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 2019
Vale S.A.
Praia de Botafogo nº 186, 18º andar, Botafogo
22250-145 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- .)
Conclusion of the Ferro-Carvão Stream Water Treatment Station in Brumadinho, MG VALE’S PERFORMANCE IN 2Q19
www.vale.com vale.ri@vale.com Tel.: (55 21) 3485-3900 Investor Relations André Figueiredo André Werner Fernando Mascarenhas Samir Bassil Bruno Siqueira Clarissa Couri Julio Molina Luciana Goes Luiza Caetano Pedro Terra Renata Capanema Department Except where otherwise indicated the operational and financial information in this release is based on the consolidated figures in accordance with IFRS. Our quarterly financial statements are reviewed by the company’s independent auditors. The main subsidiaries that are consolidated are the following: Companhia Portuária da Baía de Sepetiba, Mineração Corumbaense Reunida S.A., Minerações Brasileiras Reunidas S.A. PT Vale Indonesia Tbk, Salobo Metais S.A, Vale International Holdings GMBH, Vale Canada Limited, Vale International S.A., Vale Manganês S.A., Vale Malaysia Minerals Sdn. Bhd., Vale Moçambique S.A., Vale Nouvelle-Calédonie SAS, Vale Oman Pelletizing Company LLC and Vale Oman Distribution Center LLC. This press release may include statements about Vale's current expectations about future events or results (forward-looking statements). Many of those forward-looking statements can be identified by the use of forward-looking words such as "anticipate," "believe," "could," "expect," "should," "plan," "intend," "estimate" “will” and "potential," among others. All forward-looking statements involve various risks and uncertainties. Vale cannot guarantee that these statements will prove correct. These risks and uncertainties include, among others, factors related to: (a) the countries where Vale operates, 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. Vale cautions you that actual results may differ materially from the plans, objectives, expectations, estimates and intentions expressed in this presentation. Vale undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information or future events or for any other reason. To obtain further information on factors that may lead to results different from those forecast by Vale, please consult the reports that 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, in particular, the factors discussed under “Forward-Looking Statements” and “Risk Factors” in Vale’s annual report on Form 20-F. Cautionary Note to U.S. Investors - The SEC permits mining companies, in their filings with the SEC, to disclose only those mineral deposits that a company can economically and legally extract or produce. We present certain information in this presentation, including ‘measured resources,’ ‘indicated resources,’ ‘inferred resources,’ ‘geologic resources’, which would not be permitted in an SEC filing. These materials are not proven or probable reserves, as defined by the SEC, and we cannot assure you that these materials will be converted into proven or probable reserves, as defined by the SEC. U.S. Investors should consider closely the disclosure in our Annual Report on Form 20-K, which may be obtained from us, from our website or at http://http://us.sec.gov/edgar.shtml. The information contained in this press release includes financial measures that are not prepared in accordance with IFRS. These non-IFRS measures differ from the most directly comparable measures determined under IFRS, but we have not presented a reconciliation to the most directly comparable IFRS measures, because the non-IFRS measures are forward-looking and a reconciliation cannot be prepared without unreasonable efforts. Conference call and webcast on Thursday, August 1st Portuguese (non-translated) at 10:00 a.m. Rio de Janeiro time Brazil: (55 11) 3193-1001 or (55 11) 2820-4001 USA (toll free): (1 800) 492-3904 or (1 800) 469-5743 Other countries: (1 646) 828-8246 or (1 646) 291-8936 Access code: VALE English, at 12:00 p.m. Rio de Janeiro time (11:00 a.m. New York time, 4:00 p.m. London time). Brazil: (55 11) 3193-1001 or (55 11) 2820-4001 USA (toll free): (1 844) 204-8942 Other countries: (1 412) 717-9627 Access code: VALE
Vale’s performance in 2Q19 Rio de Janeiro, July 31st, 2019 – Six months after the rupture of Dam I in the Córrego do Feijão mine in Brumadinho (MG), Vale stays committed to the prompt and fair reparation of damages caused to the families, to the infrastructure, to the communities and to the environment. However, the company’s agenda goes beyond the full reparation and progress was made in 2Q19 in Vale’s journey to achieve operational excellence, asset integrity, sustainable results and shareholder value. Eduardo Bartolomeo, Chief Executive Officer, commented: "As we progress towards full and effective reparation, 2Q19 has been a transitional quarter for the business, with the Brumadinho dam rupture still impacting volumes, costs and expenses, however our response started to bear fruit to ensure the safety of people and of the company’s operations, as well as to reduce uncertainties and to deliver sustainable results through the supply of a high-quality product portfolio, which will already be reflected in the next quarter”. I. Reparation • We signed 15 agreements with local, state and federal entities to provide a stable legal framework for reparation. These agreements include: (i) 4 with a social scope providing support for the municipalities, including services and donations; (ii) 9 with an environmental scope, including the construction of new water catchment systems in Pará de Minas city and a water treatment station with the State Sanitation Company (COPASA), as well as initiatives to protect the fauna and flora; and (iii) 2 involving the hiring of new external auditors to review some of Vale’s structures with Public Prosecutors. • We launched the “Alliance for Brumadinho” program, that will leave a legacy for the area which includes: (i) 35 new health care units in Brumadinho; (ii) a new train passenger service; (iii) strengthening of tourism in Brumadinho; amongst other projects. • We advanced with the Preliminary Agreements for indemnifications with the Brazilian authorities with: (i) 104.686 emergency indemnifications1 paid; (ii) 263 labor agreements signed to indemnify the families of workers who lost their lives; (iii) 188 individual indemnification agreements2 signed. In 3Q19, our focus will be to accelerate the individual indemnification agreements. • We concluded several tailings containment structures and the Ferro-Carvão stream water treatment station. This station has 2 million liters per hour capacity and ensures that no more tailings are carried from the epicenter of the dam breach towards the Paraopeba river. We also presented to the public authorities a Tailings Containment Plan to ensure the removal and proper disposal of tailings, as part of the environmental recovery, as well as 23 integrated structures to prevent the flow of tailings into the Paraopeba river. 1 Payments to all residents of Brumadinho and those who resided within 1 km radius of the Paraopeba riverbed, between Brumadinho and the city of Pompéu, at the Retiro de Baixo dam. 2 Expedited indemnification procedures with the Support of the Public Defenders office. 3
• We know there is still a lot to be done, and we are committed to do it. In the following webpage, we present the updated accountability of the actions we have taken so far – vale.com/repairoverview. II. Safety • Our operational risk governance was reinforced with the appointment of the new Executive Officer for Safety and Operational Excellence, Carlos Medeiros, with the role of raising safety and operational excellence to a new level. • The Vargem Grande dam had its emergency level reduced from 2 to 1 as a result of a series of improvements we implemented, such as: lowering the water level of the reservoir; cleaning the drainage channels and updated sensitivity studies carried out by an independent audit firm to evaluate the impact of the water level lowering on the dam's stability. Consequently, 51 people returned to their homes. III. Reducing uncertainties • We made substantial progress in 2Q19 concerning the 93 Mtpy of Iron Ore production stopped in 1Q19 with the resumption of Brucutu operations on June 22nd, 2019, recovering 30 Mtpy of production capacity, and the partial return of dry processing at the Vargem Grande complex, adding about 12Mtpy (5 Mt in 2019). Regarding the approximate 50 Mtpy currently curbed, we expect that about 20 Mtpy of dry processing production will be gradually resumed starting by the end of this year and the remaining 30 Mtpy, which includes wet processing, is estimated to return in about two to three years. • In 2Q19, we were able, at the best of our knowledge, to assess and recognize a provision for all categories of the Brumadinho dam rupture impacts. We recorded a total provision of US$ 1.374 billion related to: (i) the environmental measures and related agreements (US$ 1.190 billion); (ii) the decommissioning or de-characterization of other structures not considered in 1Q19 (US$ 98 million); and (iii) revision of the provision related to the Framework Agreements, including the compensation for collective moral damages, which is part of the terms and conditions set in the agreement recently signed with the Public Ministry of Labor (Ministério Público do Trabalho – MPT) (US$ 86 million). Additionally, we recorded US$ 158 million of ongoing reparation expenses related to the Brumadinho event. IV. Sustainable results • Our cash generation of US$ 2.2 billion in 2Q19 enabled us to resume our trajectory of debt reduction and strengthened our balance sheet further. Consequently, our net debt decreased from US$ 12.0 billion in 1Q19 to US$ 9.7 billion in 2Q19. • Our gross debt totaled US$ 15.8 billion as of June 30th, 2019, decreasing by US$ 1.3 billion vs. March 31st, 2019, mainly as a result of debt repayments primarily related to the new credit lines that were raised in 1Q19. • In light of the recent decision of the Lower Public Treasury Court of Belo Horizonte authorizing Vale to replace the R$ 5 billion that were frozen by other financial guarantees and the agreement signed with Minas Gerais State Public Ministry of Labor which determined the 4
release of R$ 1.6 billion of the frozen amount, the proforma net debt would be US$ 8.0 billion in 2Q19. The release of funds is expected to occur until August. • Our proforma EBITDA (excluding the provisions and ongoing reparation expenses from the Brumadinho dam rupture) totaled US$ 4.6 billion in 2Q19, US$ 529 million higher than in 1Q19. The increase was mainly due to higher sales prices (US$ 822 million) and higher Ferrous sales volumes3 (US$ 742 million), which were partially offset by the increase in lost sales (US$ 644 million) and stoppage and extraordinary logistics expenses (US$ 204 million) related to Brumadinho. • We had the second consecutive quarter of losses, as our net income reached negative US$ 133 million in 2Q19, mainly as a result of additional provisions related to: (i) the Brumadinho dam rupture (US$ 1.5 billion); (ii) the decommissioning of Germano dam (US$ 257 million); and (iii) the Renova Foundation (US$ 383 million). Ferrous Minerals • The Ferrous Minerals EBITDA totaled US$ 4.2 billion, US$ 621 million higher than 1Q19 despite the impacts of the abnormal rain in the Northern System and of events following the Brumadinho dam rupture, which affected costs and expenses. Iron ore and pellets quality premium reached US$ 11.4/t4 in 2Q19, US$ 0.7/t higher than 1Q19 mainly due to the increase in pellet contribution. • • Iron ore fines C1 cash cost was US$ 17.6/t in 2Q19, US$ 3.6/t higher than 1Q19, mainly due to: (i) consumption of inventories with higher average production costs from 1Q19 (US$ 1.4/t); (ii) higher demurrage costs in the Northern System (US$ 1.2/t), due to the extended queue of 3 Excluding Brumadinho lost sales volumes. Does not include Manganese and Ferroalloys. 4 Iron ore premium of US$ 5.7/t and weighted average contribution of pellets of US$5.7/t. Pellets adjustment contribution released in Vale’s 2Q19 Production and Sales report was reassessed. Since this is a managerial number, this change has no impact on Vale’s results. 5
