas Gerais, Brazil. The capex budget is US$ 1.504 billion for a nominal capacity of 24 Mtpy. The project will not add production capacity to our operations given that it will replace capacity lost due to the impoverishment of resources in the Iron Quadrangle area in Brazil. The adapted plant will allow for the concentration of low-grade ores into high grades, allowing for the quality improvement of our supply of iron ore.

 

Salobo, our second greenfield copper project and with an estimated capacity of 100,000 tpy of copper in concentrates, has started the ramp up with the two lines running since June.

 

Portfolio asset management

 

Vale’s growth and sustainable value creation strategy encompasses a multilane road, in which active portfolio asset management is a very important tool to optimize capital allocation and focus management attention. The priority is to divest non-core and underperforming assets, which we do not believe to be the best owner.

 

In 2Q12, we concluded the divestiture of kaolin assets, with the sale of the 61.5% stake on CADAM. Moreover, the Colombian thermal coal assets were sold for US$ 407 million and we signed this month an agreement, still subject to regulatory approvals, to divest the French and Norwegian manganese ferroalloy operations for US$ 160 million.

 

To continue optimizing the corporate structure and to widen our exposure to the global iron ore market, Vale acquired an additional stake of 10.5% in EBM, a privately held company whose only asset is 51.0% of MBR, owner of the Southern System, for US$ 437 million. As a result of the acquisition, Vale will increase its share in EBM to 96.7% and on MBR to 98.3%.

 

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Table 7 - TOTAL INVESTMENT BY CATEGORY

 

US$ million

 

2Q11

 

%

 

1Q12

 

%

 

2Q12

 

%

 

Organic growth

 

3,075

 

76.2

 

2,830

 

77.0

 

3,260

 

76.0

 

Projects

 

2,656

 

65.8

 

2,534

 

68.9

 

2,864

 

66.8

 

R&D

 

419

 

10.4

 

296

 

8.1

 

396

 

9.2

 

Stay-in-business

 

960

 

23.8

 

847

 

23.0

 

1,027

 

24.0

 

Total

 

4,036

 

100.0

 

3,677

 

100.0

 

4,287

 

100.0

 

 

Table 8 - TOTAL INVESTMENT BY BUSINESS AREA

 

US$ million

 

2Q11

 

%

 

1Q12

 

%

 

2Q12

 

%

 

Bulk materials

 

1,553

 

38.5

 

1,969

 

53.5

 

2,390

 

55.8

 

Ferrous minerals

 

1,253

 

31.1

 

1,772

 

48.2

 

2,041

 

47.6

 

Coal

 

300

 

7.4

 

196

 

5.3

 

349

 

8.1

 

Base metals

 

1,078

 

26.7

 

881

 

24.0

 

1,038

 

24.2

 

Fertilizer nutrients

 

293

 

7.3

 

327

 

8.9

 

516

 

12.0

 

Logistics services

 

842

 

20.9

 

96

 

2.6

 

130

 

3.0

 

Power generation

 

105

 

2.6

 

74

 

2.0

 

71

 

1.6

 

Steel

 

43

 

1.1

 

225

 

6.1

 

37

 

0.9

 

Others

 

122

 

3.0

 

106

 

2.9

 

105

 

2.4

 

Total

 

4,036

 

100.0

 

3,677

 

100.0

 

4,287

 

100.0

 

 

·                      Main approved projects under construction

 

The pipeline of main projects approved by the Board of Directors, and under construction, is detailed in this section. Estimated start-up dates may be revised due to changes caused by several factors, including delays in environmental permits.

 

 

 

Estimated

 

Realized
capex
US$ million

 

Expected capex
US$ million

 

 

Project

 

start-up

 

2012

 

2012

 

Total

 

Status(1)

IRON ORE MINING AND LOGISTICS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carajás Additional 40 Mtpy
Construction of an iron ore dry processing plant, located in Carajás, Pará, Brazil.
Estimated nominal capacity of 40 Mtpy.

 

2H13

 

323

 

622

 

2,968

 

Civil engineering work and electromechanical pre-assembly continue in progress. Continue executing earthworks services to install the conveyor belt. Earthwork services for stockyard were completed.
Issuance of operation license (LO) expected for 2H13.
62% of physical progress of mine and plant. Total executed capex of US$ 1.8 billion.

 

 

 

 

 

 

 

 

 

 

 

CLN 150 Mtpy
Increase Northern system railway and port capacity, including the construction of a fourth pier at the Ponta da Madeira maritime terminal, located in Maranhão, Brazil.
Increase estimated EFC’s nominal logistics capacity to approximately 150 Mtpy.

 

1H14

 

549

 

1,085

 

4,114

 

Construction of Pier IV at Ponta da Madeira maritime terminal is being finalized. Ongoing assembly of loading equipment. Work on the car dumpers and stockyard continues. Ongoing earthwork services for the railway.
Issuance of the required railway installation licenses (LI) expected for 2H12.
77% of physical progress. Total executed

 

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Estimated

 

Realized
capex
US$ million

 

Expected capex
US$ million

 

 

Project

 

start-up

 

2012

 

2012

 

Total

 

Status(1)

 

 

 

 

 

 

 

 

 

 

capex of US$ 2.8 billion.

 

 

 

 

 

 

 

 

 

 

 

Carajás Serra Sul S11D
Development of a mine and processing plant, located in the Southern range of Carajás, Pará, Brazil.
Estimated nominal capacity of 90 Mtpy.

 

2H16

 

258

 

794

 

8,039

 

Finalized the earthworks for the construction of the access road, initiated paving. Receiving equipment for the truckless mining system and materials for the conveyor belts. Initiated off-site assembly of modules.
Preliminary environmental license (LP) issued. Issuance of installation license (LI) expected for 1H13.
33% of physical progress. Total realized capex of US$ 1.3 billion.

 

 

 

 

 

 

 

 

 

 

 

Serra Leste
Construction of new processing plant, located in Carajás, Pará, Brazil Estimated nominal capacity of 6 Mtpy.

 

1H13

 

60

 

239

 

478

 

Civil engineering work for the plant concluded. Assembly of metal structures and primary crusher equipment.
Issuance of installation licenses (LI) expected for 2H12.
49% of physical progress. Total executed capex of US$ 203 million.

 

 

 

 

 

 

 

 

 

 

 

Conceição Itabiritos
Construction of concentration plant, located in the Southeastern system, Minas Gerais, Brazil.
Estimated nominal capacity of 12 Mtpy.

 

2H13

 

101

 

184

 

1,174

 

Installation license (LI) for the power transmission line was issued. Civil engineering of the primary crusher completed. Ongoing electromechanical assembly of equipment and metallic structures.
91% of physical progress. Total executed capex of US$ 654 million.

 

 

 

 

 

 

 

 

 

 

 

Vargem Grande Itabiritos
Construction of new iron ore treatment plant, located in the Southern system, Minas Gerais, Brazil.
Estimated nominal capacity of 10 Mtpy.

 

1H14

 

207

 

429

 

1,645

 

Heavy equipment received and assembly already started. Civil engineering work and earthworks in progress.
Installation license (LI) issued. Installation license for the power transmission line expected for 2H12.
60% of physical progress. Total executed capex of US$ 635 million.

 

 

 

 

 

 

 

 

 

 

 

Conceição Itabiritos II
Adaptation of the plant to process low-grade itabirites from Conceição, located in the Southeastern system, Minas Gerais, Brazil.
Estimated nominal capacity of 19 Mtpy (without additional net capacity).

 

2H14

 

105

 

297

 

1,189

 

Heavy equipment received and assembly in progress. Assembly of the primary crushers concluded.
Installation licenses (LI) issued.
41% of physical progress. Total executed capex of US$ 263 million.

 

 

 

 

 

 

 

 

 

 

 

Cauê Itabiritos
Adaptation of the plant to process low-grade itabirites from Minas do Meio, located in the Southeastern system, Minas Gerais, Brazil.

 

2H15

 

15

 

112

 

1,504

 

Recently approved project in early stages of development. Ongoing vegetation clearing.
8% of physical progress. Total executed capex of US$ 37 million.

