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Marcos Assumpção
VP of LatAm Metals & Mining
Nuevos Tiempos
Estrategia e Innovación Comercialización y los Mercados
Internacionales “Los Commodities”
2
Agenda
SECTION 1 COMMODITY PRICE OVERVIEW
SECTION 2
NEW REALITY = NEW REGULATORY AND FISCAL FRAMEWORK SECTION 3
NEW TRENDS IN THE GLOBAL MINING INDUSTRY
4
Commodity Price Overview
CHINESE GDP GROWTH IS SLOWING DOWN!
14%
10%
7%
0%
2%
4%
6%
8%
10%
12%
14%
16%
79 82 85 88 91 94 97 00 03 06 09 12 15E
GDP Growth
5
CHINESE STEEL OUTPUT GROWTH IS DECLINING WITH GDP
Commodity Price Overview
0.0
0.5
1.0
1.5
2.0
2.5
0.0
5.0
10.0
15.0
20.0
25.0
2000 2003 2006 2009 2013 2014E 2015E
(ratio)(YoY %)
GDP Growth Rate Crude Steel Output Growth Rate Steel/GDP Elasticity (RHS)
6
-60
-40
-20
0
20
40
60
80
100
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Consumption Investment Net exports
Commodity Price Overview
GROWTH IN CHINA WILL BE LESS COMMODITY INTENSIVE
GDP Growth Contribution (%)
7
Commodity Price Overview
WEAK DEMAND FROM THE REST OF THE WORLD
Euro and Japanese PMIs Remained Weak in the
Last Few Years
55.9
50.6
52.4
20.0
25.0
30.0
35.0
40.0
45.0
50.0
55.0
60.0
Nov-1
1
Jan
-12
Mar-
12
Ma
y-1
2
Jul-1
2
Se
p-1
2
Nov-1
2
Jan
-13
Mar-
13
Ma
y-1
3
Jul-1
3
Se
p-1
3
Nov-1
3
Jan
-14
Mar-
14
Ma
y-1
4
Jul-1
4
Se
p-1
4
USA Euro Zone Japan
Source: Bloomberg and Itaú BBA
Itaú’s Global GDP Growth Expectations
2.2
0.7
0.9
3.0
1.0 1.0
USA Euro Zone Japan
2014 2015
8
1.2
1.7
0.8
1.1
2014 2015
Old Estimate New Estimate
Commodity Price Overview
WEAK DEMAND FROM THE REST OF THE WORLD
Euro and Japanese PMIs Remained Weak in the
Last Few Years
55.9
50.6
52.4
20.0
25.0
30.0
35.0
40.0
45.0
50.0
55.0
60.0
Nov-1
1
Jan
-12
Mar-
12
Ma
y-1
2
Jul-1
2
Se
p-1
2
Nov-1
2
Jan
-13
Mar-
13
Ma
y-1
3
Jul-1
3
Se
p-1
3
Nov-1
3
Jan
-14
Mar-
14
Ma
y-1
4
Jul-1
4
Se
p-1
4
USA Euro Zone Japan
Source: Bloomberg and Itaú BBA
European Commission Just Revised Down Growth
Expectations for the Continent
9
Commodity Price Overview
Source: Bloomberg and Itaú BBA
COMMODITY PRICES INCREASINGLY DEPENDENT ON
THE SUPPLY SIDE.
THE SUPER CYCLE IS OVER;
CONCLUSIONS
10
Commodity Price Overview
IRON ORE CASE STUDY
BHP’s Quarterly Iron Ore Shipments
53.6
63.3
0
20
40
60
80
100
1Q09A 4Q09A 3Q10A 2Q11A 1Q12A 4Q12A 3Q13A 2Q14A
(Mt)
+18% YoY
Fortescue’s Quarterly Iron Ore Shipments
26
42
0
20
40
60
80
100
1Q09A 4Q09A 3Q10A 2Q11A 1Q12A 4Q12A 3Q13A 2Q14A
(Mt)
+60% YoY
Rio Tinto's Quarterly Iron Ore Shipments
68.0
78.0
0
20
40
60
80
100
2Q09A 1Q10A 4Q10A 3Q11A 2Q12A 1Q13A 4Q13A 3Q14A
(Mt)+15% YoY
Australian Producers Have Been Adding Capacity and Increasing Sales Over The Years
376
418448
489
564
410
511
0
100
200
300
400
500
600
2009 2010 2011 2012 2013 9M13 9M14
Fortescue Rio Tinto BHP
mn. tons
+74mn. tons
+102mn. tons
11
Commodity Price Overview
IRON ORE COPPER
Market is currently oversupplied
New capacity expected in 2015/16
Capacity shutdowns are taking longer than
expected
Inventories at high levels in China
Market is balanced
Difficulties to add new capacity
Projects are taking longer than expected
Strikes are common
Low inventories (LME/Shanghai/Comex)
WHAT IS THE CURRENT SCENARIO?
