0 Discussion with sell-side analysts Rio de Janeiro, July 11 th 2014 J l 11 th 2014 Ri d J i Luciano Siani, Vale CFO
1 OBJECTIVE OF THE DISCUSSION The objective of this discussion is to clarify topics that have created confusion in previous releases that have created confusion in previous releases and address outstanding questions from sell-side analysts
2 Iron ore prices and margins DOCUMENT CONTENT Cash Flow Capex � � �
3 Iron ore prices and margins DOCUMENT CONTENT Cash Flow Capex � � �
4 TOPICS COVERED – IRON ORE PRICES AND MARGINS Pricing systems Price realization EBITDA margins • The transition of the • The evolution of • Vale's sales mix - benchmark to Vale's price goals and alternative pricing realization vs. the implications systems IODEX • Sales products • Sales products • Vale's provisional • Overview of Vale's impacting Vale's pricing mechanism iron ore price EBITDA per ton and its impact on p realization • Projections of prices • The main drivers Vale’s future • Evolution of Vale's impacting Vale's margins pricing mix pricing mix price realization price realization
5 TOPICS COVERED – IRON ORE PRICES AND MARGINS Pricing systems Price realization EBITDA margins • The transition of the • The evolution of • Vale's sales mix - benchmark to Vale's price goals and alternative pricing realization vs. the implications systems IODEX • Sales products • Sales products • Vale's provisional • Overview of Vale's impacting Vale's pricing mechanism iron ore price EBITDA per ton and its impact on p realization • Projections of prices • The main drivers Vale’s future • Evolution of Vale's impacting Vale's margins pricing mix pricing mix price realization price realization
Mining companies abandoned the benchmark pricing system, prevalent during periods of low price volatility, and gradually 6 adopted alternative pricing mechanisms better suitable to customer needs HISTORIC EVOLUTION OF PRICING SYSTEMS US$/t 240 MB 63% Fe FOB Brazil¹ Vale SF FOB Brazil to Asia² Sharp spot price Sharp spot price decreases 200 increases lead to the reduced the importance of collapse of benchmark the lagged-based pricing pricing system system 160 120 120 80 40 0 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Benchmark Lagged New Pricing Mechanisms ¹ Market index based on MB 63.5% CFR China ² Vale prices based on standard Sinter Feed Fines with Fe(%) adjusted to 63.5% for comparison with index
With the fall of the benchmark system, alternative pricing systems were developed to better adapt to customer 7 needs, particularly the needs of Chinese steel mills CURRENTLY PREVAILING PRICING SYSTEMS Description Trade-offs • Sales based on past prices • Provides price stability and predictability • Prices calculated based on the average price of the past three-months ending one month before • Creates disconnection with the Lagged the current quarter, i.e., based on three month short-term prices, specially in period starting 4 months before the relevant i d t ti 4 th b f th l t volatile pricing environments l til i i i t quarter • Customers invoiced based on provisional prices Customers invoiced based on provisional prices • Reflects market prices on Reflects market prices on delivery, i.e., closer to iron ore • Accounting provision in the end of the quarter usage based on “best estimate” of prices on delivery Provisional • Requires end of quarter pricing • Final prices settled and adjustments made in the adjustments between initial adjustments between initial subsequent quarter, upon delivery b t t d li invoice and delivery • Sales completed and prices settled in the current • Reflects average market prices of quarter quarter the quarter of delivery the quarter of delivery • Prices based on methodologies such as: • Maintains price volatility Current – Monthly averages – Daily prices a y p ces – Provisional prices liquidated within the quarter
Volumes subject to provisional pricing, as reported on Vale's results release, are the ones whose delivery and thus final 8 price settlement occur after the end of the current quarter PRICE AT DELIVERY CONCEPT Conceptual Q1 Q2 0 0 15 15 30 30 45 45 60 60 75 75 90 90 105 105 120 120 135 135 150 150 165 165 180 180 Adjustment of provisional price to Final price settled ~ 45 days reflect Vale’s best estimates on still in Q1 prices at delivery p y Shipments before 45 days to Delivery within the quarter Classified the end of the quarter as current Provisional pricing in current quarter (Q1) ~ 45 days Final prices settled and provision reversals i impacting the next quarter (Q2) prices ti th t t (Q2) i Shipments in the later 45 Delivery after end of quarter days of the quarter Classified Provisional pricing as in current quarter provisional (Q1)