 

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Estimated

 

Realized
capex
US$ million

 

Expected capex
US$ million

 

 

Project

 

start-up

 

2012

 

2012

 

Total

 

Status(1)

Estimated nominal capacity of 24 Mtpy (without additional net capacity).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Simandou I — Zogota
Development of the Zogota mine and processing plant in Simandou South, Guinea.
Estimated nominal capacity of 15Mtpy

 

2H12

 

157

 

380

 

1,260

 

Initial production phase with the mobile crushing equipment expected to start in 2H12, with estimated capacity of 2 Mtpy.

 

 

 

 

 

 

 

 

 

 

 

Teluk Rubiah
Construction of a maritime terminal with enough depth for the 400,000 dwt vessels and a stockyard. Located in Teluk Rubiah, Malaysia.
Stockyard capable of handling up to 30 Mtpy of iron ore products.

 

1H14

 

97

 

367

 

1,371

 

Civil engineering work on the auxiliary jetty was concluded, while the main jetty construction is ongoing. Earthworks in progress at the stockyard.
Preliminary environmental license, construction and installation license issued. Issuance of operation license expected for 1H14.
27% of physical progress. Total executed capex of US$ 312 million.

 

 

 

 

 

 

 

 

 

 

 

PELLET PLANTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tubarão VIII
Eighth pellet plant at our existing site at the Tubarão Port, Espírito Santo, Brazil.
Estimated nominal capacity of 7.5 Mtpy.

 

1H13

 

131

 

239

 

1,088

 

Mechanical assembly of the ball mills was concluded. Conclusion of the assembly of equipment and metallic structures. Hiring of services for civil engineering and assembly of windfences. Substitution of the firms responsible for equipment assembly.
Issuance of operation license (LO) expected for 2H12.
89% of physical progress. Total executed capex of US$ 743 million.

 

 

 

 

 

 

 

 

 

 

 

Samarco IV(2)
Construction of Samarco’s fourth pellet plant, and expansion of mine, pipeline and maritime terminal infrastructure. Vale has a 50% stake in Samarco.
Estimated nominal capacity of 8.3 Mtpy, increasing Samarco’s capacity to 30.5 Mtpy.

 

1H14

 

 

 

1,693

 

Earthwork services are almost complete. Advanced construction work on the slurry pipeline, with all pipes received.
No pending installation licenses (LI).
43% of physical progress of the pellet plant. Budget fully sourced by Samarco.

 

 

 

 

 

 

 

 

 

 

 

COAL MINING AND LOGISTICS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Moatize II
New pit and duplication of the Moatize CHPP, as well as all related infrastructure, located in Tete, Mozambique.
Nominal capacity of 11 Mtpy (70% coking coal and 30% thermal).

 

2H14

 

145

 

499

 

2,068

 

Ongoing earthworks for the new CHPP and main access road.
No pending installation licenses (LI).
16% of physical progress. Total executed capex of US$ 218 million.

 

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Estimated

 

Realized
capex
US$ million

 

Expected capex
US$ million

 

 

Project

 

start-up

 

2012

 

2012

 

Total

 

Status(1)

Nacala corridor
Railway and port infrastructure connecting Moatize site to the Nacala-à-Velha maritime terminal, located in Nacala, Mozambique.
Estimated nominal capacity of 18 Mtpy.

 

2H14

 

174

 

691

 

4,444

 

Signing of the concession agreement with the government of Mozambique for the greenfield railway segments connecting Moatize to the border of Malawi, and linking the existing railway to Nacala-à-Velha, and also of the concession agreement for Nacala-à-Velha coal maritime terminal, in Mozambique.
Earthwork services initiated in Malawi.
5% of physical progress. Total executed capex of US$ 212 million.

 

 

 

 

 

 

 

 

 

 

 

Eagle Downs(2)
New underground mine development including longwall, CHPP, as well as all related infrastructure, located in the Bowen Basin, central Queensland, Australia. Vale holds 50% of the joint venture which owns Eagle Downs.
Estimated nominal capacity of 4 Mtpy (100% coking coal)

 

1H16

 

18

 

87

 

875

 

Environmental license and mining lease already obtained.
Project in early stage of development, with only 4% of physical progress. Total executed capex of US$ 37 million.

 

 

 

 

 

 

 

 

 

 

 

COPPER MINING

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salobo
Development of mine, plant, and related infrastructure, located in Marabá, Pará, Brazil.
Estimated nominal capacity of 100,000 tpy of copper in concentrate.

 

1H12

 

190

 

296

 

2,507

 

Two lines of production running since June 2012.
99% of physical progress. Total executed capex of US$ 2.2 billion.

 

 

 

 

 

 

 

 

 

 

 

Salobo II
Salobo expansion, raising height of tailing dam and increase in mine capacity, located in Marabá, Pará, Brazil
Additional estimated nominal capacity of 100,000 tpy of copper in concentrate.

 

1H14

 

236

 

581

 

1,707

 

Civil engineering and electromechanical assembly of equipment in progress.
Issuance of plant operation license (LO) expected for 1H14.
59% of physical progress. Total executed capex of US$ 589 million.

 

 

 

 

 

 

 

 

 

 

 

Konkola North(2)
Development of underground mine, plant and related infrastructure, located in the Zambian Copperbelt. Vale holds 50% of the joint venture that controls the project.
Estimated nominal capacity of 45,000 tpy of copper in concentrate.

 

2H12

 

 

 

235

 

Civil engineering works were concluded. Electromechanical assembly of all the equipment on site is almost concluded.
Environmental license was issued.
72% of physical progress. Total executed capex of US$ 152 million.
This project is being funded by the JV.

 

 

 

 

 

 

 

 

 

 

 

NICKEL MINING AND REFINING

 

 

 

 

 

 

 

 

 

 

 

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Estimated

 

Realized
capex
US$ million

 

Expected capex
US$ million

 

 

Project

 

start-up

 

2012

 

2012

 

Total

 

Status(1)

Long Harbour
Hydrometallurgical facility. Located in Long Harbour, Newfoundland and Labrador, Canada.
Estimated nominal capacity for refining 50,000 tpy of finished nickel, and associated copper and cobalt.

 

2H13

 

603

 

1,208

 

3,600

 

Ongoing civil engineering. Assembly of metallic structures, and of electronic and mechanical equipment. Main equipment have already been received.
69% of physical progress. Total executed capex of US$ 2.3 billion.

 

 

 

 

 

 

 

 

 

 

 

Totten
Nickel mine (re-opening) in Sudbury, Ontario, Canada. Estimated nominal capacity of 8,200 tpy

 

2H13

 

62

 

157

 

759

 

Improvement works in the shaft and construction of the main supply duct.
64% of physical progress. Total executed capex of US$ 464 million.

 

 

 

 

 

 

 

 

 

 

 

POTASH MINING AND LOGISTICS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rio Colorado
Investments in a solution mining system, located in Mendoza, Argentina, renovation of railway tracks (440 km), construction of a railway spur (350 km) and a maritime terminal in Bahia Blanca, Argentina.
Estimated nominal capacity of 4.3 Mtpy of potash (KCl).

 

2H14

 

616

 

1,081

 

5,915

 

Equipment for the railway construction received.
Environmental licenses for the construction of the new railway and agreements with four Argentinean provinces have been obtained.
35% of physical progress. Total executed capex of US$ 1.4 billion.

 

 

 

 

 

 

 

 

 

 

 

ENERGY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Biodiesel
Project to produce biodiesel from palm oil. Plantation of 80,000 ha of palm trees. Located in Pará, Brazil.
Estimated nominal capacity of 360,000 tpy of biodiesel.

 

2015

 

61

 

227

 

633

 

Planting palm trees.
Issuance of preliminary environmental license (LP) and construction and installation license (LI) expected for 2H13.
Total executed capex of US$ 404 million.

 

 

 

 

 

 

 

 

 

 

 

STEELMAKING

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CSP(2)
Development of a steel slab plant in partnership with Dongkuk and Posco, located in Ceará, Brazil. Vale holds 50% of the joint venture.
Estimated nominal capacity of 3.0 Mtpy.

 

1H15

 

233

 

563

 

2,648

 

The project implementation started in December 2011. Earthworks initiated on site.
Preliminary environmental license (LP) and installation license (LI) obtained.
Total executed capex of US$ 514 million.

 

 

 

 

 

 

 

 

 

 

 

 


(1) as of June 2012

(2) Realized and expected capex are relative to Vale’s stake in the projects.