vessels in Ponta da Madeira port which resulted from redirecting vessels bound to the South and Southeast towards the North; (iii) higher iron ore benchmark prices and volumes on the third-party purchases (US$ 1.0/t), which were partially offset by the positive impact of the 4.1% depreciation of the BRL (US$ 0.4/t). The line-up of vessels at Ponta da Madeira port and average production costs have normalized, which will translate into a decrease of about US$ 2.5/t in iron ore C1 cash costs in 3Q195. • Stoppage and extraordinary logistics expenses related to the Brumadinho dam rupture in 2Q19 were US$ 5.7/t, US$ 3.0/t higher than 1Q19 mainly as a result of a full quarter stoppage during 2Q19 (vs. ~2 months of stoppage in 1Q19), provision for clients’ contractual claims and related-party railway take-or-pay contracts (MRS). Looking forward, unitary stoppage expenses may be reduced by about US$ 1.5/t in 3Q195 as a result of the restart of Brucutu and Vargem Grande operations and the dilution effect on the expenses of higher volumes. • Vale’s unit maritime freight cost per ton decreased US$ 0.3/t, totaling US$ 16.5/t in 2Q19, despite the increase in bunker oil prices (US$ 0.3/t)6 mainly due to lower freight contracts. • Iron ore fines and pellets EBITDA break-even totaled US$ 36.8/t in 2Q19, US$ 6.5/t higher than 1Q19, mainly due to the above-mentioned effects of higher C1 cash cost and higher expenses related to Brumadinho, which were offset by a greater pellet contribution and lower freight costs. Base Metals • Base Metals EBITDA totaled US$ 465 million in 2Q19, US$ 40 million lower than 1Q19, mainly as a result of lower copper prices, as well as lower VNC production resulting in lower fixed cost dilution; these were partly offset by higher nickel price realization and improvement in the performance of PTVI. • Nickel realized price reached US$ 12,877/t, US$ 306/t higher than 1Q19, while LME average price was US$ 111/t lower in the same period. As a result, price realization increased to 105.0 % of LME price from 101.6% in 1Q19. 5 Considering Exchange rate of BRL 3.85/USD in 3Q19. 6 The average bunker oil price in Vale’s freight portfolio increased to US$ 417/t in 2Q19 from US$ 403/t in 1Q19. 6
Selected financial indicators Net operating revenues 9,186 8,203 8,616 Expenses related to Brumadinho 1,532 4,504 - Adjusted EBIT margin (%) 23% (18%) 35% Adjusted EBITDA margin (%) 34% (8%) 45% Net income (loss) (133) (1,642) 76 Capital expenditures 730 611 705 ¹ Does not include leases (IFRS 16). Net operating revenues 17,389 17,219 1.0 Expenses related to Brumadinho 6,036 - - Adjusted EBIT margin (%) 4% 35% (31 bps) Adjusted EBITDA margin (%) 14% 45% (31 bps) Capital expenditures 1,341 1,595 (15.9) 7 Net income (loss)(1,775)1,666(206.5) Adjusted EBITDA2,4467,801(68.6) Adjusted EBIT6796,067(88.8) Total costs and other expenses10,92311,317(3.5) US$ million1H191H18% Net debt ¹9,72612,03111,519 Iron ore - 62% Fe reference price100.182.765.3 Adjusted EBITDA3,098(652)3,875 Adjusted EBIT2,132(1,453)3,014 Total costs and other expenses5,7435,1805,767 US$ million2Q191Q192Q18
Market overview IRON ORE Iron ore 62% Fe reference price averaged US$ 100.1/dmt in 2Q19, 21% higher than 1Q19 and 53% higher than 2Q18 responding to higher steel production in China and to a decrease in iron ore stocks, as a result of the iron ore supply shortage along 1H19. Seaborne imports decrease was mainly due to supply disruptions in Brazil and Australia. In China, crude steel production showed a robust output in 2Q19, since the construction sector demand continued strong, guided by improved credit conditions that had a positive knock effect on steel demand in 2019. The profit margins of Chinese mills declined as steel production volume continued resilient even with rising raw material costs. In Europe, steel mills are reducing production to adapt to a more conservative steel demand scenario and to preserve steel selling prices, while having to bear higher CO2 tax costs. Similarly, the lower steel price in the US has led mills to reduce production in order to protect their margins. Nonetheless, steel mills in these regions are still profitable and expect to improve their results as costs drop and steel production is better aligned with steel demand thus keeping the selling price at a healthy level. MB65% index averaged US$ 114.4/dmt in 2Q19, 20% higher than 1Q19 and 33% higher than 2Q18. Iron ore premiums usually show correlation with steel margins, since high quality products increase productivity of the blast furnace, creating a higher demand for those products, reducing premiums’ downward pressure. Looking forward, Chinese property data in 1H19 suggests that the demand for metals will stay high, as the Chinese Government is expected to roll out stimulus during the rest of the year, which would offer support to buoy up the country’s commodities consumption amid the China-US trade war. Additionally, steel prices in the US and other main steel production regions are recovering, with signs of staying at a higher level in 2H19 when compared to 1H19. COAL Seaborne coking coal prices decreased to US$ 203.2/t in 2Q19 from US$ 205.8/t in 1Q19. The quarter started with prices dropping to below $200/t in early April, over 16-month low met coke prices in China, due to lower blast furnace capacity utilization and lower steel margins. Prices recovered in May reaching a high of $212.5/t mainly due to resumption of steel mills, limited availability of domestic premium coals in China amid safety-environmental inspections, and restocking demand before monsoon season in India. Prices started to downtrend again in June and ranged between $195-$200/t mainly due to steel production cuts in Europe, the start of monsoon season in India and the additional volumes from Queensland before the end of 2Q19. 8
In the thermal coal market, Richards Bay FOB price averaged US$ 65.9/t, 21% lower than 1Q19 and 34% lower than 2Q18 mainly due to (i) high stock levels; (ii) mild weather and higher use of hydro energy sources in China; (iii) lower gas prices and oversupply of gas, mild weather and higher renewable power generation (4-year high in April) in Europe; and (iv) ample supply from Russia and Indonesia and rising domestic production from China. NICKEL Average LME nickel prices remained relatively unchanged for 2Q19 at US$ 12,258/t, compared to US$ 12,369/t, in 1Q19. Total exchange inventories (LME and SHFE) continued to decline closing at 178 kt by the end of 2Q19, down nearly 13 kt since 1Q19. LME stocks at the end of the 2Q19 stood at 161.7 kt, a decline of 21 kt since the end of 1Q19. SHFE inventories increased 7.6 kt to 16.3 kt by the end of 2Q19. Global stainless-steel production increased 4.4% in 2Q19 relative to 2Q18 with strong growth led by Indonesia, India and China, while consumption growth is estimated at 2-3%. This mismatch of stainless production and stainless consumption is resulting in surplus and is evidenced by the record-high reported stainless inventories, particularly in China. Sales of EVs worldwide grew 41% in 5M19 relative to 5M18 amid a continued decline in overall automotive sales (down 6% year-on-year 4M19 vs. 4M18). Demand for nickel in other applications is mixed, with aerospace supporting increased growth in super alloy applications and the poor results for the automotive market negatively impacting plating applications. Nickel supply increased approximately 7% in 2Q19 relative to 2Q18, with Class II production growing 15% whereas Class I production declined 3% during this period. Our near-term outlook for nickel remains relatively positive given that we expect the market to remain in deficit for the rest of 2019. Additional price support can be seen in recent announcements of increasing HPAL costs in Indonesia. This clearly shows that HPAL projects are more complex than originally envisioned and this has the potential to increase the financial burden on nickel producers to meet the growing battery demand. An important consideration for all commodities are the overarching macroeconomic factors such as the ongoing trade dispute and a slowing global economy, which impacts sentiment and demand and as a consequence price. Our long-term outlook for nickel continues to be positive. Nickel in electric vehicle batteries will become an increasingly important source of demand growth particularly as battery chemistry favors higher nickel content due to lower cost and higher energy density against the backdrop of robust demand growth in other nickel applications. The biggest uncertainty in the market on the supply side are the Indonesia HPAL costs (which as mentioned previously appear to be increasing), pace of construction (which is too early to tell), and the Indonesian nickel ore exports ban in 2022. Indonesian nickel ore exports are set to stop in 2022 after a grace period starting in 2017 began in support of domestic nickel smelter construction. Indonesian nickel ore exports support a large part of Chinese domestic NPI production, supplying as much as 250 kt of Ni in NPI based on 2019 quota. The stoppage of Indonesian nickel ore exports is expected given the recent comments by Indonesian government officials. 9
COPPER LME copper price averaged US$ 6,113/t in 2Q19, a decrease of 1.6% from 1Q19 (US$ 6,215/t). Copper inventories on LME increased by 73 kt 2Q19 vs. 1Q19 while both SHFE and COMEX declined by 115 kt and 10 kt, respectively. Overall, copper exchange inventory declined by 52 kt. Global demand increased approximately 1.3% in 2Q19 vs. 2Q18 with China growing, US markets remaining firm while those in the EU soften given ongoing economic woes. On the supply side, global refined copper production increased 0.5% in 2Q19 vs. 2Q18 while the recent China scrap ban supports primary use. Our near-term outlook for copper is relatively positive. We expect the market to remain essentially balanced with some upside risk for deficits in 2019, with macroeconomic factors, such as the trade dispute between China and the US, continuing to influence price as it has over this past quarter. Our long-term outlook for copper is positive. Copper demand is expected to grow, partly driven by electric vehicles and renewable energy as well as infrastructure investments, while future supply growth is challenged given declining ore grades and the need for greenfield investment creating a positive market outlook. COBALT LME cobalt price averaged US$ 34,527/t in 2Q19, remaining relatively similar to 1Q19 price (US$ 34,468/t). Our near-term expectations for cobalt are for a market in continued surplus given growth of output in the Democratic Republic of the Congo (DRC), moderated by artisanal output. Cobalt is one of the key metals used, besides nickel, to produce some of the highest energy density lithium-ion intercalation batteries for use in electric vehicles. The cobalt market needs to grow significantly in order to feed into battery demand – but unlike other metals, cobalt is predominantly a by-product of nickel and copper mining. This means that it does not have the flexibility to respond to demand pressures as readily as other commodities. Moreover, much of the cobalt comes from and is found in the DRC which introduces ethical sourcing issues as well as reliance on operations in an unpredictable jurisdiction. Over the long term, although we see demand well supported by the battery market, chemistry developments are shifting to nickel rich materials that offer lower cost and higher density. As a result of demand growth, the market will need to see significant growth of supply. Given the need to grow in nickel to support the electric vehicle market, we see the nickel industry increase its contribution of cobalt units in the future. 10
Adjusted EBITDA Adjusted EBITDA was US$ 3.098 billion in 2Q19, US$ 3.750 billion higher than 1Q19 mainly as a result of lower provisions and incurred expenses related to Brumadinho (US$ 1.532 billion in 2Q19 vs. US$ 4.504 billion in 1Q19), higher prices (US$ 822 million) and to the impact of higher sales volumes on revenues and costs (US$ 136 million). On a proforma basis, EBITDA (excluding the provisions and ongoing reparation expenses from the Brumadinho dam rupture) totaled US$ 4.6 billion in 2Q19, US$ 529 million higher than in 1Q19. The increase was mainly due to higher iron ore fines and pellets realized prices (US$ 822 million) and higher Ferrous sales volumes7 (US$ 742 million), which were partially offset by the increase in lost sales (US$ 644 million) and stoppage and extraordinary logistics expenses (US$ 204 million) related to Brumadinho. 7 Excluding Brumadinho lost sales volumes. Does not include Manganese and Ferroalloys. 11 Impact of provisions and reparation expenses related to the Brumadinho dam rupture In 2Q19, Vale was able, at the best of the knowledge of its management, to assess and recognize a provision for all categories of the Brumadinho dam rupture impacts. It was recorded a total provision of US$ 1.374 billion related to: (i) the environmental measures and related agreements (US$ 1.190 billion); (ii) the decommissioning or de-characterization of other small structures not considered in 1Q19 provision (US$ 98 million); and (iii) revision of the provision related to the Framework Agreements, including the compensation for collective moral damages, which is part of the terms and conditions set in the agreement recently signed with the Public Ministry of Labor (Ministério Público do Trabalho – MPT) (US$ 86 million). Additionally, it was recorded US$ 158 million of ongoing reparation expenses related to the Brumadinho event.