12
Commodity Price Overview
WHAT IS OUR VIEW ON THE OUTLOOK?
Prices supported at USD 3.00/pound
Scrap producers are swing producers
Prices could surprise to the upside
Prices to remain pressured
Limited room for price hike
Price volatility to remain low
IRON ORE COPPER
13
Commodity Price Overview
View on prices = cautious
LT price forecast USD 80-90/ton
View on prices = neutral/positive
LT price forecast USD 3.1/pound
CONCLUSION
IRON ORE COPPER
15
New Trends in the Mining Industry
FOCUS ON DISCIPLINE IN CAPITAL ALLOCATION
Source: Vale and Itaú BBA
Last decade
Strong demand growth (China)
New scenario
Moderate demand growth
16
New Trends in the Mining Industry
FOCUS ON DISCIPLINE IN CAPITAL ALLOCATION
Source: Vale and Itaú BBA
Last decade
Strong demand growth (China)
Focus on volume growth
New scenario
Moderate demand growth
Focus on cost cutting
17
New Trends in the Mining Industry
FOCUS ON DISCIPLINE IN CAPITAL ALLOCATION
Source: Vale and Itaú BBA
Last decade
Strong demand growth (China)
Focus on volume growth
Focus on diversification
New scenario
Moderate demand growth
Focus on cost cutting
Capital allocation discipline
18
New Trends in the Mining Industry
FOCUS ON DISCIPLINE IN CAPITAL ALLOCATION
Source: Vale and Itaú BBA
Last decade
Strong demand growth (China)
Focus on volume growth
Focus on diversification
Focus on acquisitions
New scenario
Moderate demand growth
Focus on cost cutting
Capital allocation discipline
Sale of non-core assets
19
New Trends in the Mining Industry
FOCUS ON DISCIPLINE IN CAPITAL ALLOCATION
Source: Vale and Itaú BBA
Last decade
Strong demand growth (China)
Focus on volume growth
Focus on diversification
Focus on acquisitions
Brownfield expansions
New scenario
Moderate demand growth
Focus on cost cutting
Capital allocation discipline
Sale of non-core assets
Higher capex/ton, riskier
geographies
20
New Trends in the Mining Industry
FOCUS ON DISCIPLINE IN CAPITAL ALLOCATION
Source: Vale and Itaú BBA
Last decade
Strong demand growth (China)
Focus on volume growth
Focus on diversification
Focus on acquisitions
Brownfield expansions
Slow response of industry supply
New scenario
Moderate demand growth
Focus on cost cutting
Capital allocation discipline
Sale of non-core assets
Higher capex/ton, riskier
geographies
Delayed supply coming on stream
(different for each commodity)
23
Strategies to Adapt to a New Reality
DIVESTITURES
Rio Tinto sold
>USD3 billion in 2013
BHP has sold
>USD 6.5 billion to date
25
Source: Vale and Itaú BBA
Vale’s Capex Plans: 2008 vs. Current
2008 Capex
32 PROJECTS
9 DIFFERENT BUSINESS SEGMENTS
Current Capex
5 PROJECTS
4 DIFFERENT BUSINESS SEGMENTS
Carajas USD3.3 bn
Nacala USD2.6 bn
Itabiritos USD 1.1 bn
IO Distribution USD 0.4 bn
Salobo USD 0.3 bn
Vale’s Investment Case – Adjusting to a New Reality
26
Source: Vale and Itaú BBA
Vale’s Strategy – Adjusting to a New Reality
Capex and R&D Dropped Considerably
27
Source: Vale and Itaú BBA
SG&A as a % of Revenue
Vale’s Strategy – Adjusting to a New Reality
6.1%
5.6%
4.6%
4.8%4.7%
2.9%
0%
1%
2%
3%
4%
5%
6%
7%
01 02 03 04 05 06 07 08 09 10 11 12 13 14e
SG&A as % of Revenue
28
Source: Vale and Itaú BBA
c01 02 04 05 06 07 08 09 10 1103
-Samitri (Iron Ore) -FERTECO (Iron Ore)-SIBRA e CPFL (Ferro-Alloy)-Sossego Project (Copper)
-Peru Phosphate Concession (Fertilizers)
-Mozambique Copper Concession (Copper)-Argentina Potash Concession (Fertilizers)
-AMCI Holdings Australia (Coal)-Belvedere Project (Coal)
-Salobo (Copper)-ALUNORTE (Aluminum)-Vera Cruz (Aluminum)-Estreito Hyd. Plant (Energy)
-Rana (Ferro-Alloy)-CST (Steel)-Celmar (Pulp)-Caemi (Iron Ore)
-Canico (Nickel)-Valesul (Aluminum)-Inco (Nickel)
-Mineração Apolo Mining Rights (Iron Ore)