 

DEBT INDICATORS

 

Total debt was US$ 25.518 billion as of June 30, 2012, increasing by US$ 579 million when compared to the position on March 31, 2012, of US$ 24.939 billion.

 

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Given the exposure of the mining business to cyclicality and, ultimately, cash flow volatility, we have a strong focus on maintaining a low-risk debt portfolio, with low leverage, low cost and long average maturity.

 

As of June 30, 2012, cash holdings reached US$ 4.082 billion and net debt (c) was US$ 21.436 billion.

 

The average debt maturity remained at 9.4 years and the average cost decreased to 4.61% per annum, against 4.69% per annum on March 31, 2012.

 

Debt leverage, as measured by total debt/LTM adjusted EBITDA (d) ratio, increased to 0.94x on June 30, 2012, up from 0.80x on March 31, 2012. The total debt/enterprise value (e) was 20.1% on June 30, 2012, against 17.3% on March 31, 2012.

 

Interest coverage, measured by the LTM adjusted EBITDA/LTM interest payment ratio (f), was 24.5x, compared to 27.5x on March 31, 2012.

 

Considering hedge positions, the total debt on June 30, 2012 was composed by 24% of floating interest rates and 76% fixed interest rates linked debt, while 97% was denominated in US dollars and the remainder in other currencies.

 

Table 9 - DEBT INDICATORS

 

US$ million 

 

2Q11

 

1Q12

 

2Q12

 

Total debt

 

24,459

 

24,939

 

25,518

 

Net debt

 

11,232

 

20,017

 

21,436

 

Total debt / adjusted LTM EBITDA (x)

 

0.7

 

0.8

 

0.9

 

Adjusted LTM EBITDA / LTM interest expenses (x) 

 

28.4

 

27.5

 

24.5

 

Total debt / EV (%)

 

13.9

 

17.3

 

20.1

 

 

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Table of Contents

 

FUND RAISING

 

One of the guidelines of our financial policy is the diversification of sources and instruments for fund raising.

 

In 2Q12 the financial settlement of US$ 1.25 billion 2022 @4.375% per annum notes took place. We also made some disbursements from the long-term credit lines extended by official credit agencies — Bank of China US$ 244 million, Korea Exim Corp US$ 87 million and BNDES US$ 45 million — to finance projects.

 

This month we priced and concluded the financial settlement of the EUR 750 million notes due in January 2023, with a coupon rate of 3.750% per annum, payable annually. The notes, the second Eurobond in our debt portfolio, were priced with a spread of 225.7 basis points over the German bund, implying a yield to maturity of 3.798% per year.

 

On June 15, 2012 Vale’s mandatory convertible notes (MCN) series VALE-2012 and VALE.P-2012 matured and were converted into common and preferred American Depositary Shares (ADSs), respectively. The MCN is a hybrid security with debt and equity-like features, which is not recorded as debt.

 

VALE-2012 was converted into ADSs representing a total of 15,836,884 common shares, equivalent to 1.3% of outstanding common shares, and the series VALE.P-2012 notes represented 40,241,968 preferred class A shares, equivalent to 2.2% of outstanding preferred class A shares.

 

PERFORMANCE OF THE BUSINESS SEGMENTS

 

Bulk materials

 

Ferrous minerals

 

In 2Q12, operations experienced a marked improvement from the lower production and shipment levels in the previous quarter. Sales of iron ore and pellets reached 75.255 Mt, 15.4% above 1Q12. Iron ore shipments amounted to 62.978 Mt, 14.9% higher than 1Q12, while pellets sales reached 12.227 Mt, 18.1% above 1Q12 and an all-time high quarterly figure.

 

The average sale price of iron ore was US$ 103.29 per metric ton, 5.5% lower than 1Q12. The average pellet price was US$ 159.00 per metric ton, 2.0% below the previous quarter.

 

Lower average market prices, the lower quality premium, and the lower quarterly VRP prices(12) were the main forces driving realized prices downward in 2Q12 comparing to 1Q12, while lower bunker oil prices and less moisture mitigated that decline.

 

It is important to note that reported revenues for iron ore and pellets are net of the costs of maritime freight, meaning that FOB prices are comparable to CFR prices. In 2Q12, Vale sold 28.1 Mt of iron ore and pellets on a CFR basis, against 20.9 Mt in 1Q12.

 

Vale is building a global distribution network in order to gain more flexibility and competitiveness, particularly in Asia. Moreover, distribution centers will have blending facilities that will enhance our capacity

 


(12)  VRP: The 3-month average price index for the period ending one month before the onset of the current quarter. For more detailed information on iron ore pricing dynamics, please refer to the Iron Ore Pricing box.

 

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Table of Contents

 

to sell tailor-made products to clients. It comprises a dedicated fleet of 19 proprietary and 16 leased 400,000 dwt Valemax vessels, 13 proprietary VLOCs and 12 proprietary Capesizes, iron ore distribution centers (DCs) in the Middle East and Southeast Asia and floating transfer stations (FTS)(13).

 

One of the implications of the distribution network is the increase in inventories represented by volumes stored at the DCs and FTS and eventually on board the ships. In addition, there are some stocks of pellet feed shipped from the iron ore mines in Brazil to supply the Oman pellet operations.

 

The sales of iron ore and pellets to China decreased to 43.7% in 2Q12 from 47.2% in 1Q12, but the volume sold increased to 32.9 Mt in 2Q12 from 30.8 Mt in the first quarter. Meanwhile, Europe’s share increased to 19.6% from 16.2% in 1Q12, due to a very weak first quarter and a return to 2Q11 volumes by Germany and France, while Italy and Turkey experienced new demand growth. Japan’s share decreased to 9.5% from 11.1% in the previous quarter, but remained the same volume-wise at 7.2 Mt.

 

In 2Q12, 510,000 metric tons of manganese ore were sold, representing a 61.4% increase over 1Q12, partially offset by the decrease of 7.1% in the average realized prices, US$ 123.53 per metric ton. Revenues from the sale of manganese reached US$ 63 million, up from US$ 42 million in 1Q12.

 

Sales of ferroalloys amounted to 99,000 metric tons, just under the 103,000 metric tons sold in the previous quarter, and generated US$ 129 million of revenues, against US$ 124 million in 1Q12. The average realized price increased to US$ 1,303.03 per metric ton from US$ 1,203.88 in 1Q12. On July 10, 2012, Vale signed a agreement to sell its manganese ferroalloys operations in Europe — Dunkerque and Mo I Rana.

 

Sales of ferrous minerals products — iron ore, pellets, manganese and ferroalloys — generated a total revenue of US$ 8.658 billion in 2Q12, increasing 10.3% vis-à-vis the US$ 7.851 billion in the previous quarter.

 

The adjusted EBIT margin for the ferrous minerals business was 57.6% in 2Q12, increasing from 54.7% in 1Q12.

 

Adjusted EBITDA for the ferrous minerals operations totaled US$ 5.575 billion in 2Q12, increasing 16.8% compared to 1Q12. If we exclude the non-recurring accounting loss from the sale of manganese ferroalloys assets in Europe, adjusted EBITDA was US$ 5.597 billion. The quarter-over-quarter increase in adjusted EBITDA was mainly due to the impact of higher sales volumes (US$ 863 million), a positive exchange rate effect (US$ 218 million), higher dividends from non-consolidated affiliated companies (US$ 65 million), lower SG&A (US$ 22 million) and lower COGS (US$ 14 million), which were partly offset by the negative impact of lower prices (US$ 359 million).

 

On July 1, 2012, Vale signed a 3-year leasing contract involving the assets of its affiliated pellet company, Hispanobras, to improve the efficiency and synergies of its pelletizing portfolio in Brazil. Starting in 3Q12, Vale will consolidate 100% of Hispanobras’ pelletizing operations in its financial statements.

 

The leasing of the Hispanobras assets will have some accounting implications, affecting revenues and costs. For a detailed description of the accounting impacts please see the 2Q08 Performance of Vale report, August  6, 2008, annex 1 — Effects of the lease of pelletizing plants from Nibrasco and Kobrasco, pp.23-24, available in our website, www.vale.com on the Investors section, under Press Releases.

 


(13)  As of June 2012, 8 proprietary and 5 leased Valemaxes were in operation. The DC in Malaysia, Teluk Rubiah, is under construction and is expected to start up in 1H14.