12 Provisions and ongoing reparation expenses related to the Brumadinho event Values in US$ million Provisions in 2Q19 = 1,374 9886158 1,190 6,036 4,504 ProvisionsEnvironmental DecomissioningFrameworkIncurredProvisions & ongoing programs &of other smallagreementsexpenses& ongoing expensesagreements structures expenses 1Q19 ¹2Q19 ² 1 Includes US$1.855 billion related to de-characterization of upstream structures 2 Includes US$1.953 billion related to de-characterization of structures Provision for environmental measures and framework agreements Vale has engaged in negotiations with relevant environmental authorities and has been working to remediate the environmental damages caused. During 2Q19, it has developed studies and projects to ensure geotechnical safety of the remaining structures at the Córrego do Feijão mine, in Brumadinho, and the removal and proper disposal of the tailings, especially alongside the Paraopeba river, among other projects to recover the vegetation and to compensate society. Vale has reached an agreement with Companhia de Saneamento de Minas Gerais (“COPASA”) to build a new water catchment system in the Pará de Minas city and a water treatment station, as well as initiatives to protect the fauna and flora. Vale has also advanced with the Preliminary Agreements for indemnifications with the Brazilian authorities with: (i) 104.686 thousand emergency indemnifications paid; (ii) 263 labor agreements signed to indemnify the families of workers who lost their lives; (iii) 188 individual indemnification agreements signed. Vale has recognized a provision for the final agreement with the Public Ministry of Labor to indemnify the direct and third-party employees who were affected by the termination of this operation. Under the terms of the final agreement, Vale will either maintain the jobs of its direct employees and third-party employees until January 25th, 2023 or convert this benefit into a cash compensation. The agreement set a collective moral damage indemnification payment in the amount of R$ 400 million, approximately US$ 104 million, which will be paid by August 6th, 2019.
Adjusted EBITDA Net operating revenues 9,186 8,203 8,616 SG&A (110) (110) (122) Pre-operating and stoppage expenses (335) (214) (67) Other operational expenses (35) (84) (109) Depreciation, amortization & depletion 966 801 861 Adjusted EBITDA by business area US$ million 2Q19 1Q19 2Q18 Ferrous Minerals 4,223 3,602 3,228 Base Metals 465 505 778 Brumadinho impact (1,532) (4,504) - 13 Total3,098(652)3,875 Others48(186)(176) Coal(106)(69)45 Adjusted EBITDA3,098(652)3,875 Dividends and interests on associates and JVs22128165 Adjusted EBIT2,132(1,453)3,014 Expenses related to Brumadinho(1,532)(4,504)-Research and development(90)(71)(92) COGS(5,173)(4,701)(5,377) US$ million2Q191Q192Q18 The agreement also includes indemnification payments to the relatives of the fatal victims of the event, which may vary depending on their relationship with the victims, and a lifelong medical insurance benefit to the widows and widowers and a similar benefit to the dependents of the victims until they are 25 years old. Decommissioning of other small structures Vale has recognized an additional provision for decommissioning to include the de-characterization of other small structures. Additionally, it was recognized in the current period a provision of US$ 257 million as “Equity results and other results in associates and joint ventures,” not included in the above-mentioned provision, in relation to the de-characterization of the Germano tailings dam owned by Samarco.
Net operating revenue by business area Ferrous Minerals 7,315 79.6 6,343 77.3 6,321 73.4 ROM 6 0.1 10 0.1 5 0.1 Manganese ore 27 0.3 57 0.7 74 0.9 Others 91 1.0 97 1.2 113 1.3 Metallurgical coal 194 2.1 258 3.1 261 3.0 Base Metals 1,538 16.7 1,451 17.7 1,870 21.7 Copper 495 5.4 543 6.6 570 6.6 Gold as by-product 152 1.7 132 1.6 156 1.8 Cobalt 26 0.3 30 0.4 94 1.1 Others 77 0.8 76 0.9 69 0.8 COGS by business segment 63 2,920 62 3,507 65 Ferrous Minerals 3,264 Base Metals 1,378 27 1,218 26 1,417 26 9 473 10 379 7 Coal 445 Other products 86 2 90 2 74 1 871 748 827 Depreciation ¹ COGS currency exposure in 2Q19 was as follows: 47% USD, 46% BRL, 6% CAD and 1% EUR. Expenses Administrative 85 89 88 Services 13 14 18 Others 15 15 16 Brumadinho - stoppage expenses 238 160 - Onça Puma 4 - - Others 14 11 27 Depreciation 79 39 21 Expenses related to Brumadinho 1,532 4,504 - Provisions 1,374 4,278 - Depreciation 95 53 34 14 Expenses ex-depreciation2,0074,930356 Incurred expenses158226-Other operating expenses(91)84109 Total expenses2,1024,983390 S11D--19 Stobie & Birchtree-4-Selling252134 R&D907192 Brumadinho - extraordinary logistics expenses126--Pre-operating and stoppage expenses33521467 Depreciation161413 Personnel414641 US$ million2Q191Q192Q18 SG&A ex-depreciation9496109 SG&A110110122 COGS ¹, ex-depreciation 4,302 3,953 4,550 Total COGS5,1731004,7011005,377100 US$ million2Q19%1Q19%2Q18% Total9,186100.08,203100.08,616100.0 Others50.140.040.0 Silver as by-product50.180.190.1 PGMs1151.31021.21261.5 Nickel7408.16327.791110.6 Thermal coal620.7750.9951.1 Coal2562.83334.13564.1 Ferroalloys420.5280.3410.5 Pellets1,30014.21,67420.41,51817.6 Iron ore fines5,84963.74,47754.64,57053.0 US$ million2Q19%1Q19%2Q18%
Net income (loss) Vale incurred a loss of US$ 0.1 billion in 2Q19, an improvement of US$ 1.5 billion in comparison to 1Q19. The loss was mainly due to provisions related to: (i) the Brumadinho dam rupture (US$ 1.5 billion); (ii) the decommissioning of Germano dam (US$ 257 million); and (iii) the Renova Foundation (US$ 383 million). Financial results Net financial results accounted for a loss of US$ 728 million, in line with 1Q19 and in accordance with Vale’s debt structure. Shareholders debentures was US$ 251 million in 2Q19 due to the mark-to-market adjustment as result of higher iron ore prices. For the upcoming quarters, gross interest should decrease following the reduction of the gross debt and the pre-payment of more expensive short-term credit lines. Financial results US$ million 2Q19 1Q19 2Q18 Financial expenses (751) (808) (781) Capitalization of interest 40 37 44 Shareholder debentures¹ (251) (377) (304) Others (223) (174) (176) Financial income 122 97 81 Derivatives² 66 93 (306) Currency and interest rate swaps 25 (9) (387) Foreign Exchange 21 (7) (1,946) Monetary variation (186) (81) (103) Financial result, net (728) (706) (3,055) ¹ In 2Q19, US$ 90 million were paid as remuneration on shareholder debentures. ² The net derivatives gains of US$ 66 million in 2Q19 is comprised of settlement loss of US$ 19 million and mark-to-market gains of US$ 85 million. ³ Other derivatives include bunker oil derivatives which, for 2Q19 was US$ 0 (zero). 15 Others³ (bunker oil, commodities, etc)4110281 Financial expenses (REFIS)(43)(42)(51) Gross interest(274)(252)(294)
CAPEX Investments totaled US$ 730 million in 2Q19, consisting of US$ 130 million in project execution and US$ 600 million in maintenance of operations, out of which US$ 67 million are related to replacement projects. Project Execution and Sustaining by business area Ferrous Minerals 399 54.7 365 59.7 462 65.5 Base Metals 301 41.2 193 31.6 208 29.5 Others - - - - - - Project execution Investment in project execution totaled US$ 130 million in 2Q19, with the Northern System 240 Mtpy and Salobo III as the main projects under development. The Northern System 240 Mtpy project continued to progress with hiring of contractors and the development of detailed engineering, as well as receiving part of the crushers and mobile equipment throughout 2Q19. The Salobo III project concluded the earthworks in the crushing and flotation plants. Capital projects progress indicator8 (Mtpy) start-up 240 Mt a Net a dditional capacity. 8 Pre-operating expenses were not included in the estimated capex for the year, although included in the total estimated capex column, in line with Vale’s Board of Directors approvals. Estimated capex for the year is only reviewed once a year. 16 ProjectCapacityEstimated Executed capexEstimated capex (US$ million)(US$ million) Physical progress 2019Total2019 Total Ferrous Minerals project Northern System240 (10)a2H225550 7705% Base Metals project Salobo III(30-40)a kt1H223841193 1,12815% Total730100.0611100.0705100.0 Power generation30.430.510.1 Coal273.7508.2344.8 US$ million2Q19%1Q19%2Q18%
Project execution by business area Ferrous Minerals 87 66.9 86 86.9 171 83.4 Coal - - - - 15 7.3 Base Metals 42 32.3 11 11.1 19 9.3 Others - - - - - - Sustaining CAPEX Investments in the maintenance of operations totaled US$ 600 million in 2Q19, composed mainly of US$ 358 million in enhancement of operations, US$ 71 million in investments in dams and waste dumps (of which US$ 32 million, 45%, are related to dam management), US$ 67 million in replacement projects and US$ 50 million in health and safety. Replacement projects progress indicator9 (Ktpy) Mine Extension Gelado 9,700 2H21 23 28 87 428 17% Investments in dams and waste dumps – 2Q19 New conventional dams 9 Dam raisings 10 Others - Total 71 Sustaining capex by type - 2Q19 Minerals Replacement projects 24 - 43 67 Other investments in dams and waste dumps 19 - 20 39 Social investments and environmental protection 14 5 4 23 9 Pre-operating expenses were not included in the estimated capex for the year, although included in the total estimated capex column, in line with Vale’s Board of Directors approvals. Estimated capex for the year is only reviewed once a year. 17 Administrative & Others242430 Total31427259600 Health and Safety3811150 Dam management13-20 33 US$ millionFerrousCoalBase MetalsTOTAL Enhancement of operations18219157358 Waste dumps6 Dry stacking14 US$ million2Q19 Dam management32 ProjectCapacity EstimatedExecuted capexEstimated capex start-up(US$ million)(US$ million) Physical progress 2019Total2019 Total Voisey’s Bay401H2167290311 1,69429% Total130100.099100.0205100.0 Power generation10.822.0--US$ million2Q19%1Q19%2Q18%
