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VALE Vale

 

 

 

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

 

April 2020

 

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-Fx Form 40-F¨

 

(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¨Nox

 

(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¨Nox

 

(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¨ Nox   

 

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

 

 

 

 

 

 

 

 

 

 

Interim Financial Statements

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BRGAAP in R$ (English)

 

 

 

 

 

 

Vale S.A. Interim Financial Statements

Contents

 

 Page
Report on review of quarterly information3
Consolidated and Parent Company Income Statement5
Consolidated and Parent Company Statement of Comprehensive Income6
Consolidated and Parent Company Statement of Cash Flows  7
Consolidated and Parent Company Statement of Financial Position8
Consolidated Statement of Changes in Equity9
Consolidated and Parent Company Value Added Statement10
Notes to the Interim Financial Statements11
1. Corporate information11
2. Basis of preparation of the interim financial statements11
3. Brumadinho’s dam failure14
4. Information by business segment and by geographic area18
5. Costs and expenses by nature22
6. Financial results23
7. Income taxes23
8. Basic and diluted earnings (loss) per share24
9. Accounts receivable25
10.   Inventories25
11.   Other financial assets and liabilities25
12.   Investments in associates and joint ventures26
13.   Intangibles28
14.   Property, plant and equipment29
15.   Loans, borrowings, cash and cash equivalents and short-term investments31
16.   Liabilities related to associates and joint ventures33
17.   Financial instruments classification35
18.   Fair value estimate35
19.   Derivative financial instruments37
20.   Provisions38
21.   Litigations39
22.   Employee post-retirement obligations43
23.   Stockholders’ equity43
24.   Related parties44
25.   Parent Company information (individual interim information)45
26.   Additional information about derivatives financial instruments49

 

2

 

 

 

(A free translation of the original in Portuguese)

 

Report on review of quarterly information

 

To the Board of Directors and Stockholders

Vale S.A.

 

Introduction

 

We have reviewed the accompanying consolidated and parent company interim accounting information of Vale S.A. ("Company"), included in the Quarterly Information Form (ITR) for the quarter ended March 31, 2020, comprising the statement of financial position at that date and the income statement and the statements of comprehensive income, changes in equity and cash flows for the three-month period then ended, and a summary of significant accounting policies and other explanatory information.

 

Management is responsible for the preparation of the consolidated and parent company interim accounting information in accordance with the accounting standard CPC 21, Interim Financial Reporting, of the Brazilian Accounting Pronouncements Committee (CPC) and International Accounting Standard (IAS) 34, Interim Financial Reporting issued by the International Accounting Standards Board (IASB), as well as the presentation of this information in accordance with the standards issued by the Brazilian Securities Commission (CVM), applicable to the preparation of the Quarterly Information (ITR). Our responsibility is to express a conclusion on this interim accounting information based on our review.

 

Scope of review

 

We conducted our review in accordance with Brazilian and International Standards on Reviews of Interim Financial Information (NBC TR 2410 - Review of Interim Financial Information Performed by the Independent Auditor of the Entity and ISRE 2410 - Review of Interim Financial Information Performed by the Independent Auditor of the Entity, respectively). A review of interim information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Brazilian and International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

 

Conclusion on the interim information

 

Based on our review, nothing has come to our attention that causes us to believe that the accompanying consolidated and parent company interim accounting information included in the quarterly information referred to above has not been prepared, in all material respects, in accordance with CPC 21 and IAS 34 applicable to the preparation of the Quarterly Information, and presented in accordance with the standards issued by the CVM.

 

3

 

 

(A free translation of the original in Portuguese)

 

Vale S.A.

 

Emphasis of matter

 

Brumadinho’s dam failure

 

We draw attention to Note 3 to the consolidated and parent company interim accounting information that describes the actions taken by the Company and the impacts on the interim accounting information as a consequence of the Brumadinho’s Dam failure. As disclosed by Management, the Company has incurred costs and recorded provisions based on its best estimates and assumptions. Given the nature and uncertainties inherent in this type of event, the amounts recognized and/or disclosed will be reassessed by the Company and may be adjusted significantly in future periods, as new facts and circumstances become known. Our conclusion is not qualified in relation to this matter.

 

Other matters

 

Value added statements

 

We have also reviewed the consolidated and parent company value added statements for the three-month period ended March 31, 2020. These statements are the responsibility of the Company's management, and are required to be presented in accordance with standards issued by the CVM applicable to the preparation of Quarterly Information (ITR) and are considered supplementary information under IFRS, which do not require the presentation of the value added statement. These statements have been submitted to the same review procedures described above and, based on our review, nothing has come to our attention that causes us to believe that they have not been prepared, in all material respects, in a manner consistent with the consolidated and parent company interim accounting information taken as a whole.

