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Vale S.A. (NYSE:VALE)
Q3 2019 Earnings Call
Oct 25, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen. Welcome to Vale's Conference Call to discuss 3Q '19 Results. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time.

[Operator Instructions]

As a reminder, this conference is being recorded, and the recording will be available on the Company's website at vale.com at the Investors link.This conference call is accompanied by a slide presentation, also available at the Investors link at the Company's website, and it's transmitted via internet as well. The broadcasting via internet, both the audio and the slide change have a few seconds' delay in relation to the audio transmitted via phone.

Before proceeding, let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Actual performance could differ materially from that anticipated in any forward-looking comments, as a result of macroeconomic conditions, market risks and other factors.

With us today are Mr. Eduardo de Salles Bartolomeo, President and CEO; Mr. Luciano Siani Pires, CFO; Mr. Marcello Spinelli, Executive Officer for Ferrous Minerals; Mr. Mark Travers, Executive Officer for Base Metals; Mr. Carlos Medeiros, Safety and Operational Excellence Executive Officer; Mr. Alexandre Pereira, Executive Officer for Business Support; Mr. Alexandre D'Ambrosio, General Counsel; Mr. Juarez Saliba, Director of Coal, Strategy and Mineral Exploration; and Mr. Juarez Saliba, Director of coal, strategy and Mineral exploration; and Mrs. Marina Quental, Director of People.

First, Mr. Eduardo Bartolomeo will proceed to the presentation on Vale's 3Q19 performance, and after that he will be available for question and answers. It is now my pleasure to turn the call over to Mr. Eduardo Bartolomeo. Sir, you may now begin.

Eduardo de Salles Bartolomeo -- President and Chief Executive Officer

Okay, thank you. Good morning, everyone. I would like to begin our conversation about the third quarter's results by recalling two message, which I have been reinforcing, since I took Vale's leadership.

First, that we'll fully repair what happened in Brumadinho. Second, that we are committed to making Vale one of the safest and most reliable mining companies in the world. To recap, our priorities are safety, people and reparation. Nine months have passed at Brumadinho, and we continue to be extremely committed to these three words. We are paving the way for new forms to make our business better, safer, and more stable. We are working day after day, with a very high level of rework in the manage of our risks, but also with a very keen eye for everything that society is demanding.

As you can see in this slide, our objective is the full reparation of Brumadinho, and each day we've moved toward this goal. Taking the lead to bring dignity back to the affected families and communities. First, we have opened a number of negotiations, fronts to advance with compensation as quickly and broadly as possible. Public authorities have been key players, and together we have been able to close three very important agreements addressing emergency, civil and labor indemnities.

Over BRL2 billion or around $500 million have already been paid to individuals in compensation for material and moral damage. As for the labor perspective, we have signed agreements already considering the families of more than 230 victims. In addition, we have entered into another 22 agreements with different stakeholders, covering a variety of objects including environmental remediation. On the environmental front, the second water treatment station was already delivered, and the work tailings removals and treatment continues at a fast pace.

Next slide, please. Well, speaking now about safety, I want to reinforce this message. We are working intensely to de-characterize nine upstream dams. The Fernandinho and the 8B dams will be completely de-characterized in 2020.

Well, next slide, please. I mentioned a little bit what we are doing outside Vale. Now I'd like to refer to some changes that we are taking place within Vale is that a relevant step for our governance was to open more information, channels and discussion first about risk management in the company. We currently have four specialized committees, one which is fully dedicated to geotechnical risk management. We have also reinforced our models of lines of defense with the new safety and operational excellence executive office, which already has a work plan in place.

In our dam assessments and management, we are implementing a very high level of rigor with the most conservative method. Thinking on our portfolio management, the Company's assets on a global scale, passing through a risk assessment at a fast pace. We want our asset portfolio to represent the value of the future. I would not anticipate further details today, but I'll give you a better view during the Vale Day in December.

Okay. Next please. With relation to our business, we are actively working to reduce Vale's uncertainties and achieve our objectives. Our third quarter results indicates that we are on the road to stabilization. Please remember that we said that the second quarter was a transitional period, when we started to resume operations with a strong impact of fixed costs, and the merger in the Q1. And also large impacts from stoppage expenses.

Well in the third quarter, we have already moved toward a higher normality. As we anticipated, we had higher volumes, higher cost dilution and a good reduction in C1 above $2 per ton. Brucutu is operating, and we have resumed part of the dry processing at the Vargem Grande complex. In the Northern System, production [indecipherable] result after heavy and unusual rains that occurred in the last quarter.