Sustaining capex by business area Ferrous Minerals 312 52.0 279 54.5 291 58.2 Coal 27 4.5 50 9.8 19 3.8 Base Metals 259 43.2 182 35.5 189 37.8 Copper 31 5.2 27 5.3 29 5.8 Power generation 2 0.3 1 0.2 1 0.2 Others - - - - - - Dam safety Vale continues to take several measures to increase its safety standards in dams’ management with substantial progress in 2Q19. In 2Q19, Vale started the automation of piezometers in the dams at level 3 of Emergency Action Plan for Mining Dams (PAEBM). The procedure represents an important step to guarantee a higher frequency of information provided remotely, reducing human exposure to risk areas. • In the Sul Superior dam, at Gongo Soco mine in Barão de Cocais (MG), the number of automated piezometers increased by 300%, to 20 from 5 (total of 43 piezometers). • In Forquilha III dam, at Fábrica mine in Ouro Preto (MG) the automation of 17 piezometers has been concluded (total of 108 piezometers). • In B3/B4 dam, at Mar Azul mine in Nova Lima (MG) Vale automated 17 piezometers in July (total of 18 piezometers). Due to safety measures, the access to these areas is restricted, therefore, the piezometer checking procedure is being performed using helicopter and climbing techniques. The activity was ratified by the National Civil Aviation Agency (ANAC) and it is done by specialized teams. In case of emergency, the professionals are immediately hoisted up to the helicopter. One concrete example of these initiatives to increase safety standards was the PAEBM level reduced from 2 to 1 of the Vargem Grande dam, located in the Abóboras Mine in Nova Lima (MG), on June 5th. This change in the dam’s status is the result of a series of improvements that Vale has been implementing in the structure since January this year, such as: lowering the water level of the reservoir; cleaning the drainage channels; sensitivity studies with an audit firm to evaluate the impact of the lowering of the water level on the dam’s stability. A detailed technical evaluation of the irregularities presented by the inclinometer monitoring system (instruments installed in drilled holes to measure irregularities) was also undertaken. It is expected that with the completion of the remaining actions, the structure will be totally free of its emergency status. With PAEBM level reduced to 1, 51 residents of the Vargem Grande dam self-rescue zone returned to their homes. 18 Total600100.0512100.0500100.0 Nickel22838.0 155 30.316032.0 US$ million2Q19%1Q19%2Q18%
Finally, Vale reinforced its commitment to becoming the safest and most reliable mining company in the world with the creation of the Safety and Operational Excellence Department reporting directly to the CEO and the appointment of Carlos Medeiros. His solid capacity in leading major transformational projects, together with discipline and a strong process-oriented mindset, will bring an important contribution to the safety and efficiency of our operations. As part of the role, the Safety and Operational Excellence Area is responsible for establishing minimum technical, technological and management standards for “critical disciplines” (dams, furnaces, mills, etc.) from a strong set of technical capabilities and to support use of risk and asset management models, having also the authority to stop the operation of the asset in case of critical deviations. 19
Free cash flow Free Cash Flow from Operations was US$ 2.221 billion in 2Q19, US$ 639 million higher than 1Q19, mainly due to higher prices (US$ 822 million) and to the impact of higher sales volumes on revenues and costs (US$ 136 million). The solid operational cash flow generation enabled the net debt repayments of US$ 1.3 billion and the cash and cash equivalents increase of US$ 1.040 billion. Free Cash Flow 2Q19 20
Debt indicators Gross debt totaled US$ 15.790 billion as of June 30th, 2019, decreasing by US$ 1.261 billion vs. March 31st, 2019, mainly as a result of net debt repayments of US$ 1.3 billion mostly related to the new credit lines that were raised in 1Q19. Net debt totaled US$ 9.726 billion as of June 30th, 2019, decreasing by US$ 2.305 billion vs. US$ 12.031 billion as of March 31st, 2019. In light of the recent decision of the Lower Public Treasury Court of Belo Horizonte authorizing Vale to replace the R$ 5 billion that were frozen by other financial guarantees and of the agreement signed with the Minas Gerais State Public Ministry of Labor which determined the release of R$ 1.6 billion of the frozen amount, the proforma net debt would be US$ 8.0 billion in 2Q19. The release of funds is expected to occur until August. Average debt maturity increased to 8.37 years on June 30th, 2019 when compared to 7.96 years on March 31st, 2019. Average cost of debt, after currency and interest rate swaps, decreased to 4.96% per annum on June 30th, 2019 when compared to 5.08% per annum on March 31st, 2019. Leverage measured by net debt to LTM10 adjusted EBITDA decreased to 0.9x, and interest coverage, measured by the ratio of the LTM adjusted EBITDA to LTM gross interest, decreased slightly to 10.4x on June 30th, 2019 against 10.9x on March 31st, 2019. In addition, pursuant to IFRS 16, Vale recognized leasing liabilities in the amount of US$ 1.840 billion. Debt indicators Net debt ¹ 9,726 12,031 11,519 Total debt / adjusted LTM EBITDA (x) 1.4 1.4 1.1 Adjusted LTM EBITDA / LTM gross interest (x) 10.4 10.9 11.4 ¹ Does not include leases (IFRS 16). 10 Last twelve months. 21 Net debt / adjusted LTM EBITDA (x)0.91.00.7 Leases (IFRS 16)1,8401,746-US$ million2Q191Q192Q18 Gross debt ¹15,79017,05117,906
Gross debt US$ million Net debt US$ million [ ! Leases 0 Cash posrt1on on June 30"',2019 2018 1019 2019 2018 1019 2019 Debt position breakdown by currency (before hedge) Debt position breakdown by currency (after hedge) % % •USD •BRL •EUR •Others •USD •Hedge to USD •BRL • Others Debt amortization schedule' US$ billion Debt breakdown by instrument % •Development Agencies •Captlal Markets •Bank Loans 0_4 2019 2020 2021 2022 2023Gross onwards debt 'As of June 30"', 2019 _ Does not indude accrued charges_ 65% of debt maturity after 2023
Performance of the business segments Segment information - 2Q19, as per footnote of financial statements Revenues others¹ & stoppage¹ associates EBITDA Iron ore fines 5,849 (2,093) (148) (24) (236) - 3,348 ROM 6 - - - - - 6 Pellets 1,300 (576) (3) (5) (13) 144 847 Mn & Alloys 69 (56) (1) (1) - - 11 Base Metals 1,538 (1,029) (25) (15) (4) - 465 Nickel² 1,076 (794) (22) (8) (4) - 248 Copper³ 462 (235) (3) (7) - - 217 impact ¹ Excluding depreciation and amortization ² Including copper and by-products from our nickel operations ³ Including by-products from our copper operations 23 Others77(80)44(39)(3)4948 Brumadinho--(1,532)---(1,532) Total9,186(4,302)(1,661)(90)(256)2213,098 Coal256(386)2(6)-28(106) Others ferrous91(82)2---11 Expenses Dividends and US$ millionNetCost¹SG&A andR&D¹Pre-operatinginterests onAdjusted and JVs Ferrous Minerals7,315(2,807)(150)(30)(249)1444,223
Ferrous Minerals ADJUSTED EBITDA Ferrous Minerals EBITDA was still affected by the unfolding of the Brumadinho dam rupture and abnormal rains in the Northern System and at the Tubarão port, which impacted volumes, costs and expenses. Nonetheless, Vale is transitioning into a more predictable performance, with the Brucutu operations resumption on June 22nd, recovering 30 Mtpy of capacity, and the partial return of dry processing at the Vargem Grande complex, adding about 12 Mtpy (5 Mt in 2019), as well as with the normalization of the extended queue of vessels at the Ponta da Madeira port decreasing demurrage costs in 3Q19. Adjusted EBITDA of the Ferrous Minerals business segment was US$ 4.223 billion in 2Q19, 17% higher than in 1Q19, mainly due to higher sales prices (US$ 904 million) and higher Ferrous sales volumes11 (US$ 742 million), which were partially offset by: (i) longer period of production stoppages resulting in lost sales (US$ 644 million); (ii) higher stoppage and extraordinary logistics expenses (US$ 204 million); and (iii) higher unit cash costs (US$ 309 million). In addition to the impact of the Brumadinho dam rupture on Ferrous Minerals EBITDA, provisions also related to Brumadinho were recorded as detailed in the box “Provisions related to the Brumadinho dam rupture” in the “Adjusted EBITDA” section of this report. 11 Excluding Brumadinho lost sales volumes 24
The share of premium products12 in total sales was 86% in 2Q19, higher than the recorded 81% in 1Q19, mainly due to higher Carajás sales. Iron ore fines and pellet quality premiums reached US$ 11.4/t13 in 2Q19 vs. US$ 10.7/t in 1Q19, mainly due to a higher contribution from the pellets business. Iron ore fines and pellets quality premium Iron ore fines quality premium 5.7 5.6 7.1 Iron ore fines and pellets total quality premium 11.4 10.7 10.3 Sales composition - % FERROUS MINERALS ADJUSTED EBITDA MARGIN14 Adjusted EBITDA per ton for Ferrous Minerals, excluding Manganese and Ferroalloys, was US$ 59.5/t in 2Q19, an increase of US$ 6.7/t when compared to the US$ 52.8/t recorded in 1Q19, mainly as a result of higher market prices and a greater contribution of pellets to margins. 12 Pellets, Carajás, BRBF (Brazilian Blend Fines), pellet feed and Sinter Feed Low Alumina (SFLA). 13 Iron ore premium of US$ 5.7/t and weighted average contribution of pellets of US$5.7/t. Pellet adjustment contribution released in Vale’s 2Q19 Production and Sales report was reassessed. Since this is a managerial number, this change has no impact on Vale’s results. 14 Excluding Manganese and Ferroalloys. 25 Pellets weighted average contribution5.75.13.2 US$/t2Q191Q192Q18
Iron ore fines (excluding Pellets and ROM) ADJUSTED EBITDA Adjusted EBITDA of iron ore fines was US$ 3.348 billion in 2Q19, 27% higher than 1Q19, mainly due to higher sales prices (US$ 795 million), higher sales volumes (US$ 351 million), which were partially offset by higher costs (US$ 246 million) and higher expenses (US$ 227 million). SALES REVENUES AND VOLUME Net sales revenues of iron ore fines, excluding pellets and run of mine (ROM), increased to US$ 5.849 billion in 2Q19 vs. US$ 4.477 billion in 1Q19, as a result of higher sales prices (US$ 795 million) and higher sales volumes (US$ 577 million). Sales volumes of iron ore fines totaled 61.9 Mt in 2Q19, 6.7 Mt higher than in 1Q19, mainly due to offshore inventory drawdowns. CFR sales of iron ore fines totaled 47.3 Mt in 2Q19, representing 76% of all iron ore fines sales volumes in 2Q19, slightly higher than in 1Q19. Net operating revenue by product Iron ore fines 5,849 4,477 4,570 Pellets 1,300 1,674 1,518 Manganese & Ferroalloys 69 85 115 Others 91 97 113 Volume sold Iron ore fines 61,873 55,204 72,921 Pellets 8,842 12,314 13,231 Manganese ore 92 252 239 Ferroalloys 39 25 34 26 ROM72211368 ‘000 metric tons2Q191Q192Q18 Total7,3156,3436,321 ROM6105 US$ million2Q191Q192Q18
REALIZED PRICES Pricing system breakdown - % Price realization – iron ore fines In 2Q19, the 62% Fe reference price CFR China increased US$ 17.4/t while Vale’s realized price CFR/FOB increased US$ 13.5/t, totaling US$ 94.6/t, mainly due to the effect of the pricing system mechanisms (US$ 2.3/t) which was negatively impacted by lower prices in prior periods and higher moisture discount (US$ 1.4/t). 27 The percentage of sales recorded under the provisional pricing system in relation to total sales in 2Q19 was higher than in 1Q19 mainly due to the change in the product portfolio mix.