 

Rio de Janeiro, April 28, 2020

 

PricewaterhouseCoopersPatricio Marques Roche
Auditores IndependentesContador CRC 1RJ081115/O-4
CRC 2SP000160/O-5 

 

4

 

 

  

Income Statement

In millions of Brazilian reais, except earnings per share data

  

     Consolidated  Parent company 
     Three-month period ended March 31, 
  Notes  2020  2019  2020  2019 
Net operating revenue  4(c)  31,251   30,952   18,793   16,785 
Cost of goods sold and services rendered  5(a)  (19,215)  (17,750)  (8,617)  (9,201)
Gross profit      12,036   13,202   10,176   7,584 
                     
Operating revenues (expenses)                    
Selling and administrative expenses  5(b)  (516)  (418)  (260)  (201)
Research and evaluation expenses      (429)  (269)  (178)  (159)
Pre-operating and operational stoppage      (1,192)  (815)  (1,160)  (776)
Equity results from subsidiaries      -   -   (1,687)  4,075 
Brumadinho event  3   (708)  (17,315)  (708)  (17,315)
Other operating expenses, net  5(c)  (267)  (318)  (586)  (313)
       (3,112)  (19,135)  (4,579)  (14,689)
Impairment and disposals of non-current assets  3   (136)  (781)  42   (631)
Operating income (loss)      8,788   (6,714)  5,639   (7,736)
                     
Financial income  6   492   364   173   110 
Financial expenses  6   (2,290)  (2,961)  (2,327)  (3,148)
Other financial items, net  6   (8,688)  7   (5,832)  155 
Equity results and other results in associates and joint ventures  12 and 16   (767)  314   (767)  314 
Loss before income taxes      (2,465)  (8,990)  (3,114)  (10,305)
                     
Income taxes  7                 
Current tax      (1,593)  (961)  (1,065)  (492)
Deferred tax      4,695   3,405   5,163   4,375 
       3,102   2,444   4,098   3,883 
                     
Net income (loss)      637   (6,546)  984   (6,422)
Loss attributable to noncontrolling interests      (347)  (124)  -   - 
Net income (loss) attributable to Vale's stockholders      984   (6,422)  984   (6,422)
                     
Earnings (loss) per share attributable to Vale's stockholders:                    
Basic and diluted earnings (loss) per share:  8                 
Common share (R$)      0.19   (1.24)  0.19   (1.24)

 

The accompanying notes are an integral part of these interim financial statements.

 

5

 

 

 

Statement of Comprehensive Income

In millions of Brazilian reais

 

  Consolidated  Parent company 
  Three-month period ended March 31, 
  2020  2019  2020  2019 
Net income (loss)  637   (6,546)  984   (6,422)
Other comprehensive income (loss):                
Items that will not be subsequently reclassified to income statement                
Retirement benefit obligations  47   35   (9)  (14)
Fair value adjustment to investment in equity securities  (1,209)  (147)  (1,002)  (114)
Equity results  -   -   (151)  16 
Total items that will not be subsequently reclassified to income statement, net of tax  (1,162)  (112)  (1,162)  (112)
                 
Items that may be subsequently reclassified to income statement                
Translation adjustments  18,305   1,179   19,601   1,183 
Net investments hedge (note 19c)  (2,394)  (44)  (2,394)  (44)
Cash flow hedge  277   -   277   - 
Total of items that may be subsequently reclassified to income statement, net of tax  16,188   1,135   17,484   1,139 
Total comprehensive income (loss)  15,663   (5,523)  17,306   (5,395)
Comprehensive income (loss) attributable to noncontrolling interests  (1,643)  (128)        
Comprehensive income (loss) attributable to Vale's stockholders  17,306   (5,395)        

 

Items above are stated net of tax and the related taxes are disclosed in note 7.

 

The accompanying notes are an integral part of these interim financial statements.

 

6

 

 

 

Statement of Cash Flows

In millions of Brazilian reais

  

  Consolidated  Parent company 
  Three-month period ended March 31, 
  2020  2019  2020  2019 
Cash flow from operations (a)  9,006   11,466   6,405   12,462 
Interest on loans and borrowings paid (note 15)  (1,077)  (927)  (1,589)  (1,283)
Derivatives received (paid), net  1,332   (440)  (178)  (321)
Income taxes (including settlement program)  (1,527)  (1,838)  (1,352)  (1,010)
Net cash provided by operating activities  7,734   8,261   3,286   9,848 
                 