 

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IRON ORE PRICING

 

In recent years structural changes in the global iron ore market were put in motion. This process was unleashed by the behavior of iron ore demand from emerging economies, in particular China, which have led global economic growth with large metal-intensive expansion projects in manufacturing, housing and infrastructure.

 

The strong demand for iron ore in China led to the creation of a large spot market.  In 2011, the Chinese spot market accounted for approximately 50% of the total Chinese imports of iron ore or 30% of the seaborne market.

 

One of the natural consequences of the more dynamic environment for metals markets was the replacement of the old benchmark iron ore pricing system by more flexible pricing mechanisms. Unlike bilaterally determined prices, market determined prices tend to reflect the flow of information into the marketplace, possessing the capacity to promote rapid market rebalancing and to issue the relevant signals for the decision making processes of its participants. Moreover, they bring more transparency, while price discovery becomes much less costly.

 

As a part of the convergence to flexibility, some pricing formulas have being coexisting, though all use spot market price indices as a reference. Currently, almost one-fifth of our sales are being priced according to the 3-month average price index for the period ending one month before the onset of the current quarter (VRP), about a half of them are pegged to the current quarter average price index, and the remainder to monthly averages and spot prices. Given that at the beginning, in 2010, 100% of our shipments were priced through the VRP system, it seems that iron ore pricing is moving towards the capture of the influence of more contemporaneous information flows.

 

A group of factors contributes to create differences between the average price of our shipments and the iron ore price index used as a reference and for quarterly variations of both variables: moisture content, freight prices, quality, premium for quality, product type, and the composition of sales by pricing system.

 

Price indices are quoted on a dry basis, so they must be converted to a wet basis using the moisture content of shipments, which tends to show slight changes over time, being higher during the rainy season. Thus, the higher the moisture content the lower the realized price.

 

In order to convert CFR prices — price indices are expressed on a CFR China basis - into FOB prices, the cost of maritime freight is deducted. The long-term Brazil-China freight price employed by Vale is affected in the short-term by the variations of bunker oil prices arising from oil price volatility.

 

Currently, it is temporarily higher than spot freight prices given the excess supply of dry bulk shipping tonnage to the market, a cyclical phenomenon. However, the strategy of building a global distribution network, in which a fleet of bulk carriers is a key instrument, has been successful in promoting flexibility and enhancing the competitiveness of our products in Asia.

 

Quality and its price premium contribute to increase our realized prices in relation to the 62% Fe content price indices.

 

Given the cyclically weaker demand for iron ore and negative expectations about global economic growth, the price premium has been exerting downward pressure on realized prices in addition to the decline in price indices. The average price premium for 1% Fe content fell sequentially to US$ 3.33 in 2Q12 from US$ 5.18 in 3Q11(14).

 


(14)  The average price premium for 1% Fe content was US$ 4.10 in 4Q11 and US$ 3.75 in 1Q12.

 

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As one of the consequences of the impoverishment of resources in the Iron Quadrangle — where the Southeastern and Southern Systems are located — the average quality of our iron ore has suffered some decrease, particularly due to higher silica content, thus affecting negatively our sales prices. It is a temporary factor, that tends to be less important in a stronger growth environment and will be eliminated with the expansion of Carajás production, through the Additional 40Mtpy and S11D projects, as well as new projects in the Southeastern and Southern Systems to produce high quality concentrates.

 

Vale sells small volumes — an average of 3 Mt per quarter - of low Fe run-of-mine (ROM) ores in the Brazilian market. Even adjusting by Fe units, ROM prices are lower than regular iron ore prices due to the fact that it is a non-processed material.

 

Given different quoting periods, the composition of shipments by pricing system affects quarterly prices. Although the share of VRP in our total shipments has been diminishing over time, it is a source of discrepancy from current market prices. When prices are trending downward it provides a cushion to quarterly realized sales prices, acting to smooth the decline. However, when market prices stabilize or trend upward VRP contributes to lower realized prices below current market prices.

 

In 2Q12, lower average market prices, quality, VRP and ROM sales were the main forces driving realized prices downward, while lower bunker oil prices and less moisture contributed to soften the decline in realized prices.

 

Table 10 - FERROUS MINERALS BUSINESS PERFORMANCE

VOLUME SOLD BY DESTINATION — IRON ORE AND PELLETS

 

‘000 metric tons

 

2Q11

 

%

 

1Q12

 

%

 

2Q12

 

%

 

Americas

 

12,521

 

17.2

 

10,987

 

16.9

 

11,060

 

14.7

 

Brazil

 

11,026

 

15.1

 

9,666

 

14.8

 

9,151

 

12.2

 

Steel mills and pig iron producers

 

9,840

 

13.5

 

8,553

 

13.1

 

7,953

 

10.6

 

JVs pellets

 

1,186

 

1.6

 

1,113

 

1.7

 

1,198

 

1.6

 

USA

 

 

 

213

 

0.3

 

486

 

0.6

 

Others

 

1,496

 

2.1

 

1,108

 

1.7

 

1,423

 

1.9

 

Asia

 

44,051

 

60.4

 

41,895

 

64.3

 

47,181

 

62.7

 

China

 

30,568

 

41.9

 

30,800

 

47.2

 

32,896

 

43.7

 

Japan

 

8,034

 

11.0

 

7,208

 

11.1

 

7,180

 

9.5

 

South Korea

 

3,929

 

5.4

 

3,349

 

5.1

 

4,772

 

6.3

 

Others

 

1,520

 

2.1

 

538

 

0.8

 

2,333

 

3.1

 

Europe

 

14,650

 

20.1

 

10,546

 

16.2

 

14,742

 

19.6

 

Germany

 

5,301

 

7.3

 

4,050

 

6.2

 

5,839

 

7.8

 

United Kingdom

 

852

 

1.2

 

605

 

0.9

 

530

 

0.7

 

France

 

1,723

 

2.4

 

776

 

1.2

 

1,199

 

1.6

 

Italy

 

2,987

 

4.1

 

2,135

 

3.3

 

3,451

 

4.6

 

Turkey

 

504

 

0.7

 

515

 

0.8

 

1,025

 

1.4

 

Spain

 

775

 

1.1

 

905

 

1.4

 

847

 

1.1

 

Netherlands

 

1,199

 

1.6

 

749

 

1.1

 

447

 

0.6

 

Others

 

1,308

 

1.8

 

811

 

1.2

 

1,404

 

1.9

 

Middle East

 

1,052

 

1.4

 

1,415

 

2.2

 

1,563

 

2.1

 

Rest of the World

 

623

 

0.9

 

350

 

0.5

 

709

 

0.9

 

Total

 

72,897

 

100.0

 

65,193

 

100.0

 

75,255

 

100.0

 

 

OPERATING REVENUE BY PRODUCT

 

US$ million

 

2Q11

 

1Q12

 

2Q12

 

Iron ore

 

9,102

 

5,987

 

6,505

 

Pellet plant operation services

 

9

 

10

 

9

 

Pellets

 

2,113

 

1,688

 

1,952

 

Manganese ore

 

51

 

42

 

63

 

Ferroalloys

 

150

 

124

 

129

 

Total

 

11,425

 

7,851

 

8,658

 

 

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AVERAGE SALE PRICE

 

US$/ metric ton

 

2Q11

 

1Q12

 

2Q12

 

Iron ore

 

145.30

 

109.26

 

103.29

 

Pellets

 

206.07

 

162.29

 

159.00

 

Manganese ore

 

182.14

 

132.91

 

123.53

 

Ferroalloys

 

1,485.15

 

1,203.88

 

1,303.03

 

 

VOLUME SOLD

 

‘000 metric tons

 

2Q11

 

1Q12

 

2Q12

 

Iron ore

 

62,644

 

54,793

 

62,978

 

Pellets

 

10,253

 

10,400

 

12,277

 

Manganese ore

 

280

 

316

 

510

 

Ferroalloys

 

101

 

103

 

99

 

 

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Coal

 

In 2Q12, coal revenues totaled US$ 276 million, a record for a second quarter, but 29.0% lower than the US$ 389 million in 1Q12. Both sales prices and volumes affected the drop in revenues.

 

Total coal shipments were 2.259 Mt in 2Q12, 18.4% lower than the 2.769 Mt in 1Q12, although a record for a second quarter. Coal shipments were comprised of 1.152 Mt of metallurgical coal — vs. 1.199 Mt in 1Q12 — and 1.107 Mt of thermal coal — vs. 1.570 Mt in 1Q12.