Price adjustments can be estimated based on the hypothetical realized prices in the first 45 days following the quarter 9 ended compared to the prices provisioned by the end of the quarter HYPOTHETICAL IMPACT OF PROVISIONAL PRICING Hypothetical 2Q14 Pro isional sales Provisional sales Impact Quarter 1Q US$t 4Q13 +3.1 (%) 41% Volumes under 1Q14 (6.4) provisional sales i i l l X 2Q14 (2.0) (Mt) 23.7 Sales volumes 1Q, ex-pellets (Mt) Hypothetical 57.8 Adjustment X (US$Mi) (142) H Hypothetical th ti l IODEX realized Hypothetical 2Q prices¹ ÷ price impact Realized less 111 provisioned price (US$/t) (US$/t) _ (2 0) (2.0) (US$/t) (6) Hypothetical Hypothetical 2Q provisioned² sales volume, prices ex-pellets (US$/t) (US$/t) 117 117 (Mt) 70 ¹ Average of first 45 days of 2Q14 ² Hypothetical price provisioned at the end of the quarter (1Q) estimated based on IODEX of last day of the quarter (1Q)
10 Vale’s sales mix is mostly concentrated in current and provisional pricing mechanisms EVOLUTION OF VALE’S PRICING MIX Lagged Current • Provisional pricing Provisional has increased Benchmark gradually 8% 15% • Provisional sales are 31% concentrated in the Chinese market and close to its sales 73% distribution limit 93% 64% 92% • Mix may vary with Mix may vary with 53% 53% changes in the geographical distribution of sales and the ramp-up of p p 27% 27% 21% the distribution center 16% 7% in Malaysia 2009 2010 2011 2012 2013
11 Despite short term differences, over the medium term, the Platts 62% and its forward index net-off COMPARISON PLATTS 62% AND THE 45-DAY FOWARD INDEX US$/dmt Pl Platts 62 62 Platts 62 160,00 Average Platts 62 Média Platts 62 em todo o período Platts 62, 45 days forward Platts 62 defasado em 45 dias Average Platts 62, 45 days forward Média Platts 62 defasado em todo o período 150,00 140,00 Avg = 130.6 130,00 , A Avg = 129.0 129 0 120,00 110,00 100,00 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 Quarter adjustments will net off over the long term despite short term volatility
12 TOPICS COVERED – IRON ORE PRICES AND MARGINS Pricing systems Price realization EBITDA margins • The transition of the • The evolution of • Vale's sales mix - benchmark to Vale's price goals and alternative pricing realization vs. the implications systems IODEX • Sales products • Sales products • Vale's provisional • Overview of Vale's impacting Vale's pricing mechanism iron ore price EBITDA per ton and its impact on p realization • Projections of prices • The main drivers Vale's future • Evolution of Vale's impacting Vale's margins pricing mix pricing mix price realization price realization
There has been fluctuations in the difference between the IODEX and Vale's realized prices, primarily because of price 13 volatility and the existing price mechanisms that do not correlate directly with the IODEX average IODEX VS VALE REALIZED PRICES Difference between the average IODEX¹ and Vale realized prices vs. IODEX Vale's realized price US$/t US$/t Average Iron Ore Price (IODEX) US$/dmt Realized Price US$/wmt 54 180 160 140 38 37 120 120 32 30 29 100 27 27 26 25 27.8 80 22 22 22 20 20 19 60 40 8 8 20 0 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 ¹ Platts assessmet of daily transaction value for the seaborne iron ore imported and sold into China on a 62% Fe Content
14 Vale’s iron ore price realization is impacted not only by key drivers such as freight, quality and pricing systems but also by the sale of ROM - an intermediate product PRICE REALIZATION – IRON ORE US$/t US$/t, 1Q14 29.9 9.8 120.4 Lower prices on intermediate p products 12.1 1.9 1.6 6 4 6.4 2 6 2.6 4.3 0.2 0 2 90 5 90.5 Average Humidity Freight Quality Lagged Current Impact ROM Other Vale Platts prices prior price 1Q14 quarter¹ 1Q14 Pricing system ¹ Adjustment as a result of provisional prices booked in the previous quarter
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