Please, next slide. Well, with this performance, as you can see in this slide, we are sustaining a strong cash generation. Another point that deserves our attention are the provisions. As expected, we had no provision adjustment in this quarter. What we have done is the gradual disembursment of amounts provisioned, while paying indemnities and various initiatives that we have developed related to Brumadinho.

As for the nickel business, we had higher productivity in this quarter with greater stability at the refineries in North Atlantic and Asia. We expect as well a stronger fourth quarter. In Brazil, the resumption of Onca Puma was a symbolic step toward the stabilization of production, as well in the base metals business.

Please. Well, in this context of stabilization, I want to highlight that we are working to ensure that our asset portfolio and operations represents the value of the future. A value well positioned in a scenario of growing demand for social and environmental responsibility. The flight to quality is a necessity. Currently, there is a higher offer of better quality product in the market, but that means a moment of temporary balance. We believe that the demand for better products will continue to grow.

As some of you may have seen in the Investor Tour in October, Vale has a great potential to contribute to the reduction of the greenhouse gas emissions by the [indecipherable] industry. Therefore we are evolving to ensure the best and most flexible product portfolio in this new reality.

Okay, next slide, please. As for capital allocation, I've been repeating this message, and I will do it one more time. The payments of dividends or buyback depends on the progress of preparation. Clearly, we have made progress in this process, and I believe that at some point, we will have the appropriate conditions to talk about dividends. But that moment has not yet arrived. In the meantime, we have some options for capital allocation with discipline. We have recently announced bond repurchases to continue on debt reduction plans. As I said before, I hope to bring you a clear idea about this team at Vale Day as well.

Okay, to conclude, I would like to refer to our guidelines to reduce Vale's uncertainties. We have been working hard on each of these four points, starting with Brumadinho. First, I believe that reparation is key to building a better Vale. Our governance is getting stronger and our risk management evolves every day. This quarter, we took important steps toward stabilizing iron ore production. At the same time, we are working to have a portfolio that is even more adjusted to market demands. Finally, I reinforce that we will continue with our discipline on capital allocation.

Well, as I said, with the commitment of our entire team of more than 70,000 employees, we will build a Vale that is stronger, safer and more reliable. With that, I'd like to thank your attention, and pass the word to Luciano who will give more color on the third quarter results. Thank you.

Luciano Siani Pires -- Chief Financial Officer

Good morning. Four topics I would like to highlight. Starting by, in the iron ore business. A note on the costs, as you've seen, we have delivered a reduction on C1 cash costs. We are guiding for a further reduction of $1 to $1.5 in the fourth quarter. And going forward, additional reductions are very linked to the resumption of production. We are still operating at a level of $2 to $3 above what would be normalized cost, even after the fourth quarter reductions. The reason for that is, our production flow especially in the South are very much hindered.

We're trucking ore where we didn't want to truck. We're not loading at the bright loading points for our railways. We are not blasting the mines, we are -- in some cases using dismantling, using mining equipment. This all adds to costs. Also within iron ore, freight rates have increased, our average freight rates importantly, in this quarter. And that had to do with the sudden increase in spot rates following the restart of Brucutu. What we did was, we had volumes, which were contracted on one-year to two-year contracts of affreightment. We sold these contracts in the market, because we didn't know if we were able to use them in order to for Brucutu or not. And once Brucutu restarted, we had to go back to the market and rehire freight but now at much higher rates and exposed to the spot market. This has been normalized and in the fourth quarter, you should expect a reduction of Vale's freight, and a further reduction on the average of 2020. However, slightly higher freight rates in the first quarter, but slightly lower on the fourth quarter reductions across the year, with the installation of scrubbers, and less exposure to low-sulfur oil with the IMO regulations.

Second, on the nickel business, just wanted to call your attention to the 30% hedging of production. We have very strong capex outlays in the nickel business next year and the following year, especially with the completion of the Voisey's Bay underground mine expansion. Because of capital discipline, the businesses have to stand in their own two feet, and therefore 30% of the nickel production was hedged after the spike in prices following the Indonesian ore ban.

Third, on the cash flows. As you've seen, we had $3 billion of cash flow generation, which together with $1.8 billion of funds, which were freezed and were released for a total of $4.8 billion, less the acquisition of Ferrous led us to $4.3 billion of total cash inflows, which is exactly how much our net debt decreased in the quarter. Some things helped cash flow generation, some things didn't help.