 

Our met coal operations at Carborough Downs have been suspended since May 31, 2012, after the detection of abnormal levels of carbon monoxide in the mine. We have already begun recovery activities in order to allow for longwall mining to restart, while monitoring very closely in real time the gas levels in the mine.  We estimate that mining should be normalized during 3Q12.

 

The impact in volumes from the stoppage of the operations at Carborough Downs was partly mitigated by the continuation of the ramp-up of the first phase of the Moatize coal project, in Mozambique, which is moving ahead as planned.

 

Moatize is an important part of our business strategy as a long life, low cost, world-class asset, which will provide the scale, cost structure and quality required - Chipanga premium HCC (hard coking coal) and typical HCC — to be one of our key sources of shareholder value creation. As brand sensitivity is still relevant in the market for met coal, we are shipping trial cargoes to clients in China, Japan, Korea, India and Europe. The feedback from clients has been very good and we are entering in a phase in which our shipments are composed of these cargoes and commercial sales.

 

The decrease in thermal coal volumes was mainly due to the sale of the thermal coal assets in Colombia, including El Hatillo, announced on May 28, 2012 and concluded at the end of June. The sale of the coal assets is part of our effort to optimize our asset portfolio.

 

Revenues from shipments of met coal were US$ 197 million, 21.6% lower than the last quarter, mainly due to the decrease in the average realized prices to US$ 171.13 per metric ton from US$ 209.53 in 1Q12. After the 2011 supply shock, arising from the disruption of Australian production and exports, prices have trended down in line with the slower growth of global steel consumption. At the same time, spot prices for HCC have converged to the levels of benchmark prices and Chinese domestic market prices.

 

Revenues from sales of thermal coal fell to US$ 79 million from US$ 137 million in 1Q12, being mostly impacted by lower volumes sold and, to a lesser extent, by the drop in average sale prices to US$ 70.97 per metric ton from US$ 87.58 in 1Q12.

 

Adjusted EBITDA for the coal business was a negative US$ 462 million. Excluding the non-recurring accounting loss from the sale of thermal coal assets in Colombia, adjusted EBITDA was negative US$ 107 million, against US$ 71 million in 1Q12.

 

The decrease of US$ 178 million is explained by several factors: (i) lower sales prices, US$ 63 million; (ii) no dividends received from non-consolidated affiliated companies versus US$ 60 million in the last quarter; (iii) higher COGS, US$ 8 million; (iv) higher SG&A expenses, US$ 42 million; and (v) lower volumes sold, US$ 5 million.

 

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Table 11 - COAL BUSINESS PERFORMANCE

OPERATING REVENUE BY PRODUCT

 

US$ million

 

2Q11

 

1Q12

 

2Q12

 

Thermal coal

 

139

 

137

 

79

 

Metallurgical coal

 

117

 

251

 

197

 

Total

 

256

 

389

 

276

 

 

AVERAGE SALE PRICE

 

US$/ metric ton

 

2Q11

 

1Q12

 

2Q12

 

Thermal coal

 

95.29

 

87.58

 

70.97

 

Metallurgical coal

 

256.53

 

209.53

 

171.13

 

 

VOLUME SOLD

 

‘000 metric tons

 

2Q11

 

1Q12

 

2Q12

 

Thermal coal

 

1,454

 

1,570

 

1,107

 

Metallurgical coal

 

456

 

1,199

 

1,152

 

 

Table 12 - BULK MATERIALS: SELECTED FINANCIAL INDICATORS

 

US$ million

 

2Q11

 

1Q12

 

2Q12

 

Adjusted EBIT margin excluding charges from asset sales(%)

 

 

 

 

 

 

 

Bulk materials

 

 

 

 

 

 

 

Ferrous minerals

 

69.0

 

54.7

 

57.6

 

Coal

 

(23.4

)

(17.2

)

(60.5

)

Adjusted EBITDA

 

 

 

 

 

 

 

Bulk materials

 

8,524

 

4,845

 

5,113

 

Ferrous minerals

 

8,500

 

4,774

 

5,575

 

Coal

 

24

 

71

 

(462

)

Adjusted EBITDA excluding charges from asset sales

 

 

 

 

 

 

 

Bulk materials

 

8,524

 

4,845

 

5,490

 

Ferrous minerals

 

8,500

 

4,774

 

5,597

 

Coal

 

24

 

71

 

(107

)

 

Base metals

 

Revenues from the sale of base metals and by-products in 2Q12 totaled US$ 1.781 billion, slightly above the US$ 1.775 billion for 1Q12. The positive effect from the increase in sales volumes of US$ 141 million was almost completely offset by the impact of lower average sales prices of US$ 135 million.

 

Nickel sales revenues were US$ 1.119 billion in 2Q12, only US$ 16 million higher than the last quarter. The increase in shipments contributed positively to revenues with US$ 138 million, while prices had a negative impact of US$ 122 million.

 

Shipments improved to 63,000 t from 56,000 t in 1Q12, showing an increase of 12.5%, despite problems faced in our operations in Sudbury, VNC and Onça Puma, as mentioned in our 2Q12 Production Report released on July 18, 2012. The average nickel price in 2Q12 fell to US$ 17,762 per metric ton from US$ 19,696 in the previous quarter, reflecting the increasing global economic concerns and weaker demand from the stainless steel industry. Currently, nickel prices are hovering around US$ 16,000, a level estimated to be very close to the industry marginal cost.

 

Copper revenues totaled US$ 458 million in 2Q12 against US$ 467 million in 1Q12. Although there was an increase in copper shipments to 61,000 t in 2Q12 from 58,000 t in 1Q12, it was offset by the negative impact of the decrease in sales prices to US$ 7,566 per metric ton from US$ 8,117 in the previous quarter.

 

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In 1Q12, PGMs revenues were US$ 115 million, 9.5% higher than 1Q12. The platinum sales price decreased to US$ 1,494 per troy ounce from US$ 1,741 in the previous quarter, but the higher sales volumes contributed to the increase in revenues.

 

The adjusted EBIT margin for base metals was -17.8% in 2Q12 against -3.0% in 1Q12. Excluding start-up costs of Onça Puma (US$ 78 million), start-up costs and inventory adjustments at VNC (US$ 178 million) and damage costs caused by the incident at VNC (US$ 41 million), the operating margin comes to -1.1%.

 

Other factors also affected the adjusted EBIT margin in 2Q12. The adjustments from the provisional pricing of our nickel and copper sales had an impact on selling expenses US$ 35 million higher than 1Q12.

 

Adjusted EBITDA was US$ 255 million in 2Q12, 38.7% below 1Q12. The decrease of US$ 161 million was mainly due to lower sales prices, US$ 137 million, and higher SG&A expenses, US$ 113 million, which were partially offset by higher dividends received from non-consolidated affiliated companies, US$ 47 million, and higher sales volumes, US$ 42 million.

 

Table 13 - BASE METALS BUSINESS PERFORMANCE

OPERATING REVENUE BY PRODUCT

 

US$ million

 

2Q11

 

1Q12

 

2Q12

 

Nickel

 

1,461

 

1,103

 

1,119

 

Copper

 

491

 

467

 

458

 

PGMs

 

159

 

105

 

115

 

Precious metals

 

90

 

83

 

73

 

Cobalt

 

23

 

17

 

16

 

Total

 

2,225

 

1,775

 

1,781

 

 

AVERAGE SALE PRICE

 

US$/ metric ton

 

2Q11

 

1Q12

 

2Q12

 

Nickel

 

25,541.96

 

19,696.43

 

17,761.90

 

Copper

 

8,871.38

 

8,117.28

 

7,566.00

 

Platinum (US$/oz)

 

1,765.12

 

1,741.17

 

1,493.65

 

Cobalt (US$/lb)

 

15.83

 

13.36

 

12.73

 

 

VOLUME SOLD

 

‘000 metric tons

 

2Q11

 

1Q12

 

2Q12

 

Nickel

 

57

 

56

 

63

 

Copper

 

55

 

58

 

61

 

Precious metals (oz)

 

702

 

567

 

561

 

PGMs (oz)

 

136

 

97

 

114

 

Cobalt (metric ton)

 

659

 

577

 

570

 

 

SELECTED FINANCIAL INDICATORS

 

US$ million

 

2Q11

 

1Q12

 

2Q12

 

Adjusted EBIT margin (%)

 

11.4

 

(3.0

)

(17.8

)

Adjusted EBITDA

 

754

 

416

 

255

 

 

Fertilizer nutrients

 

Sales revenues from fertilizer nutrients increased to US$ 923 million in 2Q12, 11.3% higher than the US$ 829 million in 1Q12.