Average prices Iron ore - Metal Bulletin 65% index 114.4 95.2 86.0 Iron ore - 62% Fe reference price 100.1 82.7 65.3 Iron ore fines CFR reference (dmt) 106.8 91.6 72.7 Pellets CFR/FOB (wmt) 147.1 135.9 114.7 Ferroalloys 1,073.8 1,162.7 1,194.4 COSTS Costs for iron ore fines amounted to US$ 2.093 billion (or US$ 2.412 billion with depreciation charges) in 2Q19. Costs increased US$ 246 million when compared to 1Q1915, mainly due to higher unit C1 cash costs. IRON ORE COGS - 1Q19 x 2Q19 variation C1 cash costs 774 90 (23) 245 312 1,086 Others 190 23 - 13 36 226 Depreciation 255 28 (23) 59 64 319 Unit maritime freight cost per iron ore metric ton decreased US$ 0.3/t, totaling US$ 16.5/t in 2Q19, despite the increase in bunker oil prices (US$ 0.3/t), mainly due to the lower freight contracts. Freight cost may increase in the short term as a result of current spot freight rates and the new IMO 2020 regulation. IMO 2020 effect will be gradually offset during 2020 and 2021, as scrubbers are installed and the new Guaibamax vessels start operating. C1 CASH COST C1 cash cost FOB port per metric ton for iron ore fines ex-royalties increased to US$ 17.6/t in 2Q19 from US$ 14.0/t in 1Q19, mainly due to (i) US$ 1.4/ton of consumption of inventories with higher average production costs; (ii) US$ 1.2/ton of higher demurrage in the Northern System, due to the extended queue of vessels at the Ponta da Madeira port which resulted from redirecting vessels bound to the south towards the north; (iii) US$ 1.0/ton of higher iron ore benchmark prices 15 After adjusting for the effects of higher sales volumes (US$ 226 million) and the positive impact of exchange rate variations (US$ 23 million). 28 Total1,899254(46)3055132,412 Total costs before depreciation and1,644226(23)2464492,093 amortization Freight680113-(12)101781 Variance drivers US$ million1Q19VolumeExchange rateOthersTotal2Q19 Manganese ore294.6227.8310.1 Iron ore fines CFR/FOB realized price94.681.162.7 Provisional price at the end of the quarter108.485.164.0 Iron ore - Metal Bulletin 62% low alumina index103.684.2n.a US$/ metric ton2Q191Q192Q18
and volumes on the third-party purchases, which were partially offset by the positive impact of the 4.1% depreciation of the BRL (US$ 0.4/ton). The normalized line-up of vessels at the Ponta da Madeira port combined with lower average production costs in May, June and July, which will positively impact COGS in 3Q19, will translate into a decrease of about US$ 2.5/t in iron ore C1 cash costs in 3Q1916. It is important to highlight, though, that the impact of the stoppages following the Brumadinho dam rupture (US$ 5.7/t) were registered as expenses (see “Expenses” below). Iron Ore Fines Costs and Expenses in BRL C1 cash costs¹ 68.9 52.9 53.3 Stoppage expenses related to Brumadinho¹ 22.1 10.3 - Other expenses¹ 3.6 2.8 3.9 ¹ Net of depreciation Iron ore fines cash cost and freight Costs (US$ million) COGS, less depreciation and amortization 2,093 1,644 2,144 (-) Distribution costs 63 67 51 (-) Royalties 163 123 160 Sales volumes (Mt) Total iron ore volume sold 61.9 55.4 73.3 (-) Total ROM volume sold 0.0 0.2 0.4 (B/C) Freight % of CFR sales (D) 76% 73% 69% Vale's iron ore unit freight cost (US$/t) (A/E) 16.5 16.8 17.2 EXPENSES Iron ore fines expenses, net of depreciation, amounted to US$ 408 million in 2Q19, increasing US$ 219 million vs. 1Q19, mainly as a result of events following the Brumadinho dam rupture: a full quarter stoppage effect during 2Q19 vs. about two months of stoppage in 1Q19 and extraordinary logistics expenses, which are mainly related to provision of clients’ contractual claims and third-party railway take-or-pay contracts (MRS). 16 Considering exchange rate of BRL 3.85/USD in 3Q19. 29 Volume CFR (Mt) (E = C x D)47.340.550.0 Maritime freight costs (A)781680861 Volume sold (ex-ROM) (C)61.955.272.9 Vale's iron ore cash cost (ex-ROM, ex-royalties), FOB (US$ /t)17.614.014.7 FOB at port costs (ex-ROM and ex-royalties) (B)1,0867741,072 (-) Maritime freight costs (A)781680861 FOB at port costs (ex-ROM)1,2498971,232 2Q191Q192Q18 Total94.566.057.2 R$/t2Q191Q192Q18
Sales and other expenses totaled US$ 148 million in 2Q19, increasing US$ 135 million vs. 1Q19, mainly due to the above-mentioned extraordinary logistics expenses. R&D amounted to US$ 24 million, increasing US$ 5 million vs. 1Q19, following the usual seasonality of disbursements. Pre-operating and stoppage expenses excluding the stoppage expenses related to Brumadinho, net of depreciation, amounted to US$ 11 million in 2Q19, in line with in 1Q19. Looking forward, unitary stoppage expenses may be reduced by about US$ 1.5/t in 3Q1917 as a result of the restart of Brucutu and Vargem Grande operations and the dilution effect on the expenses of higher volumes. Expenses - iron ore fines R&D 24 19 25 Pre-operating and stoppage expenses 236 157 27 Brumadinho stoppage expenses 225 150 - Iron ore pellets Adjusted EBITDA for pellets was US$ 847 million in 2Q19, 6% lower than in 1Q19, mainly as a result of lower volumes (US$ 253 million), which were partially offset by higher market prices (US$ 78 million) and higher dividends received18 (US$ 144 million). Sales totaled 8.8 Mt in 2Q19, 28% lower than in 1Q19 mainly due to the impact of the full stoppage of the Southern System pellet plants during the quarter, as well as maintenance carried out and abnormal rains at the Tubarão plants. CFR pellet sales of 3.2 Mt in 2Q19 represented 37% of total pellet sales, with this share remaining in line with 1Q19. FOB pellet sales amounted to 5.6 Mt in 2Q19. Realized prices in 2Q19 were an average CFR/FOB of US$ 147.1/t, increasing US$ 11.2/t vs. 1Q19, lower than the increase in reference price for 62% Fe (US$ 17.4/t), mainly due to the pricing system mechanism based on prior quarter which was impacted by lower prices. 17 Considering exchange rate of BRL 3.85/USD in 3Q19. 18 Dividends from leased pelletizing plants, which are usually paid every 6 months (in 2Q and 4Q). 30 Others11727 Extraordinary logistics expenses126--Other expenses727 Total expenses40818978 US$ million2Q191Q192Q18 Selling151119
Costs totaled US$ 576 million (or US$ 680 million with depreciation charges) in 2Q19, an increase19 of US$ 38 million vs. 1Q19, mainly due to higher maintenance costs. Expenses totaled US$ 21 million in 2Q19, remaining in line with 1Q19. Pellets - EBITDA million million Dividends received (Leased pelletizing plants) 144 16.3 - - Pre-operating & stoppage expenses (13) (1.5) (10) (0.8) EBITDA 847 95.8 902 73.2 Iron ore fines and pellets cash break-even20 In 2Q19, Vale’s iron ore fines and pellets EBITDA break-even increased US$ 6.5/t, totaling US$ 36.8/t, mainly as a result of higher C1 cash costs (US$ 3.6/t), higher stoppage expenses related to Brumadinho (US$ 3.0/t) and higher royalties expenses (US$ 0.4/t), which were partially offset by a greater pellet contribution (US$ 0.6/t) and lower freight costs (US$ 0.3/t). Iron ore and pellets cash break-even landed in China¹ Vale's iron ore cash cost (ex-ROM, ex-royalties), FOB (US$ /t) 17.6 14.0 14.7 Iron ore fines distribution cost 1.0 1.2 0.7 Iron ore fines expenses² & royalties 3.5 2.9 3.3 Iron ore fines quality adjustment (5.7) (5.6) (7.1) Iron ore fines EBITDA break-even (US$/dmt) 42.6 35.4 32.0 Iron ore fines pellet adjustment (5.7) (5.1) (3.2) Iron ore fines and pellets EBITDA break-even (US$/dmt) 36.8 30.3 28.8 Iron ore fines sustaining investments 4.5 4.2 3.5 Iron ore fines and pellets cash break-even landed in China (US$/dmt) 41.3 34.4 32.3 ¹ Measured by unit cost + expenses + sustaining investment adjusted for quality ² Net of depreciation and includes dividends received 19 After adjusting for the effects of lower sales volumes (US$ 199 million) and the negative impact of exchange rate variations (US$ 16 million). 20 Does not include the impact from the iron ore fines and pellets pricing system mechanism. 31 Iron ore fines moisture adjustment4.03.33.2 Iron ore fines stoppage expenses² related to Brumadinho5.72.7-Iron ore fines freight cost (ex-bunker oil hedge)16.516.817.2 US$/t2Q191Q192Q18 Expenses (Selling, R&D and other)(8)(0.9)(9)(0.7) Cash costs (Iron ore, leasing, freight, overhead, energy and other)(576)(65.1)(753)(61.1) 2Q191Q19 US$ US$/wmtUS$ US$/wmt Net revenues / Realized price1,300147.11,674135.9
Manganese and ferroalloys Adjusted EBITDA of manganese ore and ferroalloys was US$ 11 million in 2Q19, 59% lower than in 1Q19, mainly due to lower sales volumes and lower market prices. Manganese ore sales volumes reached 92,000 t in 2Q19, 63.5% lower than in 1Q19, mainly due to lower production and abnormal rains at the Ponta da Madeira port which affected shipments. Ferroalloys sales volumes totaled 39,000 t in 2Q19, 58.0% higher than in 1Q19 as a result of new clients in the domestic and international markets. Volume sold by destination – Iron ore and pellets Americas 9,013 8,534 10,155 Others 2,293 2,274 3,091 China 38,984 36,196 45,995 Others 5,728 4,752 5,172 Germany 3,272 3,284 4,545 Others 3,617 3,944 6,795 Rest of the World 1,517 1,851 2,035 Total 70,787 67,730 86,520 Selected financial indicators - Ferrous Minerals Net Revenues 7,315 6,343 6,321 Expenses¹ (150) (26) (33) R&D expenses (30) (24) (32) Adjusted EBITDA 4,223 3,602 3,228 Adjusted EBIT 3,691 3,174 2,803 ¹ Net of depreciation and amortization 32 Adjusted EBIT margin (%)50.550.044.3 Depreciation and amortization(532)(428)(425) Dividends and interests on associates and JVs144-106 Pre-operating and stoppage expenses¹ (249)(160)(33) Costs¹(2,807)(2,531)(3,101) US$ million2Q191Q192Q18 Middle East1,4852,2481,960 France1,3531,1211,769 Europe8,2428,34913,109 Japan5,8185,8008,094 Asia50,53046,74859,261 Brazil6,7206,2607,064 ‘000 metric tons2Q191Q192Q18