On the positive side, we had a $900 million positive effect on working capital of which about half of it comes from the collection of invoices issued in the second quarter, very high prices. And the outstanding invoices from the third to the fourth quarter, they are accounted for at much lower prices. A very, very big difference. So you see these -- this change in working capital because accounts receivable goes down, but the nature of it is collections from the very high prices of the second quarter. So this is not something that should be reversed.

On the other hand, about $400 million comes with things that we will need to pay in the following quarters, especially suppliers as investments accelerate throughout the end of the year, some provisions for variable compensation for our employees, freight payments, leasing payments and the like. So you should expect $400 million to reverse over the next few quarters.

On your attention also for the amount of disbursements related to Brumadinho. $386 million were disbursed against provisions. And another $225 million were disbursed against EBITDA. So more than $600 million, and this should be a good proxy for what to expect going forward over the next -- many quarters. So this is an important reduction in cash flow going forward.

The $225 million for Brumadinho come mostly from day-to-day expenditures that are not provisioned for. For example, the 400 people that are working on the reparation, our employees of Vale, the source of water for the populations around the river, the operation of the water treatment stations, the monitoring of water, small civil works of reparation that have smaller values and do not relate to specific legal agreements. So again, as I said, this should be typical going forward.

And again also something, which was non-recurring in the quarter was the $243 million that were paid as premium for the retirement of the bonds that Eduardo mentioned. Those bonds were trading above par. So we had to pay a premium in order to retire them, that reduced our cash flow. So all in all, the factors that helped our cash flow are similar in magnitude to the facts that helped that decrease our cash flow. So $3 billion is very much a proxy over what the business effectively generated in the quarter.

Lastly, just a comment on net income. Some of you might have noticed that the financial expenses have increased in the quarter. There is $486 million non-cash charge, because of the mark-to-market of our participation debentures. We have increased in price by almost 20% in the quarter. We lagged increase in iron ore price probably, part of this price increase should reverse in the next quarter as iron ore prices have come down. Those debentures are very illiquid, so they tend to lag iron ore price movements, and therefore, part of this $486 million charge should reverse.

We'll now open for questions-and-answers.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]

Our first question comes from Carlos De Alba, Morgan Stanley. Sir, you may proceed.

Carlos De Alba -- Morgan Stanley -- Analyst

Yeah, good morning everyone. Thank you for taking my question. First one, maybe Luciano just to clarify, so the -- almost $600 million disburse related to Brumadinho, about $246 million coming out of the loss provision before and a $225 million that went against EBITDA. So this is something that you expect to be more or less recurrent on a quarterly basis for the next few quarters, maybe until late 2020 or first half of 2021? That's my first question.

And my second question is, given that around $3 billion normalized cash from operations that you expect to generate per quarter going forward. What can we expect and what are the next steps or the roadmap in terms of liability management? What do you want to tackle given that the repayment of dividends or the resumption of dividend payments is still unknown? What do you want to tackle and when do you expect that we're going to see some announcement in terms of what are the liabilities the company will pay with this strong cash flow generation? Thank you.

Luciano Siani Pires -- Chief Financial Officer

Carlos, thanks for your question. Yes, you should expect similar disbursements related to Brumadinho going forward. Things that could abbreviate part of those disbursements. For example, if the populations resume sourcing water from the river, then you should see some decline. But while, we are still waiting for good news and that's a conservative assumption of what to expect going forward. On the $3 billion normalized cash flow, I didn't say that we should generate $3 billion each and every quarter coming forward. Remember that, there is some seasonality in Vale's cash flow generation, it tends to be stronger in the third and fourth quarter, and less strong in the first and second. So this is a normalized cash flow generation for third quarter for Vale, just to note.

In terms of liability management, there are some non-debt liabilities that we want to address. First in line or the preferred shares of MBR, which is a subsidiary that hold some iron ore assets, and there is a financial investor that holds those preferred shares. It's being very -- we've been paying a lot of dividends because of iron ore prices on those preferred shares. So we intend to withdraw those. We are looking into some lease contracts as well, and you should continue to see gross debt reduction given that the carry is clearly negative. So not only net debt will reduce, but also gross debt needs to come down in order to eliminate this carry. And as regards dividend payments, as we said, we link it very directly to reparation efforts and we don't see right now, as having the conditions to resume dividend payments.

Carlos De Alba -- Morgan Stanley -- Analyst

Thank you.

Operator

Our next question comes from Jon Brandt, HSBC. Mr. Jon, you may proceed.