 

In 2Q12, potash sales increased to US$ 81 million from US$ 70 million in the previous quarter. The increase in revenues was due to the higher sales volumes of 164,000 t in 2Q12 against 128,000 t in 1Q12. The lower average sales price, decreasing to US$ 493.90 per metric ton from US$ 546.88 in 1Q12, meant a negative contribution to revenues.

 

On April 23, 2012, in line with the strategy of becoming one of the leading global players in the fertilizers industry, Vale renewed the lease contract for potash assets and mining rights with Petróleo Brasileiro S.A.

 

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(Petrobras) in the state of Sergipe, Brazil, for a period of 30 years, allowing for the continuation of potash mining in Taquari-Vassouras and the development of the Carnalita project. The Carnalita project is expected to be the largest potash operation in Brazil, with an estimated nominal capacity of 1.2 million metric tons of potash per year, and is currently subject to approval by the Board of Directors.

 

Revenues from sales of phosphates products reached US$ 630 million in 2Q12, 14.9% higher quarter-on-quarter, due to the increase of sales volumes of almost all phosphates products. Total shipments of MAP were 268,000 t, TSP 239,000 t, SSP 693,000 t, and DCP 123,000 t. Sales of phosphate rock were 746,000 t, 8.6% lower than the 816,000 t in 1Q12.

 

Sales of nitrogen fertilizers were US$ 193 million, in line with the US$ 192 million in 1Q12. The increase in sales prices was almost fully offset by the decrease in volumes sold. Sales of other related products amounted to US$ 19 million in 2Q12.

 

The adjusted EBIT margin of the fertilizer nutrients business was 5.3% in 2Q12, slightly lower than the 5.8% of the previous quarter. Higher prices of ammonia and oil derivatives and higher maintenance in 2Q12 caused an increase of US$ 46 million and US$ 28 million, respectively, in COGS versus 1Q12.

 

Adjusted EBITDA for the fertilizers business increased to US$ 183 million in 2Q12, from US$ 169 million in 1Q12. The increase in volumes sold, US$ 98 million, was the positive contributor to higher adjusted EBITDA, being mostly mitigated by lower sales prices, US$ 39 million, higher COGS, US$ 33 million, and higher SG&A expenses, US$ 12 million.

 

Table 14 - FERTILIZER NUTRIENTS BUSINESS PERFORMANCE

OPERATING REVENUE BY PRODUCT

 

US$ million

 

2Q11

 

1Q12

 

2Q12

 

Potash

 

68

 

70

 

81

 

Phosphates

 

584

 

548

 

630

 

Nitrogen

 

194

 

192

 

193

 

Others

 

21

 

19

 

19

 

Total

 

867

 

829

 

923

 

 

AVERAGE SALE PRICE

 

US$/ metric ton

 

2Q11

 

1Q12

 

2Q12

 

Potash

 

492.75

 

546.88

 

493.90

 

Phosphates

 

 

 

 

 

 

 

MAP

 

718.28

 

693.67

 

583.61

 

TSP

 

620.70

 

567.80

 

505.23

 

SSP

 

277.56

 

248.86

 

238.76

 

DCP

 

705.05

 

706.88

 

622.39

 

Phosphate rock

 

110.36

 

114.76

 

135.39

 

Nitrogen

 

568.91

 

542.37

 

599.97

 

 

VOLUME SOLD

 

‘000 metric tons

 

2Q11

 

1Q12

 

2Q12

 

Potash

 

138

 

128

 

164

 

Phosphates

 

 

 

 

 

 

 

MAP

 

133

 

280

 

268

 

TSP

 

179

 

88

 

239

 

SSP

 

724

 

499

 

693

 

DCP

 

145

 

108

 

123

 

Phosphate rock

 

592

 

816

 

746

 

Others phosphates

 

33

 

39

 

36

 

Nitrogen

 

341

 

354

 

322

 

 

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Table of Contents

 

SELECTED FINANCIAL INDICATORS

 

US$ million

 

2Q11

 

1Q12

 

2Q12

 

Adjusted EBIT margin (%)

 

7.9

 

5.8

 

5.3

 

Adjusted EBITDA

 

209

 

169

 

183

 

 

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Logistics services

 

Logistics services generated revenues of US$ 408 million in 2Q12, slightly higher than the US$ 403 million figure for 1Q12.

 

Revenues from rail transportation of general cargo increased to US$ 294 million, 10.9% above the US$ 265 million in 1Q12.

 

Vale railroads — Carajás (EFC), Vitória a Minas (EFVM), Norte-Sul (FNS) and Centro-Atlântica (FCA) — transported 5.787 billion ntk(15) of general cargo for clients in 2Q12, rising 14.1% from the 5.070 billion ntk in 1Q12. The increase in rail transportation was due to the crop season resulting in higher volumes of agricultural products transported. Volumes of sugar and fertilizers transported increased 13% compared to 1Q12.

 

The main cargoes carried by our railroads in 2Q12 were agricultural products (51.2%), steel industry inputs and products (29.8%), building materials and forestry products (12.1%), fuels (6.5%) and others (0.4%).

 

Port services revenues totaled US$ 114 million in 2Q12, against US$ 138 million in 1Q12. Our ports and maritime terminals handled 6.421 Mt of general cargo, 20.8% above 1Q12. The drop in revenue is explained by a reduction in revenues originating from port maneuver services with tugs owned by Vale to US$ 14 million from US$ 49 million in 1Q12.

 

Adjusted EBIT margin was -12.7% in 2Q12.

 

Adjusted EBITDA improved in 2Q12, increasing to US$ 14 million from negative US$ 8 million in 1Q12. The positive effects from lower COGS (US$ 42 million) and lower SG&A expenses (US$ 12 million) caused the improved performance, more than offsetting the effect of lower prices (US$ 32 million).

 

Table 15 - LOGISTICS BUSINESS PERFORMANCE

OPERATING REVENUE BY PRODUCT

 

US$ million

 

2Q11

 

1Q12

 

2Q12

 

Railroads

 

357

 

265

 

294

 

Ports

 

119

 

138

 

114

 

Total

 

476

 

403

 

408

 

 

VOLUME SOLD

 

‘000 metric tons

 

2Q11

 

1Q12

 

2Q12

 

Railroads (million ntk)

 

6,392

 

5,070

 

5,787

 

Ports

 

6,653

 

5,314

 

6,421

 

 

SELECTED FINANCIAL INDICATORS

 

US$ million

 

2Q11

 

1Q12

 

2Q12

 

Adjusted EBIT margin (%)

 

(2.5

)

(21.7

)

(12.7

)

Adjusted EBITDA

 

80

 

(8

)

14

 

 


(15)  Ntk=net ton kilometer

 

34



Table of Contents

 

FINANCIAL INDICATORS OF NON-CONSOLIDATED COMPANIES

 

For selected financial indicators of the main non-consolidated companies, see our quarterly financial statements on www.vale.com/ Investors/ Financial Performance / SEC Reports.

 

CONFERENCE CALL AND WEBCAST

 

On July 26, 2012, Vale will hold a conference call and webcast in Portuguese, at 10:00 a.m. Rio de Janeiro time, 9:00 a.m. US Eastern Time, 2:00 p.m. British Time, 3:00 p.m. Paris Time, 9:00 p.m. Hong Kong Time. Vale will also hold another conference call and webcast in English, at 12:00 p.m. Rio de Janeiro time, 11:00 a.m. US Eastern Time, 4:00 p.m. British Time, 5:00 p.m. Paris Time, 11:00 p.m. Hong Kong Time. To connect the webcast, please dial:

 

Call in Portuguese:

Participants from Brazil: (55 11) 4688-6341

Participants from USA: (1-888) 700-0802

Participants from other countries: (1-786) 924-6977

Access code: VALE

 

Call in English:

Participants from Brazil: 0800 891 51 84

Participants from USA: (1-866) 710-0179

Participants from other countries: (1-334) 323-7224

Access code: VALE

 

Instructions for participation will be available on the website www.vale.com/Investors. A recording will be available on Vale’s website for 90 days as of July 26, 2012.