Selected financial indicators - Iron ore fines Adjusted EBITDA (US$ million) 3,348 2,644 2,349 Adjusted EBITDA (US$/t) 54 48 32 Selected financial indicators - Pellets Adjusted EBITDA (US$ million) 847 902 797 Adjusted EBITDA (US$/t) 96 73 60 Selected financial indicators - Ferrous ex Manganese and Ferroalloys Adjusted EBITDA (US$ million) 4,212 3,575 3,181 Adjusted EBITDA (US$/t) 60 53 37 ¹ Volume including iron ore fines, pellets and ROM. 33 Volume Sold (Mt)¹70.867.786.5 US$ million2Q191Q192Q18 Volume Sold (Mt)8.812.313.2 US$ million2Q191Q192Q18 Volume Sold (Mt)61.955.272.9 US$ million2Q191Q192Q18
Base Metals Base Metals operations in the North Atlantic achieved solid performance in the mine-mill-smelting activities in 2Q19. In turn, nickel refining activities were affected by scheduled and unscheduled maintenances which also led to lower cobalt, gold, silver and PGMs’ feed reducing overall by-product credits. Nevertheless, copper production from Sudbury was 4.7% higher in relation to 1Q19, as the copper concentrate production lines are independent from the nickel refineries operations. In the upcoming quarters, the performance of the North Atlantic mines in 2Q19 shall be reflected in the refineries’ post-maintenance output in 2H19. Likewise, after concluding its maintenance in 1Q19, PTVI had a significant boost in site production volume, one of the main factors for it q-o-q increase in EBITDA. Copper operations were impacted by lower copper realized prices in 2Q19, partially offset by Salobo’s performance, which reached sub-US$ 900/t unit cash costs due to strong operational performance and higher by-product credits. Base Metals adjusted EBITDA was US$ 465 million in 2Q19 vs. US$ 505 million in 1Q19, mainly due to lower copper realized prices (US$ 73 million) and higher costs (US$ 25 million) partially offset by higher nickel, copper and by-product volumes (US$ 44 million) and the positive effect of exchange rate variations (US$ 11 million). Average prices Nickel - LME 12,258 12,369 14,476 Nickel 12,877 12,571 14,784 Gold (US$/oz) 1,341 1,279 1,330 Cobalt (US$/t) 24,222 25,886 73,984 ¹Considers Salobo and Sossego operations. Base Metals EBITDA overview – 2Q19 North Onça US$ million PTVI Site VNC Site Sossego Salobo Others Base Costs (508) (132) (139) (40) (82) (153) 25 (1,029) Pre-operating and stoppage expenses - - - (4) - - - (4) 34 R&D(4)(1)(1)(1)(6)(1)(1)(15) EBITDA26233(87)33018737464 Selling and other expenses(15)--(1)(1)(2)(6)(25) Total AtlanticPumaMetals Net Revenues7891665349119343191,538 Silver (US$/oz)13.0915.2415.28 Copper¹5,1996,0516,030 Copper - LME6,1136,2156,872 US$/ metric ton2Q191Q192Q18
Nickel operations Nickel operations – EBITDA by operation US$ million 2Q19 1Q19 2Q18 North Atlantic operations¹ 262 293 393 VNC (87) (64) 1 Onça Puma 3 16 25 Others² 37 16 12 ¹ Includes the operations in Canada and in the United Kingdom. ² Includes the PTVI and VNC off-takes, intercompany sales eliminations and purchase of finished nickel. Nickel operations – unit cash cost of sales, net of by-product credits PTVI 7,774 8,834 7,170 Onça Puma 9,991 8,846 7,957 ¹ North Atlantic figures include Clydach refining costs. Details of nickel operations’ adjusted EBITDA by operation are as follows: • The North Atlantic operations’ EBITDA was US$ 262 million, decreasing US$ 31 million vs. 1Q19 mainly due to lower by-products realized prices (US$ 21 million) and higher expenses (US$ 8 million). Unit cash costs increased to US$ 5,159/t mainly due to lower by-product credits and maintenance costs. • PTVI’s EBITDA was US$ 33 million, increasing by US$ 29 million compared to 1Q19, mainly due to higher dilution of fixed costs on higher volumes (US$ 18 million) and higher nickel realized prices (US$ 9 million). After the completion of maintenance works in 1Q19 at the PTVI site, unit cash costs decreased to US$ 7,774/t in 2Q19 as higher volumes in the quarter diluted fixed costs and operations returned to higher productivity rates with hydroelectric power. • VNC's EBITDA was negative US$ 87 million, decreasing by US$ 23 million when compared to 1Q19, mainly as a result of higher unit cash costs (US$ 27 million) despite the positive effect of cobalt by-product credits (US$ 9 million). Unit cash costs increased to US$ 27,316/t in 2Q19 mainly due to costs associated with the maintenance program to enhance future operations as well as the effect of lower dilution of fixed costs on lower volumes at VNC site. 35 VNC27,31622,77112,515 US$/t2Q191Q192Q18 North Atlantic operations¹5,1593,9724,680 Total248265497 PTVI33466
• Onça Puma’s EBITDA was US$ 3 million, decreasing by US$ 13 million compared to 1Q19, mainly as a result of higher unit costs (US$ 6 million), lower volumes (US$ 4 million) and higher expenses (US$ 4 million). Unit cash costs increased to US$ 9,991/t mainly due to lower volumes as a result of the suspension of processing activities in June 2019 related to a decision by a Brazilian court. EBITDA break-even – nickel operations21 SALES REVENUES AND VOLUMES Nickel sales revenues were US$ 740 million in 2Q19, increasing US$ 108 million vs. 1Q19 as a result of higher volumes (US$ 93 million) and higher price realization (US$ 15 million). Sales volumes of nickel were 57.5 kt in 2Q19, 7.2 kt higher than in 1Q19, reflecting Vale’s decision to optimize supply chain opportunities and draw down regional inventories in line with demand. Copper by-product from nickel operations generated sales revenues of US$ 170 million in 2Q19, decreasing US$ 21 million vs. 1Q19 as a result of lower copper price realization (US$ 23 million) offset by higher sales volumes (US$ 2 million). Sales volumes of copper by-product totaled 32.5 kt in 2Q19, in line with 1Q19. Cobalt by-product sales revenues totaled US$ 26 million in 2Q19, decreasing US$ 4 million vs. 1Q19, mainly as a result of lower cobalt prices (US$ 2 million) and lower volumes (US$ 2 million) in the quarter. Sales volumes of cobalt by-product amounted to 1,072 t in 2Q19, 101 t lower than in 1Q19. 21 Considering only the cash effect of US$ 400/oz that Wheaton Precious Metals pays for 70% of Sudbury’s gold by-product, nickel operations EBITDA break-even would increase to US$ 8,831/t. 36
Net operating revenue by product - Nickel operations Nickel 740 632 911 Gold as by-product 18 16 23 PGMs 115 102 126 Others 5 4 4 Total 1,076 980 1,340 Volume sold - Nickel operations Class I nickel 38 29 37 Class II Battery-suitable nickel 12 12 16 Class II nickel 4 5 4 Copper 32 32 30 Gold as by-product ('000 oz) 14 13 18 Silver as by-product ('000 oz) 204 302 329 Cobalt (metric ton) 1,072 1,173 1,272 REALIZED NICKEL PRICES Vale’s nickel products are classified as Class I, Class II Battery-suitable, Class II and Intermediates. In 2Q19, 66% of our sales were high-quality Class I nickel products. 37 PGMs ('000 oz)9276138 Intermediates444 ‘000 metric tons2Q191Q192Q18 Nickel575062 Cobalt263094 Silver as by-product255 Copper170191176 US$ million2Q191Q192Q18
Class I products, 37.9 kt, 66% of nickel sales in 2Q19 Class I products were sourced from 100% of North Atlantic operations and 32% operations in 2Q19. of PTVI Part of the Class I nickel products is sold at higher premiums for the specialties/high-quality markets but part of it is sold to stainless-steel Class II markets, with lower premiums. As demand for specialty products and EV batteries increases, a larger portion of our high-quality Class I nickel products will be sold to Class I markets, capturing a larger share of premiums in the product mix. Class II Battery-suitable, Class II and Intermediates, 19.6 kt, 34% of nickel sales in 2Q19 Class II Battery-suitable products offer varied levels of upside for use as feed into the battery supply chain for EV batteries. Although technically any nickel can be upgraded to the purity level required by the EV batteries market, the products comprising the Class II Battery-suitable nickel are those which offer very low-cost solutions to be upgraded and used in that market. The different products included in this category offer different levels of potential and readiness 38
for utilization in EVs. The Class II Battery-suitable products were sourced from 100% of VNC operations and 42% of PTVI operations in 2Q19. It is economically challenging to use Class II products such as ferro-nickel in electric vehicle battery applications, mainly due to impurities as well as operational and capital costs associated with the conversion process. Vale’s Class II products were sourced from 100% of Onça Puma operations in 2Q19. Intermediate products were sourced from 26% of PTVI production in 2Q19. These products do not represent finished nickel production and are generally sold at a discount given that they still need to be processed before being sold to end customers. Premiums / discount by nickel product Class I nickel 1,090 1,320 1,430 Class II Battery-suitable nickel (200) (90) (180) Intermediates (2,550) (2,460) (2,690) The average nickel realized price was US$ 12,877/t, US$ 619/t higher than the average LME nickel price of US$ 12,258/t in 2Q19. The aggregate impact of the above-mentioned premiums and discounts (considering their respective volumes in the sales mix) was: • Premium for Class I nickel products for 66% of sales, with aggregate impact of US$ 719/t; • Discount for Class II Battery-suitable nickel products for 21% of sales, with aggregate impact of -US$ 42/t; • Discount for Class II nickel products for 7% of sales, with aggregate impact of -US$ 5/t; • Discount for Intermediates for 6% of sales, with aggregate impact of -US$ 153/t; and, • Other timing and pricing adjustments, mainly due to carryover effects from the differences between the LME price at the moment of sale and the quarterly LME average, along with the impact of fixed forward price sales, with an aggregate positive impact of US$ 100/t. 39 Class II nickel(70)(50)420 US$/t2Q191Q192Q18