Jon Brandt -- HSBC -- Analyst

Thanks for taking my questions. I first wanted to ask you about the iron ore premiums. So it sounds like you're pretty convinced that it will return to normalized levels. I'm just wondering what gives you the confidence. Is it an improvement in sort of the Chinese steel environment, and improving margins there? And if we don't see that improvement that you're expecting in the next three to six months, would you consider potentially decreasing your -- the quality of your product portfolio, and maybe shipping lower quality products? I guess that's my first question.

And the second question, just, sorry to ask about the capital management. What else would you consider doing, I mean the shareholder debentures, is that something that you could look to potentially buyback, and get rid of those? And on the dividends, depending on how the fourth quarter shapes up, it would appear that you'd have a net profit for 2019. So would you be obligated to pay them at the minimum 25% dividends in the first quarter next year? Thank you.

Marcello Spinelli -- Executive Officer for Ferrous Minerals

Hello, Jon. This is Marcello Spinelli, and thank you for the question. Regarding, the premiums, let's talk about the fines premiums. You're right, depends on the Chinese margins. We see -- still see a pressure on the narrow margins in the steel business in China. Obviously, it depends on the -- of the price of the pellets, but the supply demand balance is more to decline the pellets gradually next year. So this can make the pressure of the constraints of the margins better in this case.

On the other hand, we have another component of this, the premium price that -- the concentrates in China, the competitors in China. Most of the mines came after the problem in Brumadinho, also the disruption in Australia. Almost 30 million tonnes of concentrate leaving the market in the next, we see this leaving the market in the next two quarters. We also have a reflection of the -- all the concentrates that came to the market. So this is a gradual process. We still see this concentrates bothering the premiums in the next quarter. But gradually, we can see the premiums for Carajas and BRBF going up after the concentrates. We don't expect to -- we are working hard to resume their operation. We see this is the effect of the higher price of the pellets and this process will decline the pellets and we'll recover the premiums.

Luciano Siani Pires -- Chief Financial Officer

Jon, we do not intend to withdraw the -- you named it shareholder debentures, I understand you're talking about the participation debentures, because they are extremely expensive right now because of the increasing iron ore prices. So there is a disconnect between the price of those debentures and the price of the share -- the share price, for example. And on the, what else to do, there is something to highlight, which is although the headline net debt is just $5.3 billion, one has to remember that we still have $4.7 billion provision to face the Brumadinho expenditures.

So at this point in time, we're considering liability to be, like an expanded indebtedness for the company. And we have to have clarity on how this is going to progress in order to be more bold in terms of retiring other liabilities. So you've heard many times that we are targeting a net debt of $10 billion. As a coincidence, if you just sum up the $5.3 billion with the $4.7 billion to get exactly to $10 billion debt. So that's something we want you to have in mind, we are having on it a large view, a comprehensive view of our indebtedness at this point in time to be on the conservative side. Next question.

Operator

Our next question comes from Timna Tanners, Bank of America Merrill Lynch.

Timna Tanners -- Bank of America Merrill Lynch -- Analyst

Yeah. Happy Friday. Just wanted to ask a little bit about the pellet premium and the Samarco update that I've heard, you're getting closer to perhaps a restart, the starts on the pellet premium and Samarco please. And then my second question, I just wanted to dive in a little bit more to the thoughts about green pig, HBI. China has been moving slowly toward adopting more electric arc furnaces but a constraint has been the high cost of scrap. Do you think that this additional volume, first of all, is it short-term or long-term and will it cannibalize your existing sales to China? Or is it kind of a necessary evolution to complement your -- and sustain your existing sales? Thanks a lot.

Marcello Spinelli -- Executive Officer for Ferrous Minerals

Hi Timna, this is Spinelli. Thank you for the question. Talking about the pellet premium. The dynamics of the market is quite different from the fines. We used to have negotiate -- annual negotiation of the premiums with our clients. After the disruption of offer, and the index went to almost 130, with the 60 those premium price, the pellets almost reached $200 in the premiums and make a lot of pressure -- made a lot of pressure on our clients and sustainability of their business.

So as a company that we are really focused on our clients. We decided to adjust the way we negotiate the premiums in the quarterly basis. Just and these changes happened to the third quarter and we are now moving forward with those dynamics. And considering what is going on in the market, the scrap cost is a key element for this dynamics. After China, we closed the market to import scraps, there is -- the price went down and also very important consumer of scrap that is Turkey is under pressure in their production, they -- probably they will reduce 11% to 12% of their production, and there is a lot of scrap available that made a lot of pressure in our reduction of pellets in the market. So we just adjust the production to guarantee that the premium -- that the prediction that volume is not over volume to the market. So that's what had happened in the pellet premium side.