 

35



Table of Contents

 

IFRS — RECONCILIATION WITH USGAAP

 

Since December 2010, the convergence of the full year financial statements was completed and therefore IFRS is now the accounting standard adopted in Brazil. During the intermediate periods of 2010, we already adopted all pronouncements issued by the Brazilian Accounting Practice Committee (CPC) which are in conformity with the IFRS.

 

The net income reconciliation between the net income according to Brazilian rules (in conformity with the IFRS) and USGAAP is as follows:

 

US$ million 

 

2Q12

 

Net income IFRS

 

2,637

 

Depletion of assets on business acquired

 

(38

)

Income tax

 

(13

)

Pension plan

 

77

 

Other adjustments

 

(1

)

Net income US GAAP

 

2,662

 

 

Depletion of assets on business acquired: Refers to additional depletion of the adjustments to fair value of property, plant and equipment on business acquired before the new rules issued by CPC in respect of business combinations. This difference will cease by the end of the useful life of these assets.

 

Pension plan: This adjustment reflects the return on the overfunded plans, which under IFRS recognition is more restricted.

 

Income tax: Income tax related to the previously described adjustments.

 

36



Table of Contents

 

ANNEX 1 — FINANCIAL STATEMENTS

 

Table 16 - INCOME STATEMENT

 

US$ million 

 

2Q11

 

1Q12

 

2Q12

 

Gross operating revenues

 

15,345

 

11,339

 

12,150

 

Taxes

 

(356

)

(285

)

(257

)

Net operating revenue

 

14,989

 

11,054

 

11,893

 

Cost of goods sold

 

(5,721

)

(5,690

)

(6,015

)

Gross profit

 

9,268

 

5,364

 

5,878

 

Gross margin (%)

 

61.8

 

48.5

 

49.4

 

Selling, general and administrative expenses

 

(434

)

(529

)

(615

)

Research and development expenses

 

(363

)

(299

)

(359

)

Gain (loss) from sale of assets

 

 

 

(377

)

Others

 

(724

)

(686

)

(604

)

Operating profit

 

7,747

 

3,850

 

3,923

 

Financial revenues

 

226

 

119

 

120

 

Financial expenses

 

(514

)

(613

)

(559

)

Gains (losses) on derivatives, net

 

358

 

296

 

(416

)

Monetary and exchange variation

 

578

 

427

 

(1,693

)

Tax and social contribution (Current)

 

(1,719

)

(813

)

(25

)

Tax and social contribution (Deferred)

 

(688

)

260

 

(151

)

Reversal of deferred income tax

 

 

 

1,236

 

Equity income and provision for losses

 

406

 

243

 

158

 

Minority shareholding participation

 

58

 

58

 

69

 

Net earnings

 

6,452

 

3,827

 

2,662

 

Earnings per share (US$)

 

1.24

 

0.75

 

0.52

 

Diluted earnings per share (US$)

 

1.22

 

0.74

 

0.52

 

 

Table 17 - FINANCIAL RESULTS

 

US$ million 

 

2Q11

 

1Q12

 

2Q12

 

Gross interest

 

(324

)

(338

)

(325

)

Debt with third parties

 

(324

)

(338

)

(325

)

Tax and labour contingencies

 

 

(36

)

(12

)

Others

 

(190

)

(239

)

(222

)

Financial expenses

 

(514

)

(613

)

(559

)

Financial income

 

226

 

119

 

120

 

Derivatives

 

358

 

296

 

(416

)

Exchange and monetary gain (losses), net

 

578

 

427

 

(1,693

)

Financial result, net

 

648

 

229

 

(2,548

)

 

Table 18 - EQUITY INCOME BY BUSINESS SEGMENT

 

US$ million 

 

2Q11

 

%

 

1Q12

 

%

 

2Q12

 

%

 

Ferrous minerals

 

319

 

78.6

 

231

 

95.1

 

173

 

109.5

 

Coal

 

14

 

3.4

 

14

 

5.8

 

13

 

8.2

 

Base metals

 

49

 

12.1

 

34

 

14.0

 

3

 

1.9

 

Logistics

 

33

 

8.1

 

30

 

12.3

 

15

 

9.5

 

Steel

 

(3

)

(0.7

)

(34

)

(14.0

)

(38

)

(24.1

)

Others

 

(6

)

(1.5

)

(32

)

(13.2

)

(8

)

(5.1

)

Total

 

406

 

100.0

 

243

 

100.0

 

158

 

100.0

 

 

37



Table of Contents

 

Table 19 - BALANCE SHEET

 

US$ million 

 

6/30/2011

 

3/31/2012

 

6/30/2012

 

Assets

 

 

 

 

 

 

 

Current

 

31,673

 

22,727

 

20,787

 

Long-term

 

9,967

 

9,268

 

9,438

 

Fixed

 

101,573

 

102,437

 

99,331

 

Total

 

143,213

 

134,432

 

129,556

 

Liabilities

 

 

 

 

 

 

 

Current

 

15,607

 

10,892

 

9,220

 

Long term

 

39,685

 

39,250

 

38,429

 

Shareholders’ equity

 

87,921

 

84,290

 

81,907

 

Paid-up capital

 

40,223

 

36,832

 

37,719

 

Reserves

 

43,859

 

44,678

 

42,575

 

Non controlling interest

 

2,905

 

1,846

 

1,613

 

Mandatory convertible notes

 

934

 

934

 

 

Total

 

143,213

 

134,432

 

129,556

 

 

38



Table of Contents

 

Table 20 - CASH FLOW

 

US$ million

 

2Q11

 

1Q12

 

2Q12

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

6,394

 

3,769

 

2,593

 

Adjustments to reconcile net income with cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

979

 

1,055

 

1,084

 

Dividends received

 

343

 

60

 

112

 

Equity in results of affiliates and joint ventures and change in provision for losses on equity investments

 

(406

)

(243

)

(158

)

Deferred income taxes

 

688

 

(260

)

(1,085

)

Loss on sale of property, plant and equipment

 

19

 

44

 

207

 

Gain on sale of investment

 

 

 

377

 

Exchange and monetary losses

 

257

 

(182

)

82

 

Net unrealized derivative losses

 

(230

)

(114

)

642

 

Net interest payable

 

(41

)

47

 

(29

)

Others

 

(41

)

(38

)

(73

)

Decrease (increase) in assets:

 

 

 

 

 

 

 

Accounts receivable

 

(658

)

645

 

425

 

Inventories

 

(73

)

(445

)

292

 

Recoverable taxes

 

(79

)

355

 

(287

)

Others

 

(280

)

(21

)

(42

)

Increase (decrease) in liabilities:

 

 

 

 

 

 

 

Suppliers

 

246

 

(391

)

92

 

Payroll and related charges

 

204

 

(601

)

284

 

Income tax

 

(24

)

(472

)

(166

)

Others

 

(233

)

47

 

29

 

Net cash provided by operating activities

 

7,065

 

3,255

 

4,379

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Short term investments

 

540

 

 

 

Loans and advances receivable

 

(34

)

(38

)

8

 

Guarantees and deposits

 

(159

)

(12

)

(76

)

Additions to investments

 

(26

)

(217

)

(53

)

Additions to property, plant and equipment

 

(3,480

)

(2,961

)

(3,228

)

Proceeds from disposals of investment

 

 

 

366

 

Net cash used in investing activities

 

(3,159

)

(3,228

)

(2,983

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Short-term debt, net issuances (repayments)

 

(45

)

464

 

21

 

Long-term debt

 

268

 

1,014

 

1,809

 

Repayment of long-term debt

 

(419

)

(63

)

(502

)

Transactions of noncontrolling interest

 

 

(76

)

(427

)

Interest attributed to shareholders

 

(2,000

)

 

(3,000

)

Dividends to minority interest

 

(60

)

 

(35

)

Net cash used in financing activities

 

(2,256

)

1,339

 

(2,134

)

Increase (decrease) in cash and cash equivalents

 

1,650

 

1,366

 

(738

)

Effect of exchange rate changes on cash and cash equivalents

 

306

 

25

 

(101

)

Cash and cash equivalents, beginning of period

 

11,271

 

3,531

 

4,922

 

Cash and cash equivalents, end of period

 

13,227

 

4,922

 