Cash flow from investing activities:          -     
Capital expenditures  (4,999)  (2,305)  (2,678)  (1,300)
Additions to investments  (364)  (1)  (628)  (208)
Acquisition of subsidiary, net of cash (note 12)  -   (1,884)  -   (1,884)
Proceeds from disposal of assets and investments  3   347   119   13 
Dividends and interest on capital received  -   -   6   342 
Judicial deposits and restricted cash related to Brumadinho event (note 3)  -   (13,042)  -   (13,042)
Short-term investment (LFTs)  884   50   870   (2)
Other investments activities, net  (247)  48   1,407   (498)
Net cash used in investing activities  (4,723)  (16,787)  (904)  (16,579)
                 
Cash flow from financing activities:                
Loans and borrowings from third-parties (note 15)  24,419   6,933   -   2,894 
Payments of loans and borrowings from third-parties (note 15)  (1,678)  (789)  (1,226)  (660)
Payments of leasing  (218)  (288)  (26)  (19)
Dividends and interest on capital paid to noncontrolling interest  (12)  (237)  -   - 
Net cash provided by (used in) financing activities  22,511   5,619   (1,252)  2,215 
                 
Increase (decrease) in cash and cash equivalents  25,522   (2,907)  1,130   (4,516)
Cash and cash equivalents in the beginning of the period  29,627   22,413   9,597   4,835 
Effect of exchange rate changes on cash and cash equivalents  6,135   7   -   - 
Cash and cash equivalents at end of the period  61,284   19,513   10,727   319 
                 
Non-cash transactions:                
Additions to property, plant and equipment - capitalized loans and borrowing costs  138   141   138   140 
                 
Cash flow from operating activities:                
Loss before income taxes  (2,465)  (8,990)  (3,114)  (10,305)
Adjusted for:                
Provisions related to Brumadinho event (note 3)  -   16,454   -   16,454 
Equity results from subsidiaries  -   -   1,687   (4,075)
Equity results and other results in associates and joint ventures  767   (314)  767   (314)
Impairment and disposal of non-current assets  136   781   (42)  631 
Depreciation, amortization and depletion  3,676   3,029   1,932   1,744 
Financial results, net  10,486   2,590   7,986   2,883 
Changes in assets and liabilities:                
Accounts receivable  2,553   2,121   430   6,497 
Inventories  (865)  (1,706)  (591)  (456)
Suppliers and contractors (i)  (2,846)  (362)  (2,820)  314 
Provision - Payroll, related charges and other remunerations  (885)  (1,758)  (496)  (1,157)
Payments related to Brumadinho event (note 3) (ii)  (970)  -   (970)  - 
Other assets and liabilities, net  (581)  (379)  1,636   246 
Cash flow from operations (a)  9,006   11,466   6,405   12,462 

 

(i) Includes variable lease payments.

(ii) Additionally, for the three-month periods ended March 31, 2020 and 2019, the Company incurred in expenses in the amount of R$708 and R$392, respectively, which did not qualify for provision and, as such were recognized in the income statement.

 

The accompanying notes are an integral part of these interim financial statements.

 

7

 

  

 

Statement of Financial Position

In millions of Brazilian reais

 

     Consolidated  Parent company 
  Notes  March 31,
2020
  December 31,
2019
  March 31,
2020
  December 31,
2019
 
Assets               
Current assets                    
Cash and cash equivalents      61,284   29,627   10,727   9,597 
Short-term investments  15   2,488   3,329   2,435   3,309 
Accounts receivable  9   10,896   10,195   19,402   16,599 
Other financial assets  11   2,650   3,062   619   1,140 
Inventories  10   21,263   17,228   5,901   5,310 
Prepaid income taxes      916   1,492   516   648 
Recoverable taxes      2,053   2,227   936   929 
Others      2,132   1,538   1,879   1,569 
       103,682   68,698   42,415   39,101 
                     
Non-current assets                    
Judicial deposits  21(c)  12,664   12,629   12,287   12,242 
Other financial assets  11   11,684   11,074   2,756   3,972 
Prepaid income taxes      2,894   2,407   -   - 
Recoverable taxes      2,795   2,446   1,673   1,471 
Deferred income taxes  7(a)  52,301   37,151   41,285   28,770 
Others      2,893   1,998   1,092   937 
       85,231   67,705   59,093   47,392 
                     
Investments  12   11,299   11,278   172,436   144,594 
Intangibles  13   35,852   34,257   16,151   16,271 
Property, plant and equipment  14   203,641   187,733   105,791   105,875 
       336,023   300,973   353,471   314,132 
Total assets      439,705   369,671   395,886   353,233 
Liabilities               
                