The second question of HBI. Well, we are in the process to seek what is going on in the market. We have many legislations around the globe. Europe is leading the process of the commercialization of business and in our chain, the steel business is -- they have to make a lot of efforts in the future in the next 10 years. So what we see that we need to be ready for the right portfolio to guarantee a feed -- the feed for what the client will need. HBI, it's a possibility to solve part of the problem of our clients, and what we are doing is to anticipate the movements and seek the technology, the right technology and be ready to lock in any perspective of iron ore in the future to feed the right process or the right way that our clients will solve this problem.

So we are really committed to them, and we are going to check and see what would be the right solution for each market and HBI is part of our portfolio to understand that we will be or not a trend, but it will be ready to be the producer and the supplier for the iron ore for the future. We have the best iron ore in the market, and this is very good for this problem -- to solve this problem.

Eduardo de Salles Bartolomeo -- President and Chief Executive Officer

Okay. Just to add on to Spinelli, to what he was speaking, it's not to move downstream and it's not cannibalizing our main product. So it's a matter of facing the reality, scrap is going to increase. The need for a green -- a green product is going to increase, and we're going to be able to supply that if the client comes together with us. So it is a process of joint ventures or ideas together to fulfill a need -- a niche, but necessary to protect our core and not to move downstream. And just to give you some clarity on Samarco because we are very optimistic that we're going to have the license today.

Marcello Spinelli -- Executive Officer for Ferrous Minerals

So as you wish, Timna, we hope to have a good Friday today, and we see the permit for Samarco restart. We will issue a press release once it happens to give the full information to all the market. At the same time, it will contain estimates of when Samarco will restart, what is the forecast for volumes going forward and some details about the restart. Just giving you a context as you know, Samarco does not have tailings disposal systems. So that's a bit constrained for a full Samarco restart, and that's why you are going to see what you're going to see on the release. But let's await for the good news and the details are going to be known to everyone.

Operator

Our next question comes from Grant Sporre, Macquarie.

Grant Sporre -- Macquarie -- Analyst

Good afternoon, gentlemen, and thank you for hosting the call. Two questions from my side. The first one is, just a thought on some of your, the sort of -- let's call them the poor performing assets in the portfolio at the moment. So obviously Mozambican coal and VNC. And just your thoughts on when those might turn EBITDA positive? And perhaps if I link that to your earlier comments on a risk assessment and having the right portfolio for the Vale of the future. If you could just make some comments around those? And then just on the hedge, just that I totally understand, my understanding is the hedging is just for one quarter or does it go until the end of 2020? I wasn't quite sure on that? If you can just add some clarity around the nickel hedging? Thank you.

Eduardo de Salles Bartolomeo -- President and Chief Executive Officer

Hey Grant. Thanks for the question. First to get back to you on a broader view. It is true. We are revising all of the portfolio, not only the low performing ones. The matter is not only the financial performance but a holistic view on risk. So you will get more information as I mentioned on the call when we are able to discuss that IFRS strategic cycle. But I will ask Mark Travers to talk a little bit about VNC. I was closely linked to it before but I want Mark to detail a little bit more to you, what the strategy is to get back to a better position in dry tailings detail a little bit more about Mozambique. Please Mark.

Mark Travers -- Executive Officer for Base Metals

Both from an operational perspective and profitability perspective, the results have been quite disappointing to date. With respect to the question of getting to EBITDA neutral or positive, clearly stabilization of production would be necessary clearly higher nickel prices that we've seen and cobalt prices will help but we really do need to find a stable position in New Caledonia, but however -- because of the disappointing nature of the results, we really are evaluating all options for the operations and looking for a basis for stable operations, so that good cost performance and operating performance. We expect to be able to inform you of our conclusions about what those viable solutions are in the near future.

In the meantime, we have taken some steps to moderate costs and also to protect or to minimize capital expenditures. We've rescoped and extended the schedule of Project Lucy, which is our dry tailings project. We've extended that out a couple of years and really significantly reduce the capital in that project for next year and the year after.

Eduardo de Salles Bartolomeo -- President and Chief Executive Officer

Yeah, sorry, I will repeat. Regarding Mozambique, we are facing lot of problem this year and most of them are related to maintenance, we have problems with maintenance of mine equipments. We have problems with maintenance in the manifestation facilities. But we also have some problems related and they are consequence of the previous ones, that availability of our run of mine, the yield that we are producing products in an organizational facilities. The ratio of coking coal and thermal coal, everything we -- they are all connected. So, we are, I can guarantee to you that the maintenance of the mining equipments is already done, we recovered very well. So currently we are running at full capacity demand.