Nickel premium/discount by product and average aggregate premiums Nickel COGS - 1Q19 x 2Q19 rate Nickel operations 688 85 (5) 26 106 794 EXPENSES Selling expenses and other expenses totaled US$ 22 million in 2Q19, including other expenses related to maintenance of older mines in the North Atlantic (US$ 12 million), payroll provisions (US$ 4 million) and provision for supplies inventory obsolescence (US$ 4 million). Pre-operating and stoppage expenses were US$ 4 million in 2Q19 due to stoppage expenses at Onça Puma. R&D expenses were US$ 8 million in 2Q19, higher than the US$ 7 million recorded in 1Q19. These expenses encompass R&D initiatives for further operational improvements, with the main expenses associated with North Atlantic, VNC, PTVI and Onça Puma, corresponding to US$ 4 million, US$ 1 million, US$ 1 million and US$ 1 million, respectively, in the quarter. 40 Depreciation25727(3)2246303 Total945112(8)481521,097 Variance drivers US$ million1Q19VolumeExchangeOthersTotal variation2Q19
Selected financial indicators - Nickel operations Net Revenues 1,076 980 1,340 Expenses¹ (22) (12) (18) R&D expenses (8) (7) (8) Adjusted EBITDA 248 265 497 Adjusted EBIT (62) 6 184 ¹ Net of depreciation and amortization Copper operations – Salobo and Sossego Copper – EBITDA by operation Salobo 187 190 220 Copper operations – unit cash cost of sales, net of by-product credits Salobo 816 1,086 937 Details of copper operations’ adjusted EBITDA by operation are as follows: • Salobo’s EBITDA was US$ 187 million, in line with 1Q19, as lower copper realized prices (US$ 31 million) were offset by higher volumes (US$ 15 million), higher by-product prices (US$ 6 million) and lower unit costs (US$ 4 million). Unit cash costs decreased to US$ 816/t mainly due to higher by-product credits. • Sossego’s EBITDA was US$ 30 million, decreasing by US$ 20 million vs. 1Q19, mainly as a result of lower copper realized prices (US$ 19 million). Unit cash costs decreased to US$ 3,293/t due to higher by-product credits. 41 Sossego3,2933,3833,212 US$/t2Q191Q192Q18 Sossego305061 Total217240281 US$ million2Q191Q192Q18 Adjusted EBIT margin (%)(5.8)0.613.7 Depreciation and amortization(310)(259)(313) Dividends and interests on associates and JVs---Pre-operating and stoppage expenses¹(4)(8)(7) Costs¹(794)(688)(810) US$ million2Q191Q192Q18
EBITDA break-even – copper operations22 The realized price to be used against the EBITDA break-even should be the copper realized price before discounts (US$ 5,765/t), given that TC/RCs, penalties and other discounts are already part of the EBITDA break-even build-up. SALES REVENUES AND VOLUMES Copper sales revenues were US$ 325 million in 2Q19, decreasing by US$ 27 million vs. 1Q19 as a result of lower price realization (US$ 50 million) which was offset by higher volumes (US$ 22 million). Copper sales volumes were 62.5 kt in 2Q19, 4.3 kt higher than in 1Q19, in line with the increase in production over the quarter. By-product revenues were US$ 137 million in 2Q19, increasing by US$ 18 million vs. 1Q19 as a result of higher by-product volumes (US$ 12 million) and higher price realization (US$ 6 million). Sales volumes of gold by-product were 99 koz in 2Q19, 9 koz higher than in 1Q19 and sales volumes of silver by-product were 164 koz in 2Q19, 40 koz lower than in 1Q19. Net operating revenue by product - Copper operations Copper 325 352 394 Gold as by-product 134 116 133 Silver as by-product 3 3 4 Volume sold - Copper operations Copper 63 58 65 Gold as by-product ('000 oz) 99 90 99 Silver as by-product ('000 oz) 164 204 259 22 Considering only the cash effect of US$ 400/oz that Wheaton Precious Metals pays for 75% of Salobo’s gold by-product, copper operations EBITDA break-even would increase to US$ 3,220/t. 42 ‘000 metric tons2Q191Q192Q18 Total462471530 US$ million2Q191Q192Q18
REALIZED COPPER PRICES The realized copper price was US$ 5,199/t, US$ 914/t lower than the average LME copper price of US$ 6,113/t in 2Q19. Vale’s copper products are sold on a provisional pricing basis during the quarter with final prices determined in a future period, generally one to four months forward. The realized copper price differed from the average LME price in 2Q19 due to the following factors23: • Current period price adjustments: mark-to-market of invoices still open in the quarter based on the copper price forward curve at the end of the quarter (+US$ 61/t); • Prior period price adjustment: variance between the price used in final invoices (and in the mark-to-market of invoices from previous quarters still open at the end of the quarter) and the provisional prices used for sales in previous quarters (-US$ 409/t); and, • TC/RCs, penalties, premiums and discounts for intermediate products (-US$ 566/t). Price realization – copper operations Copper COGS - 1Q19 x 2Q19 rate Copper operations 226 16 (7) - 9 235 EXPENSES Selling expenses and other expenses totaled US$ 3 million in 2Q19. Research and development expenses were US$ 7 million in 2Q19, with Sossego and Salobo corresponding to US$ 6 million and US$ 1 million, respectively, in the quarter. 23 On June 30th, 2019, Vale had provisionally priced copper sales from Sossego and Salobo totaling 76,928 tons valued at an LME forward price of US$ 5,995/t, subject to final pricing over the following months. 43 Depreciation473(1)(3)(1)46 Total27319(8)(3)8281 Variance drivers US$ million1Q19VolumeExchangeOthersTotal variation2Q19
Selected financial indicators - Copper operations Net Revenues 462 471 530 Expenses¹ (3) - - R&D expenses (7) (5) (4) Adjusted EBITDA 217 240 281 Adjusted EBIT 171 193 228 ¹ Net of depreciation and amortization 44 Adjusted EBIT margin (%)37.041.043.0 Depreciation and amortization(46)(47)(53) Dividends and interests on associates and JVs---Pre-operating and stoppage expenses¹---Costs¹(235)(226)(245) US$ million2Q191Q192Q18
Coal ADJUSTED EBITDA Coal adjusted EBITDA was negative US$ 106 million in 2Q19, US$ 37 million lower than in 1Q19, mainly as a result of lower sales volumes and prices for metallurgical and thermal coal. 2019 has been a challenging year for the Coal business. Despite some initiatives that resulted in a better availability of mine equipment and an increase in tonnage moved, the lower ROM quality and mix gathered during the opening of new mine sections and higher maintenance at processing plants led to the review of the production guidance and the reassessment of mining plans. Reassessing mining plans in 2H19 will be an important step to pave the way to improve the stability of the quality of the ROM that feeds the plants, thus achieving a higher sustainable ongoing level of production. Volume sold Metallurgical coal 1,037 1,291 1,408 Thermal coal 1,056 1,103 1,101 Total 2,093 2,394 2,509 Revenues and price realization Revenues decreased by US$ 77 million to US$ 256 million in 2Q19 from US$ 333 million in 1Q19, due to lower sales volumes (US$ 54 million) and lower thermal and metallurgical coal prices (US$ 23 million). Sales volumes totaled 2.1 Mt in 2Q19,11.7% lower than production in the same period, mainly as a result of an increase of sales on which the change of the ownership of the cargo to customers and the revenue recognition occur on delivery of the cargo at the port of discharge24. These sales will be recognized in the next quarter. Net operating revenue by product Metallurgical coal 194 258 261 24 DAP and DAT International Commercial Terms 45 Thermal coal627595 Total256333356 US$ million2Q191Q192Q18 ‘000 metric tons2Q191Q192Q18
Price realization – Metallurgical coal US$/t, 2Q19 Price realization – Thermal coal US$/t, 2Q19 Coal prices Metallurgical coal index price¹ 203.2 205.8 190.2 Thermal coal index price² 66.0 83.0 100.3 Vale’s average realized price 122.3 139.1 142.1 ¹ Reference price Premium Low Vol Hard Coking Coal FOB Australia. ² McCloskey FOB Richards Bay 46 Vale’s thermal coal realized price59.167.786.1 Vale’s metallurgical coal realized price186.7200.2185.9 US$/ metric ton2Q191Q192Q18
Costs and expenses Costs totaled US$ 386 million in 2Q19, US$ 37 million lower than in 1Q19, mainly due to the impact of variable costs on lower sales volumes. Pro-forma C1 cash cost totaled US$ 169.2/t in 2Q19, an increase of US$ 5.7/t in relation to 1Q19 mainly due to lower dilution of fixed costs, which was partially offset by a decrease in the Nacala non-operational tariff. Pro-forma cash cost Pro-forma operational costs¹ (A) 128.7 117.8 75.5 Nacala non-operational tariff ² ³ (B) 46.5 53.6 49.0 Cost at Nacala Port (D = A+B+C) 182.6 175.2 128.1 NLC’s debt service to Vale (E) 13.4 11.7 11.6 Pro-forma C1 cash cost (F = D-E) 169.2 163.5 116.6 ¹ Includes the inferred NLC tariff components related to fixed and variable costs and excludes royalties ² Includes the inferred NLC tariff components related to sustaining capex, working capital, taxes and other financial items ³ Reallocation of US$ 6.9/t in 2Q18, US$ 11.7/t in 1Q19 between pro-forma operational costs and Nacala non-operational tariff lines. Selected financial indicators - Coal Net Revenues 256 333 356 Expenses¹ 2 (1) (7) R&D expenses (6) (6) (6) Adjusted EBITDA (106) (69) 45 Adjusted EBIT (166) (118) (10) ¹ Net of depreciation and amortization 47 Adjusted EBIT margin (%)(64.8)(35.4)(2.9) Depreciation and amortization(60)(49)(56) Dividends and interests on associates and JVs282829 Pre-operating and stoppage expenses¹---Costs¹(386)(423)(327) US$ million2Q191Q192Q18 Other costs (C)7.43.83.6 US$/ metric ton2Q191Q192Q18