Current liabilities                    
Suppliers and contractors      15,642   16,556   8,083   10,765 
Loans and borrowings  15   4,887   4,895   3,795   3,986 
Leases      1,173   910   396   337 
Other financial liabilities  11   8,139   4,328   7,721   6,672 
Taxes payable      2,004   2,065   1,327   1,062 
Settlement program ("REFIS")  7(d)  1,748   1,737   1,713   1,702 
Liabilities related to associates and joint ventures  16   2,356   2,079   2,356   2,079 
Provisions  20   4,092   4,956   2,485   3,210 
Liabilities related to Brumadinho  3   5,145   6,319   5,145   6,319 
De-characterization of dams  3   1,426   1,247   1,426   1,247 
Interest on capital      6,333   6,333   6,333   6,333 
Others      7,241   4,381   4,520   3,187 
       60,186   55,806   45,300   46,899 
Non-current liabilities                    
Loans and borrowings  15   83,882   47,730   21,119   18,713 
Leases      7,631   6,308   1,891   1,833 
Other financial liabilities  11   22,682   17,622   101,436   76,365 
Settlement program ("REFIS")  7(d)  13,664   14,012   13,392   13,733 
Deferred income taxes  7(a)  9,050   7,585   -   - 
Provisions  20   38,876   34,233   11,103   11,368 
Liabilities related to Brumadinho  3   6,100   5,703   6,100   5,703 
De-characterization of dams  3   7,995   8,787   7,995   8,787 
Liabilities related to associates and joint ventures  16   4,270   4,774   4,270   4,774 
Streaming transactions      10,638   8,313   -   - 
Others      1,835   1,649   4,426   3,578 
       206,623   156,716   171,732   144,854 
Total liabilities      266,809   212,522   217,032   191,753 
                     
Stockholders' equity  23                 
Equity attributable to Vale's stockholders      178,854   161,480   178,854   161,480 
Equity attributable to noncontrolling interests      (5,958)  (4,331)  -   - 
Total stockholders' equity      172,896   157,149   178,854   161,480 
Total liabilities and stockholders' equity      439,705   369,671   395,886   353,233 

 

The accompanying notes are an integral part of these interim financial statements.

 

8

 

 

 

Statement of Changes in Equity

In millions of Brazilian reais

  

  Share capital  Capital reserve  Profit reserves  Treasury stocks  Other reserves  Cumulative translation adjustments  Retained earnings  Equity attributable to Vale’s stockholders  Equity attributable to noncontrolling interests  Total stockholders' equity 
Balance at December 31, 2019  77,300   3,634   28,577   (6,520)  (5,673)  64,162   -   161,480   (4,331)  157,149 
Net income (loss)  -   -   -   -   -   -   984   984   (347)  637 
Other comprehensive income  -   -   -   -   (1,162)  17,484   -   16,322   (1,296)  15,026 
Dividends of noncontrolling interest  -   -   -   -   -   -   -   -   (9)  (9)
Capitalization of noncontrolling interest advances  -   -   -   -   -   -   -   -   25   25 
Assignment and transfer of shares (note 23)  -   -   -   68   -   -   -   68   -   68 
Balance at March 31, 2020  77,300   3,634   28,577   (6,452)  (6,835)  81,646   984   178,854   (5,958)  172,896 
                                         
   Share capital   Capital reserve   Profit reserves   Treasury stocks   Other reserves   Cumulative translation adjustments   Retained earnings   Equity attributable to Vale’s stockholders   Equity attributable to noncontrolling interests   Total stockholders' equity 
Balance at December 31, 2018  77,300   3,634   42,502   (6,604)  (5,912)  59,483   -   170,403   3,280   173,683 
Loss  -   -   -   -   -   -   (6,422)  (6,422)  (124)  (6,546)
Other comprehensive income  -   -   -   -   (112)  1,139   -   1,027   (4)  1,023 
Dividends of noncontrolling interest  -   -   -   -   -   -   -   -   (6)  (6)
Capitalization of noncontrolling interest advances  -   -   -   -   -   -   -   -   22   22 
Assignment and transfer of shares (note 23)  -   -   -   84   -   -   -   84   -   84 
Balance at March 31, 2019  77,300   3,634   42,502   (6,520)  (6,024)  60,622   (6,422)  165,092   3,168   168,260 
                                         

 

The accompanying notes are an integral part of these interim financial statements.

 

9

 

 

 

Value Added Statement

In millions of Brazilian Reais

 

 

  Consolidated  Parent company 
  Three-month period ended March 31, 
  2020  2019  2020  2019 
Generation of value added                
Gross revenue                
Revenue from products and services  31,648   31,285   19,146   17,066 
Revenue from the construction of own assets  1,196   2,680   589   1,497 
Other revenues  343   616   130   195 
Less:                
Cost of products, goods and services sold  (5,174)  (5,330)  (2,503)  (2,534)
Material, energy, third-party services and other  (7,925)  (8,239)  (2,967)  (3,189)
Impairment of non-current assets and others results  (136)  (781)  42   (631)
Brumadinho event  (708)  (17,315)  (708)  (17,315)
Other costs and expenses  (2,910)  (2,443)  (1,609)  (1,618)
Gross value added  16,334   473   12,120   (6,529)
Depreciation, amortization and depletion  (3,676)  (3,029)  (1,932)  (1,744)
Net value added  12,658   (2,556)  10,188   (8,273)
                 