We are reaching in the last three months, almost 300 million ounce, the run rate in the mining operations, the manifestation facility, we are currently working very hard on planning and programming the maintenance we will do next year, because when we just buy-to-buy spare parts and things like that bring some mechanics and people for the work of maintenance and the way we start doing this in March next year. I think by the end of first half of 2020, the manifestation facility would be ready. We will make some change in the flow sheet as well in order to improve the quality of the products. So we are quite strong that we can finish the ramp up of the operations by the end of 2020, and for sure in 2021, we will return to a positive EBITDA. I have no doubt about that.

Regarding the review of coal is related to Mozambique. We are always taking a look on these issues and the company after we finish this work. I mean in other words, by the end of next year, we can discuss for the situation.

Luciano Siani Pires -- Chief Financial Officer

Grant, on the hedge, we have hedged to the end of 2020. So each and every quarter, 30% approximately of our expected production.

Operator

Our next question comes from Alex Hacking, Citi.

Alex Hacking -- Citi -- Analyst

Yeah, thank you for the questions. I have two questions. First, very specifically on iron ore. Are you getting any indications from steel mills in India, who are looking for iron ore next year. Obviously, a lot of news and headlines around the auctions of the concessions and I'm wondering if the mills there are getting nervous? And then secondly on nickel, Mark, thanks for the color on VNC. I guess could you just give us an overview of the other major initiatives that are going on in base metals. I've lost track a little bit of that with Brumadinho and so on. Where are we in the turnaround process? I know you guys have kind of redesigned the Atlantic Basin. Sossego, you've taken quite a bit of production offline. I guess what's next. Thank you.

Marcello Spinelli -- Executive Officer for Ferrous Minerals

Hi Alex. Thank you for your questions, this is Spinelli. We are seeking for opportunities, but we don't have any information about the process yet that they are under new concessions, but we don't have any full information yet. Mark, please.

Mark Travers -- Executive Officer for Base Metals

The base metals. We have a major initiative to turn around the base metals business, it's been under way for more than a year. I would say the primary focus through this year has been to really invest in our assets and make us a stable and predictable operator. We've really put a lot of effort and money into our asset integrity, rebuilding our maintenance programs and really making sure that our assets are there to perform on an ongoing basis. And maybe just to comment a little bit on how things are going. As we -- as Eduardo was telling us earlier, we saw a strong Q3 production. We saw the refinery stabilize in North Atlantic. So the -- in Sudbury in the UK as well as we came out of planned maintenance in the Asian refinery. So good Q3 performance and nickel and look very, I would say look very good for Q4, with all the refineries going well. We've seen significant improvement and stabilization in the mines in Canada, which has been fantastic leading to some improved copper production this year, which has been a real bonus for us.

In terms of some of the other assets. I would say that Indonesia has really turned around nicely toward the second half of the year, as we got through some major maintenance in the first half, producing well costs have come down and EBITDA and cash flow have picked up quite nicely. So looking very positive.

And Onca Puma, we're very happy with the court decision that allows us to continue and after being down for two years in the mine, it's taking a little bit of time to get back up, that we're going to see that coming back around November, and the processing plant is using stockpile ore which is a lower grade. So once the mine comes together with the plant, we're going to see some better production and we'll really benefit from that next year. In Q4, we're expecting a little bit below 4,000 tons of ferronickel from the restart of Onca Puma.

And maybe a little bit of a comment on copper in Brazil. Salobo has performed extremely well in Q3 and expect a strong performance through Q4, we had record production in July. Great costs, record gold production as well. At Sossego, we struggled a little bit with some with some asset availability issues. But we look to have that stabilized in Q4 and I've already commented on New Caledonia.

Luciano Siani Pires -- Chief Financial Officer

Mark, if you allow me just a few additions to that. So with all this, the expected performance in the fourth quarter, we expect at least a 20%, about 20% increase in nickel production. So because we're not going to have any major maintenances in the fourth quarter. Also, you might have seen the news about our signing the heads of agreement with the Indonesian government for divestiture in Indonesia, important step to renew our concession rights there. The resumption of the prior levels of production in nickel, especially in North Atlantic, it's contingent on the completion of Voisey's Bay mine expansion because I don't know if you remember when we decided to do the project.