ANNEXES SIMPLIFIED FINANCIAL STATEMENTS Income Statement Net operating revenue 9,186 8,203 8,616 Cost of goods sold and services rendered (5,173) (4,701) (5,377) Gross margin (%) 43.7 42.7 37.6 Research and evaluation expenses (90) (71) (92) Brumadinho event (1,532) (4,504) - Impairment and disposal of non-current assets (109) (204) 5 Operating income 1,802 (1,685) 2,854 Financial income 122 97 81 Other financial items, net (99) 5 (2,355) Income (loss) before income taxes 331 (2,307) (571) Current tax (366) (247) (127) Net income (loss) from continuing operations (142) (1,675) 93 Net income (loss) attributable to noncontrolling interest (9) (33) (7) Earnings (loss) per share (attributable to the Company's stockholders - US$) (0.03) (0.32) 0.01 Company's stockholders - US$) Equity income (loss) by business segment Ferrous Minerals 71 79 84 79 105 256 Base Metals - - - - - - Others 16 18 27 25 (72) (176) 48 Total9010010610041100 Logistics------Coal33(5)(5)820 US$ million2Q19%1Q19%2Q18% Basic and diluted earnings (loss) per share (attributable to the(0.03)(0.32)0.01 Loss from discontinued operations--(10) Net income (loss) attributable to Vale's stockholders(133)(1,642)76 Deferred tax(107)879791 Equity results and other results in associates and joint ventures(743)84(370) Financial expenses(751)(808)(781) Other operational expenses, net(35)(84)(109) Pre-operating and operational stoppage(335)(214)(67) Selling and administrative expenses(110)(110)(122) Gross profit4,0133,5023,239 US$ million2Q191Q192Q18
Balance sheet Current assets 15,914 15,075 15,468 Cash and cash equivalents 6,048 5,008 6,369 Other financial assets 402 467 482 Prepaid income taxes 508 567 657 Others 565 483 590 Judicial deposits 5,035 5,124 1,744 Other financial assets 3,118 3,108 3,042 Prepaid income taxes 695 560 505 Deferred income taxes 7,698 7,711 6,535 Others 367 297 304 Total assets 95,732 94,150 88,087 Current liabilities 12,834 12,467 9,186 Suppliers and contractors 3,907 3,331 3,587 Loans and borrowing 1,287 2,715 1,822 Leases 239 219 - Taxes payable 607 669 640 Settlement program (REFIS) 445 433 255 Provisions 942 818 1,005 Liabilities related to Brumadinho 2,320 1,642 - De-characterization of dams 388 158 Others 1,178 768 809 Loans and borrowing 14,503 14,336 16,084 Other financial liabilities 3,215 3,011 2,994 Deferred income taxes 1,469 1,524 1,678 Liabilities related to associates and joint ventures 1,298 765 895 De-characterization of dams 1,630 1,674 - Others 1,270 2,101 1,999 Total liabilities 52,408 50,957 45,199 49 Stockholders' equity43,32443,19342,888 Total liabilities and stockholders' equity95,73294,15088,087 Deferred revenue - Gold stream1,4611,5221,725 Liabilities related to Brumadinho1,208749-Provisions8,1047,4566,567 Settlement program (REFIS)3,8153,8254,071 Leases1,6011,527-Non-current liabilities39,57438,49036,013 - Liabilities related to associates and joint ventures412280273 Other financial liabilities1,1091,434795 Liabilities Fixed assets62,39461,71559,925 Recoverable taxes511560564 Non-current assets17,42417,36012,694 Recoverable taxes6841,1881,023 Inventories4,7244,9093,999 Accounts receivable2,9832,4532,348 US$ million6/30/20193/31/20196/30/2018 Assets
Cash flow Cash flows from operating activities: Adjusted for: Equity results and other results in associates and joint ventures 743 (84) 370 Financial results, net 728 706 3,055 Change in assets and liabilities Inventories 229 (461) (262) Provision - Payroll, related charges and other remunerations 166 (460) 175 Liabilities related to Brumadinho 1,069 2,423 - Other assets and liabilities, net (375) 16 (440) Interest on loans and borrowings paid (237) (246) (274) Remuneration paid to debentures (90) - (72) Net cash provided by operating activities 2,955 2,200 3,544 Cash flows from investing activities: Capital expenditures (730) (611) (705) Acquisition of subsidiary, net of cash - (496) - Proceeds from disposal of assets and investments 11 93 259 Dividends received from joint ventures and associates 193 - 136 Other investment activities, net (190) 38 (124) Cash flows from financing activities: Loans and financing: Loans and borrowings from third-parties 300 1,842 765 Payments of leasing (3) (75) - Payments to stockholders: Dividends and interest on capital paid to noncontrolling interest (14) (63) (6) Net cash used in discontinued operations - - (2) Cash and cash equivalents in the beginning of the period 5,008 5,784 5,368 Effects of disposals of subsidiaries and merger, net of cash and cash equivalents - - (14) Non-cash transactions: 50 Additions to property, plant and equipment - interest capitalization403744 Cash and cash equivalents, end of period6,0485,0086,369 Effect of exchange rate changes on cash and cash equivalents312(247) Increase (decrease) in cash and cash equivalents1,009(778)1,262 Net cash provided by (used in) financing activities(1,353)1,488(1,840) Payments of loans and borrowings from third-parties(1,636)(216)(2,599) Net cash used in investing activities(593)(4,466)(440) Restricted cash and judicial deposits124(3,490)-Additions to investments(1)-(6) Income taxes (including settlement program)(359)(490)(159) Derivatives received (paid), net(4)(118)12 Net cash provided by operations3,6453,0544,037 De-characterization of dams831,855-Proceeds from cobalt stream transaction--690 Suppliers and contractors434(103)(37) Accounts receivable(557)464201 Others(281)--Impairment and disposal of non-current assets109204(5) Depreciation, depletion and amortization966801861 Income (loss) before income taxes from continuing operations331(2,307)(571) US$ million2Q191Q192Q18
REVENUES, VOLUMES SOLD, PRICES AND MARGINS Net operating revenue by destination North America 533 5.8 557 6.8 578 6.7 Canada 137 1.5 220 2.7 184 2.1 South America 1,086 11.8 896 10.9 890 10.3 Others 145 1.6 131 1.6 155 1.8 China 4,200 45.7 3,387 41.3 3,264 37.9 South Korea 320 3.5 292 3.6 402 4.7 Europe 1,383 15.1 1,295 15.8 1,549 18.0 Italy 152 1.7 66 0.8 150 1.7 Middle East 252 2.7 356 4.3 252 2.9 Volume sold - Minerals and metals Iron ore fines 61,873 55,204 72,921 ROM 72 211 368 Pellets 8,842 12,314 13,231 Ferroalloys 39 25 34 Thermal coal 1,056 1,103 1,101 Metallurgical coal 1,037 1,291 1,408 Copper 95 90 95 Gold as by-product ('000 oz) 113 103 117 Silver as by-product ('000 oz) 368 505 588 Cobalt (metric ton) 1,072 1,173 1,272 Average prices Iron ore fines CFR reference (dmt) 106.8 91.6 72.7 Pellets CFR/FOB (wmt) 147.1 135.9 114.7 Ferroalloys 1,073.8 1,162.7 1,194.4 Metallurgical coal 186.7 200.2 185.9 Copper¹ 5,206 6,012 6,020 Silver (US$/oz) 13.09 15.24 15.28 ¹Considers Salobo, Sossego and North Atlantic operations. 51 Cobalt (US$/t)24,22225,88673,984 Gold (US$/oz)1,3411,2791,330 Nickel12,87712,57114,784 Thermal coal59.167.786.1 Manganese ore294.6227.8310.1 Iron ore fines CFR/FOB realized price94.681.162.7 US$/ton2Q191Q192Q18 PGMs ('000 oz)9276138 Nickel575062 Manganese ore92252239 ‘000 metric tons2Q191Q192Q18 Rest of the World2532.83053.72873.3 Total9,186100.08,203100.08,616100.0 Others7788.584910.397211.3 Germany4534.93804.64275.0 Others5706.24835.96357.4 Japan5896.46327.77598.8 Asia5,67961.84,79458.45,06058.7 Brazil94110.27659.37358.5 Mexico290.3300.4400.5 USA3674.03073.73544.1 US$ million2Q19%1Q19%2Q18%
Operating margin by segment (EBIT adjusted margin) Ferrous Minerals 50.5 50.0 44.3 Base Metals 7.1 13.7 22.0 Total¹ 23.2 (17.7) 35.3 ¹ Excluding non-recurring effects RECONCILIATION OF IFRS AND “NON-GAAP” INFORMATION (a) Adjusted EBIT Net operating revenues 9,186 8,203 8,616 COGS (5,173) (4,701) (5,377) SG&A (110) (110) (122) Pre-operating and stoppage expenses (335) (214) (67) Expenses related to Brumadinho (1,532) (4,504) - Other operational expenses (35) (84) (109) (b) Adjusted EBITDA EBITDA defines profit or loss before interest, tax, depreciation and amortization. Vale uses the term adjusted EBITDA to reflect exclusion of gains and/or losses on sale of assets, non-recurring expenses and the inclusion of dividends received from non-consolidated affiliates. However, our adjusted EBITDA is not the measure defined as EBITDA under IFRS 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 IFRS. 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 Adjusted EBITDA 3,098 (652) 3,875 Working capital: Inventories 229 (461) (262) Suppliers and contractors 434 (103) (37) Provision - Payroll, related charges and other remunerations 166 (460) 175 De-characterization of dams 83 1,855 - Others (877) (12) 85 Cash provided from operations 3,645 3,054 4,037 Income taxes paid - settlement program (108) (112) (113) Interest paid for third parties (237) (246) (274) Participative stockholders' debentures paid (90) - (72) Net cash provided by (used in) operating activities 2,955 2,200 3,544 52 Derivatives received (paid), net(4)(118)12 Income taxes paid - current(251)(378)(46) Liabilities related to Brumadinho1,0692,423-Accounts receivable(557)464201 US$ million2Q191Q192Q18 Dividends and interests on associates and JVs22128165 Adjusted EBIT2,132(1,453)3,014 Research and development(90)(71)(92) US$ million2Q191Q192Q18 Coal(64.8)(35.4)(2.9) %2Q191Q192Q18
Reconciliation between adjusted EBITDA and net income (loss) Depreciation, depletion and amortization (966) (801) (861) (221) (28) (165) ventures Impairment and disposal of non-current assets (109) (204) 5 Financial results (728) (706) (3,055) Equity results and other results in associates and joint ventures (743) 84 (370) Income taxes (473) 632 664 Net income (loss) attributable to noncontrolling interests (9) (33) 7 Net income (loss) attributable to Vale's stockholders (133) (1,642) 86 (c) Net debt Total debt 15,790 17,051 17,906 Net debt 9,726 12,031 11,519 ¹ Including financial investments (d) Gross debt / LTM Adjusted EBITDA Gross debt / LTM Adjusted EBITDA (x) 1.4 1.4 1.1 (e) LTM Adjusted EBITDA / LTM interest payments US$ million 2Q19 1Q19 2Q18 Adjusted LTM EBITDA / LTM gross interest (x) 10.4 10.9 11.4 LTM operational profit / LTM interest payments (x) 7.0 8.1 8.6 53 LTM adjusted EBITDA / LTM interest payments (x) 11.8 12.111.4 Gross debt / LTM operational cash flow (x)1.31.31.5 US$ million2Q191Q192Q18 Cash and cash equivalents¹6,0645,0206,387 US$ million2Q191Q192Q18 Net income (loss) from continuing operations(142)(1,675)93 Operating income1,802(1,685)2,854 Dividends received and interest from associates and joint US$ million2Q191Q192Q18 Adjusted EBITDA3,098(652)3,875