Received from third parties                
Equity results from entities  (767)  314   (2,454)  4,389 
Financial income  4,769   548   5,083   302 
Total value added to be distributed  16,660   (1,694)  12,817   (3,582)
                 
Direct compensation  1,928   1,915   959   952 
Benefits  37   16   23   13 
F.G.T.S.  7   5   6   5 
Federal taxes  (1,395)  (1,056)  (2,559)  (3,305)
State taxes  83   145   19   745 
Municipal taxes  3   9   1   3 
Interest (net derivatives and monetary and exchange rate variation)  15,165   3,050   13,014   3,131 
Other remunerations of third party funds  195   768   370   1,296 
Reinvested net income (absorbed loss)  984   (6,422)  984   (6,422)
Loss attributable to noncontrolling interest  (347)  (124)  -   - 
Distributed value added  16,660   (1,694)  12,817   (3,582)

 

The accompanying notes are an integral part of these interim financial statements.

 

10

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

1.        Corporate information

 

Vale S.A. and its direct and indirect subsidiaries (“Vale” or the “Company”) are global producers of iron ore and iron ore pellets, key raw materials for steelmaking, and producers of nickel, which is used to produce stainless steel and metal alloys employed in the production of several products. The Company also produces copper, metallurgical and thermal coal, manganese ore, ferroalloys, platinum group metals, gold, silver and cobalt. The information by segment is presented in note 4.

 

Vale S.A. (the “Parent Company”) is a public company headquartered in the city of Rio de Janeiro, Brazil with securities traded on the stock exchanges of São Paulo – B3 S.A. (VALE3), New York - NYSE (VALE) and Madrid – LATIBEX (XVALO).

 

2.        Basis of preparation of the interim financial statements

 

a)    Statement of compliance

 

The condensed consolidated and individual interim financial statements of the Company (“interim financial statements”) have been prepared and are being presented in accordance with IAS 34 Interim Financial Reporting (CPC 21) of the International Financial Reporting Standards (“IFRS”), as implemented in Brazil by the Brazilian Accounting Pronouncements Committee ("CPC"), approved by the Brazilian Securities and Exchange Commission ("CVM") and by the Brazilian Federal Accounting Council (“CFC”). All relevant information from its own interim financial statements, and only this information, are being presented and correspond to those used by the Company's Management.

 

The selected notes of the Parent Company are presented in a summarized form in note 25.

 

b)    Basis of presentation

 

The interim financial statements have been prepared to update users about relevant events and transactions that occurred in the period and should be read in conjunction with the financial statements for the year ended December 31, 2019. The accounting policies, accounting estimates and judgements, risk management and measurement methods are the same as those applied when preparing the last annual financial statements.

 

The interim financial statements of the Company and its associates and joint ventures are measured using the currency of the primary economic environment in which the entity operates (“functional currency”), which in the case of the Parent Company is the Brazilian real (“R$”).

 

The exchange rates used by the Company to translate its foreign operations are as follows:

 

        Average rate 
  Closing rate  Three-month period ended 
  March 31, 2020  December 31, 2019  March 31, 2020  March 31, 2019 
US Dollar ("US$")  5.1987   4.0307   4.4656   3.7684 
Canadian dollar ("CAD")  3.6808   3.1034   3.3148   2.8346 
Euro ("EUR" or "€")  5.7264   4.5305   4.9224   4.2802 

 

These interim financial statements were authorized for issue on April 28, 2020.

 

c)    Coronavirus outbreak

 

The coronavirus outbreak (“COVID-19”) was first reported on December 30, 2019 and has since spread through various countries, with reports of multiple fatalities from the virus, including locations where the Company has its main operations.

 

On March 11, 2020, the World Health Organization declared COVID-19 outbreak pandemic. During the month of March 2020, governmental authorities in various jurisdictions imposed lockdowns or other restrictions to contain the virus, and various businesses suspended or reduced operations. The final impact on the global economy and financial markets is still uncertain, but is expected to be significant.