We delayed by one year to the decision, as a result, the current open-pit mine is not producing at its full capacity, in order not to have a gap in production because of that delay in the future. But we continue to have lots of options discussing also we mentioned last year on Vale Day, a potential agreement with Glencore to bring in a new ore body with nickel and copper additional production. And we are very optimistic also in partnerships in Indonesia whereby without any capital, Indonesia by itself will be able to finance expansion opportunities with partners.

Operator

Our next question comes from Sergey Donskoy, Societe Generale.

Sergey Donskoy -- Societe Generale -- Analyst

Yes, thank you very much. I have two questions, one very short. Could you provide some update on what is your CapEx expectations budget for this year and as we are approaching 2020, what do you think it will look like next year. And secondly, one thing going back to Brumadinho expenses. One thing I don't quite understand. If I understand it correctly, you spent about $600 million last quarter, of which roughly 60% was charged against provisions, and the rest was charged against EBITDA. And you expect this level in the coming quarters. So it sounds like you have pretty good visibility. And then the question is, if you have such good level of visibility, why your provisions don't go higher, while you don't add to those provisions, the amount that is being charged to EBITDA now. Sorry if it's a very basic question.

Luciano Siani Pires -- Chief Financial Officer

Sergey, on capital expenditures, we should end 2019 with something around $3.6 billion. Their rhythm, the pace of execution was also jeopardized a little bit because of Brumadinho especially in the beginning of the year. And also we had the depreciation of the Brazilian real that lowers capital expenditures. From 2020 onwards, we continue to expect capital expenditures to be a non-issue. We continue to, obviously, we will update guidance in Vale Day. But we continue to see normalized levels of CapEx very similar to what we've announced before. There is some studies being done now to accelerate the filtration investments that might have some impact on CapEx, but we're talking just very few hundreds of millions of dollars. So some things we are considering as a result of what happened in Brumadinho in order to increase dry stacking of tailings but nevertheless, the picture is pretty much stable and boring.

In terms of Brumadinho expenditures. It's interesting because part of this, the expenditures which are charged to EBITDA, the wages of the reparation team, right? So from an accounting basis I cannot charge provision for those wages. So these are Vale employees. A lot of expenditures, they relate to the water, the lack of water supply. So we are supplying water for the nearby communities, we are operating the water treatments stations and for example, if all of a sudden we have a permission to resume sourcing water from the river, those things can change very quickly. So we are adopting a more conservative guidance, guiding you that this should remain stable over the coming quarters but there are upside. If things change those expenditures could reduce all of a sudden.

Other examples, people who are still in living in hotels and for them which, for which we are providing food, those situations also can change. So there is not a basis for identifying precisely a very well known liability to make a provision when it relates to those ongoing expenditures. So therefore what I'm putting out for you is just a gut feeling of how we see things going and how they should translate on the income statement on this portion of expenditures.

Operator

Our next question comes from Tyler Broda, RBC.

Tyler Broda -- RBC -- Analyst

Great, thanks very much. All my questions have been answered, but the one I want, I guess we've seen the freight prices start to pull back here. I guess, would you be able to give us an update on sort of how you see the freight market developing through 2020 with IMO and just from your perspective?

Marcello Spinelli -- Executive Officer for Ferrous Minerals

Hi Tyler, this is Spinelli. Thank you for your question. Well, what we see -- well the IMO is coming on January, the use of low-sulfur bunker. We have a difference today between both bunkers about, is about $250. What we see next year, we have this impact but at same time, we have actions to go to make effort for that. So the first one is the scrubbers. We are in line with our the installation of the scrubbers in our fleet. In the end of next year, we're going to have almost more than 70% of the vessels for these scrubbers. Also we have the Valemax that are coming and also the Guaibamax, so they will have an impact in freight and also they will be -- the scrubbers already installed in the vessels. And we see that we can with these actions have the same level of freight. So we expect something around $80 like we have in this year.

Operator

Our next question comes from Petr Grishchenko, Barclays.

Petr Grishchenko -- Barclays -- Analyst

Hi, good morning, good afternoon, gentlemen. Just wanted to follow-up on your comments related to Samarco. I was curious if you can provide any update on your recent thinking on the restart of actual production kind of timeline that you have in mind. Also do you expect the amendment business plan to be materially different or somewhat different from a prior plan, I mean those are my questions.