4,083

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest on short-term debt

 

(1

)

(1

)

 

Interest on long-term debt

 

(374

)

(325

)

(350

)

Income tax

 

(1,171

)

(656

)

(282

)

Non-cash transactions

 

 

 

 

 

 

 

Interest capitalized

 

69

 

56

 

70

 

 

39



Table of Contents

 

ANNEX 2 — VOLUMES SOLD, PRICES, MARGINS AND CASH FLOWS

 

Table 21 - VOLUME SOLD - MINERALS AND METALS

 

‘000 metric tons

 

2Q11

 

1Q12

 

2Q12

 

Iron ore

 

62,644

 

54,793

 

62,978

 

Pellets

 

10,253

 

10,400

 

12,277

 

Manganese ore

 

280

 

316

 

510

 

Ferroalloys

 

101

 

103

 

99

 

Thermal coal

 

1,454

 

1,570

 

1,107

 

Metallurgical coal

 

456

 

1,199

 

1,152

 

Nickel

 

57

 

56

 

63

 

Copper

 

55

 

58

 

61

 

Precious metals (oz)

 

702

 

567

 

561

 

PGMs (oz)

 

136

 

97

 

114

 

Cobalt (metric ton)

 

659

 

577

 

570

 

Potash

 

138

 

128

 

164

 

Phosphates

 

 

 

 

 

 

 

MAP

 

133

 

280

 

268

 

TSP

 

179

 

88

 

239

 

SSP

 

724

 

499

 

693

 

DCP

 

145

 

108

 

123

 

Phosphate rock

 

592

 

816

 

746

 

Others phosphates

 

33

 

39

 

36

 

Nitrogen

 

341

 

354

 

322

 

 

Table 22 - AVERAGE SALE PRICES

 

US$/ton

 

2Q11

 

1Q12

 

2Q12

 

Iron ore

 

145.30

 

109.26

 

103.29

 

Pellets

 

206.07

 

162.29

 

159.00

 

Manganese ore

 

182.14

 

132.91

 

123.53

 

Ferroalloys

 

1,485.15

 

1,203.88

 

1,303.03

 

Thermal coal

 

95.29

 

87.58

 

70.97

 

Metallurgical coal

 

256.53

 

209.53

 

171.13

 

Nickel

 

25,541.96

 

19,696.43

 

17,761.90

 

Copper

 

8,871.38

 

8,117.28

 

7,566.00

 

Platinum (US$/oz)

 

1,765.12

 

1,741.17

 

1,493.65

 

Cobalt (US$/lb)

 

15.83

 

13.36

 

12.73

 

Potash

 

492.75

 

546.88

 

493.90

 

Phosphates

 

 

 

 

 

 

 

MAP

 

718.28

 

693.67

 

583.61

 

TSP

 

620.70

 

567.80

 

505.23

 

SSP

 

277.56

 

248.86

 

238.76

 

DCP

 

705.05

 

706.88

 

622.39

 

Phosphate rock

 

110.36

 

114.76

 

135.39

 

Nitrogen

 

568.91

 

542.37

 

599.97

 

 

Table 23- OPERATING MARGIN BY SEGMENT (EBIT ADJUSTED MARGIN)

 

%

 

2Q11

 

1Q12

 

2Q12

 

Bulk materials(1)

 

 

 

 

 

 

 

Ferrous minerals

 

69.0

 

54.7

 

57.6

 

Coal

 

(23.4

)

(17.2

)

(60.5

)

Base metals

 

11.4

 

(3.0

)

(17.8

)

Fertilizer nutrients

 

7.9

 

5.8

 

5.3

 

Logistics

 

(2.5

)

(21.7

)

(12.7

)

Total(1)

 

51.7

 

34.8

 

36.2

 

 


(1) excluding charges from asset sales

 

40



Table of Contents

 

ANNEX 3 — RECONCILIATION OF US GAAP and “NON-GAAP” INFORMATION

 

(a) Adjusted EBIT

 

US$ million

 

2Q11

 

1Q12

 

2Q12

 

Net operating revenues

 

14,989

 

11,054

 

11,893

 

COGS

 

(5,721

)

(5,690

)

(6,015

)

SG&A

 

(434

)

(529

)

(615

)

Research and development

 

(363

)

(299

)

(359

)

Other operational expenses

 

(724

)

(686

)

(604

)

Gain (loss) on sale of assets

 

 

 

(377

)

Adjusted EBIT

 

7,747

 

3,850

 

3,923

 

 

(b) Adjusted EBITDA

 

EBITDA defines profit or loss before interest, tax, depreciation and amortization. Vale uses the term adjusted EBITDA to reflect exclusion, also, of: monetary variations; equity income from the profit or loss of affiliated companies and joint ventures, less the dividends received from them; provisions for losses on investments; adjustments for changes in accounting practices; minority interests; and non-recurrent expenses. However our adjusted EBITDA is not the measure defined as EBITDA under US GAAP, and may possibly not be comparable with indicators with the same name reported by other companies. Adjusted EBITDA should not be considered as a substitute for operational profit or as a better measure of liquidity than operational cash flow, which are calculated in accordance with GAAP. Vale provides its adjusted EBITDA to give additional information about its capacity to pay debt, carry out investments and cover working capital needs. The following table shows the reconciliation between adjusted EBITDA and operational cash flow, in accordance with its statement of changes in financial position:

 

RECONCILIATION BETWEEN ADJUSTED EBITDA AND OPERATIONAL CASH FLOW

 

US$ million

 

2Q11

 

1Q12

 

2Q12

 

Operational cash flow

 

7,065

 

3,255

 

4,379

 

Income tax

 

1,719

 

813

 

25

 

FX and monetary losses

 

(853

)

(245

)

1,611

 

Financial expenses

 

(11

)

151

 

884

 

Net working capital

 

897

 

883

 

(627

)

Other

 

252

 

108

 

(1,153

)

Adjusted EBITDA

 

9,069

 

4,965

 

5,119

 

 

(c) Net debt

RECONCILIATION BETWEEN Total debt AND NET DEBT

 

US$ million

 

2Q11

 

1Q12

 

2Q12

 

Total debt

 

24,459

 

24,939

 

25,518

 

Cash and cash equivalents

 

13,227

 

4,922

 

4,082

 

Net debt

 

11,232

 

20,017

 

21,436

 

 

(d) Total debt / LTM Adjusted EBITDA

 

US$ million

 

2Q11

 

1Q12

 

2Q12

 

Total debt / LTM Adjusted EBITDA (x)

 

0.7

 

0.8

 

0.9

 

Total debt / LTM operational cash flow (x)

 

0.9

 

1.1

 

1.3

 

 

(e) Total debt / Enterprise value

 

US$ million

 

2Q11

 

1Q12

 

2Q12

 

Total debt / EV (%)

 

13.87

 

17.34

 

20.06

 

Total debt / total assets (%)

 

17.08

 

18.55

 

19.70

 

 

Enterprise value = Market capitalization + Net debt

 

(f) LTM Adjusted EBITDA / LTM interest payments

 

US$ million

 

2Q11

 

1Q12

 

2Q12

 

LTM adjusted EBITDA / LTM interest payments (x)

 

28.36

 

27.46

 

24.49

 

LTM operational profit / LTM interest payments (x)

 

24.25

 

22.98

 

20.03

 

 

41



Table of Contents

 

This press release may include statements that present Vale’s expectations about future events or results.  All statements, when based upon expectations about the future and not on historical facts, involve various risks and uncertainties. Vale cannot guarantee that such statements will prove correct. These risks and uncertainties include factors related to the following: (a) the countries where we operate, especially Brazil and Canada; (b) the global economy; (c) the capital markets; (d) the mining and metals prices and their dependence on global industrial production, which is cyclical by nature; and (e) global competition in the markets in which Vale operates. To obtain further 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 (SEC), the Brazilian Comissão de Valores Mobiliários (CVM), the French Autorité des Marchés Financiers (AMF), and The Stock Exchange of Hong Kong Limited, and in particular the factors discussed under “Forward-Looking Statements” and “Risk Factors” in Vale’s annual report on Form 20-F.

 

42



Table of Contents

 

Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

Vale S.A.

 

(Registrant)

 

 

 

By:

/s/ Roberto Castello Branco

Date: July 25, 2012

 

Roberto Castello Branco

 

 

Director of Investor Relations

 

43