 

11

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

As the outbreak develops over the regions where Vale’s operations are concentrated, the Company may face workforce related operational difficulties and may need to adopt contingency measures or eventually suspend operations. A significant portion of the Company’s revenue is originated from sales made to customers in Asia and Europe, and Vale as well rely on an extensive logistics and supply chain, including several ports, distribution centers and suppliers that have operations in affected regions. The Company is closely evaluating the impact of the COVID-19 on its business. Below is a summary of the key impacts on the Company’s business as at March 31, 2020:

 

Impairment and onerous contracts – The Company assessed whether there have been any trigger events that would require an impairment assessment of its non-financial assets and concluded there have been no changes in the circumstances that would indicate an impairment loss. As the pandemic is still progressing, the financial impact arising from the COVID-19 on the Company’s cash generating units (“CGU”), if any, cannot be reliably estimated at this time. Therefore, the major long-term assumptions applied on the preparation of the cash flow models, such as commodities prices and production levels, remain unchanged for the impairment trigger assessment.

 

Mozambique, Coal – In 2019, the Company fully impaired the assets related to this CGU because the expected yield of metallurgical coal and thermal coal will not be achieved, mostly due to technical issues on the project and operation of the assets related to this CGU. As a result, the Company has decided to implement a new mining plan and a new plant strategy to achieve the ramp-up of this asset, which includes shortening the life of mine and completing a plant overhaul. However, due to travel and equipment transportation restrictions resulting from the COVID-19 outbreak, the Company is revisiting plans for the Mozambique coal processing plant stoppage.

 

The halting of the processing plants’ operations was previously expected to start in the second quarter of 2020 and a new date is under evaluation. Other than this, the plan for this CGU has not changed and, therefore, no further impact was recognized in the period ended March 31, 2020.

 

New Caledonia, Nickel – The New Caledonian operation experienced issues throughout 2019, mainly in relation to production and processing of the refined nickel, associated with the challenges of the unique remoteness of the area. Thus, the Company has started studying alternatives for the operations in New Caledonia, while also considering operational and commercial alternatives to improve the short-term cash flows of Vale New Caledonia. Based on the revision of the business plan taken in 2019, the Company has reduced the expected production levels of refined nickel product for remaining useful life of the mine, leading to an impairment charge of R$10,319 recorded as at December 31, 2019. After the impairment charge, the CGU’s carrying value was R$1,628 at the year ended December 31, 2019.

 

Following the recent developments on the COVID-19 outbreak, the disruption in the global markets could increase the challenges that have been already faced by the Company to operate this asset in New Caledonia. Management is currently reviewing the business model in place and studying all options available, including exit alternatives or changes on the production profile. As at March 31, 2020, the Company believes the impairment model prepared for the year ended December 31, 2019 is still the most reasonable scenario as the impacts on the long-term assumptions due to the pandemic are still very uncertain and, accordingly, no additional impairment loss. However, the conclusion of the review and studies referred above may significant change the approach applied to build the discounted cash flows and as a more detailed analysis of the Company’s business plan and alternatives progresses, an additional impairment loss may be required in future reporting periods.

 

Voisey’s Bay, Nickel - On March 16, 2020, the Company ramped down the Voisey’s Bay mining operation and placed it on care and maintenance, as a precaution to avoid exposure to travel helping to protect the health and well-being of Nunatsiavut and Innu indigenous communities in Labrador in face of the COVID-19 pandemic. The Company did not change its plan for this asset and expects to resume the operation in 2020 and, therefore, impairment losses were not identified in relation to this asset.

 

Teluk Rubiah Maritime Terminal (“TRMT”), Iron Ore - On March 24, 2020, the Company temporarily halted its operations in the TRMT in Malaysia, as the Company is temporarily unable to secure the minimum resources to safely operate the terminal. During suspension of the operations, vessels heading to TRMT will be redirected and redistributed to blending facilities in China with no expected impact on production and sales volume in 2020. The Company did not change its plan for this asset and expects to resume the operation in 2020 and, therefore, impairment losses were not identified in relation to this asset.

 

Other assets - The Company did not identify any changes in the circumstances that would indicate an impairment trigger of other assets. At this time, the outbreak has not caused a significant impact to the Company’s operations, but if it continues for an extended period of time, the Company’s financial conditions or results of operations in 2020 may be adversely impacted.

 

12

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

Liquidity– In March 2020, the Company took precautionary measures in order to increase its cash position and preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 outbreak. The Company drew down R$25,994 (US$5 billion) under its revolving credit lines maturing June 2022 R$10,397 (US$2 billion) and December 2024 R$15,597 (US$3 billion) and has discontinued the nickel hedge accounting program by selling the contract options for a total consideration of R$1,123 (US$ 230 million), of which R$1,074 (US$220 million) was settled during the period ended March 31, 2020.

 

On April 1, 2020 (subsequent event), R$500 of the Company's bank accounts, which were restricted due to the Brumadinho event (note 3), were released for humanitarian and social actions against COVID-19 outbreak.