Luciano Siani Pires -- Chief Financial Officer

Petr, because of the sensitivity of the information, this will be known through a formal release to the markets once the restart license is granted, which should happen today with the answer -- specific answers for all those questions. The only context that I can give you right now is the former business plan was made before Brumadinho and there were some tailings disposal solutions that Samarco explored and defined prior to then. After Brumadinho, there were some changes in the legislation, local legislation and some structures started to be deemed, you have dam characteristics. So for example, if you deposit tailings on an exhausted paid or if you stack tailings on a certain area, some of the characteristics of those areas change. So bottom line is Samarco had to redo all its tailing disposals plan. And that's the reason why the revised business plan is different from the previous one, but the details will come out through a press release this afternoon.

Operator

Our next question comes from John Tumazos, John Tumazos Very Independent.

John Tumazos -- John Tumazos Very Independent -- Analyst

Thank you for taking my questions and thank you for your service to the company. Could you explain some of the details of the Vargem Grande restarted dry processing. Is the dry processing a temporary measure until dams are rebuilt and improved? Can it be improved with dry stacking or magnetic separation as technology improves? And how is the blending, do you take may be 7.5 million tons of 65% Northern ore, with 5 million tons of say 55% ore or is it lower grade and you lose the quality premium, does it cost $5 to bring the Northern stuff to the South? Does the blending cost $1.50 or some different amount per ton for handling, excuse me, if you could just explain the dry processing and the restarts?

Marcello Spinelli -- Executive Officer for Ferrous Minerals

Hi, John. Thank you for the question, this is Marcello Spinelli speaking here. Well, let me we give you some colors in the resumption of Vargem Grande. Vargem Grande is today, we are with Capitao and Aboboras that were coming, this is a dry processing operation. The limitation here that we don't -- we cannot use the dams now for the production. We expect to have Maravilhas III, that's a dam that is under construction in the end of next year. So after that, we are going to have the wet processing.

So regarding the magnetic process, we are installing the filters in this operation, in 2020, it will not be ready yet. So we'll be ready for the production of filtering, and also we are adding the magnetic separation for the process after the filtering. So what we can expect for the quality in this during the dry process that will be a high silica product. We are using the high silica to blend in China for BRBF. With the return of wet processing, we have the pellet feed that will feed Vargem Grandea pelletizing plants by the end of next year.

So that's the roadmap of Vargem Grande. Today, we have a step by step resumption with the permit of the mining agents. It's just a step-by-step process, so we are covering off the mine but we need now, we already made it a pass for the loading in the trains. In the last permit, we will be regarding the pellet plants. We have high silica product in the first, most of the year, next year. And the end of the year, we after -- just three we have the pellet feed and the full operational Vargem Grandea plant. But the pellet plant, we will return with pellets feed from the market, we are buying from the market to guarantee the operation of the of the pellet plant.

Luciano Siani Pires -- Chief Financial Officer

And that pellet plant is very important because it's the sole supplier of pellet feed for one of the steel mills in Brazil. And remember I spoke in the beginning about additional logistics costs. And for example, the supplying of this client, this is CSA is being very costly for Vale right now. So the resumption of the pellet because it's been a slide through to borrow with a very awkward logistics. So for example, the restart of the pellet plant reduces significantly those extraordinary logistics expenses or has other side benefits as well.

Operator

This concludes today's question-and-answer session. Mr. Eduardo Bartolome, at this time you may proceed with your closing statements.

Eduardo de Salles Bartolomeo -- President and Chief Executive Officer

Okay, thank you. Thanks everyone for the participation and for the questions. As we mentioned during the call, clearly, the second quarter was a transition one and this one is a clear stabilization moment for us both for iron ore and base metals. But I want to reinforce one thing very important, our focus is extremely given to the reparation of Brumadinho and to the improvement and our safety governance. With that, I think and our team here thinks that we reduce uncertainties and make, as I mentioned Vale a much stronger, safer and reliable company. Okay. Thanks for your participation and I hope to see you in the next call. Thank you.

Operator

[Operator Closing Remarks]

Duration: 61 minutes

Call participants:

Eduardo de Salles Bartolomeo -- President and Chief Executive Officer

Luciano Siani Pires -- Chief Financial Officer

Marcello Spinelli -- Executive Officer for Ferrous Minerals

Mark Travers -- Executive Officer for Base Metals

Carlos De Alba -- Morgan Stanley -- Analyst

Jon Brandt -- HSBC -- Analyst

Timna Tanners -- Bank of America Merrill Lynch -- Analyst

Grant Sporre -- Macquarie -- Analyst

Alex Hacking -- Citi -- Analyst

Sergey Donskoy -- Societe Generale -- Analyst

Tyler Broda -- RBC -- Analyst

Petr Grishchenko -- Barclays -- Analyst

John Tumazos -- John Tumazos Very Independent -- Analyst

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