-Rio Colorado Project (Fertilizers)-Regina Project (Fertilizers)-Exploration Fields in Africa (Copper)-Coal Assets in Colombia (Coal)-Corumbá (Iron Ore)-CSA (Steel)
-Bunge and Fosfertil (Fertilizers)-Simandou (Iron Ore)-Belvedere Stake Increase (Coal)
-Belo Monte Stake (Energy)
Previous Management, Asset Investments
Vale’s Strategy – Adjusting to a New Reality
29
Source: Vale and Itaú BBA
c01 02 04 05 06 07 08 09 10 1103
-Samitri (Iron Ore) -FERTECO (Iron Ore)-SIBRA e CPFL (Ferro-Alloy)-Sossego Project (Copper)
-Peru Phosphate Concession (Fertilizers)
-Mozambique Copper Concession (Copper)-Argentina Potash Concession (Fertilizers)
-AMCI Holdings Australia (Coal)-Belvedere Project (Coal)
-Salobo (Copper)-ALUNORTE (Aluminum)-Vera Cruz (Aluminum)-Estreito Hyd. Plant (Energy)
-Rana (Ferro-Alloy)-CST (Steel)-Celmar (Pulp)-Caemi (Iron Ore)
-Canico (Nickel)-Valesul (Aluminum)-Inco (Nickel)
-Mineração Apolo Mining Rights (Iron Ore)
-Rio Colorado Project (Fertilizers)-Regina Project (Fertilizers)-Exploration Fields in Africa (Copper)-Coal Assets in Colombia (Coal)-Corumbá (Iron Ore)-CSA (Steel)
-Bunge and Fosfertil (Fertilizers)-Simandou (Iron Ore)-Belvedere Stake Increase (Coal)
-Belo Monte Stake (Energy)
11 12 13
- Log-in Stake Sale- VLI Stake Sale- Phosphoric Acid Asset Sale- Tres Valles Asset Sale- Norsk Hydro- Salobo Gold Production Stream
- Oil & Gas Assets- Araucária Fertilizer Sale- European Manganese Assets- Ship Sales- Colombian Coal Assets- CADAM Kaolin Assets
New Management,
Asset Sales
Previous Management, Asset Investments
Vale’s Strategy – Adjusting to a New Reality
30
0.4 0.61.0
4.251.7
2.5 2.5 2.5
12.0
6.0
4.54.3
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
2003A 2004A 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014E
USD billion
Source: Vale and Itaú BBA
Vale’s Strategy – Adjusting to a New Reality
LOWER INVESTOR RETURNS
HIGHER INVESTOR RETURNS
32
Mining is a Relevant Industry in LatAm
Mining Represents More Than 10% of GDP and 50% of Exports in Some Countries
GDP Growth: Mining vs. Brazil Mining as % of 2013 Exports and GDP in LatAm
2.7
1.1
5.7
3.24.0
6.1
5.2
-0.3
7.5
2.7 0.9
11.6
4.7
4.3
9.3
4.4
3.73.5
-3.2
13.6
3.2
-1.1
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Brazil Mining
60%
57%
18%16%
12%
16%
12%
3%
Peru Chile Colombia Brazil
Metal Mining exports as % of Total Exports Metal Mining Exports - % GDP
33
Latam Has Been Investing Heavily in Mining
Latam Countries Also Invest Heavily in Exploration
Global Mining Exploration - 2012
4.0
3.5
3.0
2.5
2.0
2.0
1.5
1.0
0.5
0.0
Au
str
alia
Can
ad
a
US
A
Me
xic
o
Chile
Pe
ru
Bra
zil
Russia
Chin
a
Arg
en
tin
a
Ind
on
esia
So
uth
Afr
ica
US
$ b
ilio
n
34
Mining Activities Benefit Many Sectors in the Economy
Capex
Development of local suppliers
Employment
Exports
Trade Balance
Taxes
R&D
Development of communities
35
Mining is an important Trade Balance Contributor
Vale has a huge contribution to the positive figures in the Brazilian trade balance surplus
Source: Vale, MDIC, Itaú BBA
6.3
8.8
11.5
16.2
13.0
27.7
36.9
26.527.6
44.946.5
40.0
25.0 25.3
20.1
29.7
19.4
2.6
2005 2006 2007 2008 2009 2010 2011 2012 2013
Vale Trade Balance Brazil Trade Balance
Peru and Chile – Metal Mining Exports
as % of GDP
00%
05%
10%
15%
20%
25%
30%
Dec-9
6
Nov-9
7
Oct-
98
Se
p-9
9
Au
g-0
0
Jul-0
1
Jun
-02
May-0
3
Ap
r-04
Mar-
05
Feb-0
6
Jan
-07
Dec-0
7
Nov-0
8
Oct-
09
Se
p-1
0
Au
g-1
1
Jul-1
2
Jun
-13
May-1
4
Peru Chile
USD billion
36
A Stable and Friendly Framework is Desired
Global competition
High capital intensity
Long lead times
Operations in remote areas require infrastructure investments
Environmental risks
A stable and friendly regulatory and fiscal framework is desired to
continue attracting and incentivizing investments in the mining industry
Mining is a high risk business