 

Deferred taxes – On March 31, 2020, the Indonesian Government issued Government Regulation (“PERPPU-1”) to manage the economic impact of the COVID-19 global pandemic, which impacts the Indonesian tax policies. The current income tax rate of 25% will be decreased to 22% for fiscal years 2020 and 2021 and further decreased to 20% starting from fiscal year 2022. Therefore, the Company has remeasured its deferred taxes arising from PT Vale Indonesia Tbk (“PTVI”) considering the substantive enactment of the new tax rate. As a result, the Company recognized an income tax gain of R$357 (US$ 80 million) as at March 31, 2020.

 

Fair value of other assets and liabilities - At this time, the outbreak has not caused any significant impact on the fair value of the Company’s assets and liabilities. However, abnormally large changes have occurred in the valuation of financial assets across many markets since the outbreak. The outbreak continues to be uncertain, making it impossible to forecast the final impact it could have on the economy, and in turn, on the Company’s business, liquidity, and financial position meaning that the fair values of the Company’s assets and liabilities may change in later periods.

 

Supply chain – The Company’s supply chain might be significantly impacted by the COVID-19, which would result in suspension of operations, operation difficulties, and increases in costs and expenses. In addition, the Company has suspended all non-essential construction works, which could delay the achievement of the expansion plans, revision of operations or resumption of production capacity. There will be no impact on constructions related to dam safety.

 

Other impacts – In 2019, the Company entered into agreements to sell its 25% interest in Henan Longyu and to divest 20% of its interest in PTVI (note 12). The closing of both transactions was expected in the first quarter of 2020. However, due to the recent developments of the COVID-19 outbreak, the closing of these transactions has been pushed back to later dates in 2020.

 

13

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

3.       Brumadinho dam failure

 

On January 25, 2019, a tailings dam (“Dam I”) failed at the Córrego do Feijão mine, in the city of Brumadinho, state of Minas Gerais. The failure released a flow of tailings debris, destroying some of Vale’s facilities, affecting local communities and disturbing the environment. The tailings released have caused an impact of around 315 km in extension, reaching the nearby Paraopeba River. The dam failure in Brumadinho (“event”) resulted in 270 fatalities or presumed fatalities.

 

The Company has been taking the necessary actions to support the victims and to mitigate and recover the social and environmental damages resulting from the event. For the three-month period ended March 31, 2020 and 2019, the Company recognized in the income statement R$708 and R$17,315, respectively, to meet its assumed obligations, including de-characterization of the dams, indemnification and donations to those affected by the event, remediation of the affected areas and compensation to the society.

 

a)    De-characterization of the dams

 

On January 29, 2019, the Company informed the market and Brazilian authorities the decision to speed up the plan to “de-characterize” all of its tailings dams built under the upstream method (same method as Brumadinho’s dam), located in Brazil. Vale has developed engineering projects for de-characterization these structures and recognized a provision of the total expected costs to carry out all projects, including upstream structures, certain “centerline structures” and dikes.

 

The changes in the provision for the period ended March 31, 2020 and 2019 are as follows:

 

  Consolidated 
  2020  2019 
Balance at January 1,  10,034   - 
Provision recognized  -   7,137 
Payments  (291)  - 
Present value valuation  (322)  - 
Balance at March 31,  9,421   7,137 
         
   March 31, 2020   December 31, 2019 
Current liabilities  1,426   1,247 
Non-current liabilities  7,995   8,787 
Liabilities  9,421   10,034 

 

14

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

b)    Framework Agreements and donations

 

The Company has been working together with the authorities and society to remediate the environmental and social impacts of the event. Therefore, the Company has started negotiations and entered into agreements with the relevant authorities and affected people. Vale has also 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. In addition, Vale has set up an exclusive structure for treatment of the rescued animals, enabling emergency care and recovery.

 

The changes in the provision for the period ended March 31, 2020 and 2019 are as follows:

 

  Consolidated 
  2020  2019 
Balance at January 1,  12,022   - 
Provision for social and economic compensation  -   9,317 
Payments  (679)  - 
Present value valuation  (98)  - 
Balance at March 31,  11,245   9,317 
         
   March 31, 2020   December 31, 2019 
Current liabilities  5,145   6,319 
Non-current liabilities  6,100   5,703 
Liabilities  11,245   12,022 

 

The total amount of this provision may vary due to the early stage of the ongoing negotiations, timing and scope of the measures currently being discussed, which are subject to the approval and consent by the relevant authorities.

 

On April 22, 2020 (subsequent event), was ratified an agreement between Vale and the union to indemnify survivors and workers that were at the Feijão and Jangada mines on the date of the event. The agreement establishes the payment terms for material and moral damages, as well as psychological and psychiatric assistance to survivors until January 2022. The provision for social compensation already considers the estimated amount to comply with this obligation and, therefore, this agreement is part of the provision as at March 31, 2020.

 

In addition, the Company is under negotiations with the Government of the State of Minas Gerais (“GEMG”) and other relevant authorities for an additional agreement for collective damages indemnification and further compensation for the society and environment. The goal of Vale with a potential agreement would be to provide a stable legal framework for the execution of reparation and compensation, with the suspension of the existing civil lawsuits.

 

The potential agreement is still very uncertain as it is subject to conclusion of the ongoing negotiations and approval by the Company, the Government of the State of Minas Gerais, Public Prosecutors and other Authorities and Intervenient parties.

 

Therefore, the provisions recorded in these interim financial statements do not include the potential outcome of the current negotiation as it is not yet possible to reliably estimate an amount or whether the current negotiations will be successful.

 

The estimate of the economic impact of a potential agreement will depend on (i) final agreement on the list of reparation and compensation projects, (ii) a detailed assessment of the estimates of the amounts to be spent on the reparation and compensation projects being discussed, (iii) an analysis of the detailed scope of such projects to determine their overlap with the initiatives and amounts already provisioned; and (iv) the timing of the execution of projects and disbursements, which will impact the present value of the obligations.

 

Based on the current terms under discussion, and preliminary estimates subject to the uncertainties listed above, such possible agreement might result in an additional provision ranging from R$4 billion to R$8 billion. All accounting impacts, if any, will be recorded in the period an agreement is reached.

 

c)    Incurred expenses

 

The Company has incurred expenses, which do not qualify for provision and have been recognized in the income statement, in the amount of R$708 and R$392 for the three-month period ended March 31, 2020 and 2019, respectively. These expenses include communication services, accommodation and humanitarian assistance, equipment, legal services, water, food aid, taxes, among others.

 

d)   Operation stoppages

 

The Company has suspended some operations due to judicial decisions or technical analysis performed by Vale on it’s upstream dam structures. The Company recorded a loss in the income statement of R$722 and R$605 for the three-month period ended March 31, 2020 and 2019, respectively, related to the operational stoppage and idle capacity of the ferrous mineral segment. The Company is working on legal and technical measures to resume all operations at full capacity.

 

15

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

e)   Assets write-off

 

Following the event and the decision to speed up the de-characterization of the upstream dams, the Company recognized a loss of R$585 as “Impairment and disposal of non-current assets” for the three-month period ended March 31, 2019 in relation to the assets write-off of the Córrego do Feijão mine and those related to the other upstream dams in Brazil. In 2020, the Company did not write-off any asset related to the Brumadinho event.

 

f)    Contingencies and other legal matters

 

Vale is subject to significant contingencies due to the Brumadinho dam failure. Vale has already been named on several judicial and administrative proceedings brought by authorities and affected people and is currently under investigation. Vale is evaluating these contingencies and would recognize a provision based on the updates on the stage of these claims.

 

Following these contingencies, approximately R$6,572 of the Company's assets are restricted as at March 31, 2020, of which approximately R$508 of the Company’s bank accounts are restricted and R$6,064 were converted into judicial deposits.

 

On April 1, 2020 (subsequent event), the judge of the 2nd Public Finance Court of Belo Horizonte released R$500 from the Company's restricted bank accounts to be used on actions against COVID-19 outbreak.

 

For the Brumadinho event, the Company has additional guarantees in the amount of R$5,677, as at March 31, 2020. The expenses related to these additional guarantees in the amount of R$10 was recorded as financial expense in the Company's income statement for the three-month period ended March 31, 2020.

 

(f.i) Administrative sanctions

 

The Company was notified of the imposition of administrative fines by the Brazilian Institute of the Environment and Renewable Natural Resources (“IBAMA”), in the amount of R$250, which the Company expects to settle through environmental projects. Furthermore, the Secretary for Environment – SEMA Brumadinho imposed administrative fines, in the total amount of R$108. Both amounts are also recorded as at March 31, 2020.

 

(f.ii) U.S. Securities class action suits

 

Vale and certain of its officers and former officers have been named defendants in civil putative class action suits, under U.S. federal securities laws, brought before federal courts in New York by holders of our securities. These complaints were consolidated through an amended complaint brought by the Lead Plaintiff on October 25, 2019 before the United States District Court for the Eastern District of New York.

 

The Lead Plaintiff alleges that we made false and misleading statements or omitted to make disclosures concerning the risks of the operations of Dam I in the Córrego do Feijão mine and the adequacy of the related programs and procedures.  The Lead Plaintiff has not specified an amount of alleged damages in these actions.  On December 13, 2019, the Company made a motion to dismiss the amended complaint. In January 2020, the lead plaintiff filed an opposition to this motion to dismiss.  On February 21, 2020, Vale filed a reply to the opposition. In March 2020, the lead plaintiff has requested to start the partial discovery, for which the Company filed an opposition on March 20, 2020. The judge has not issued a decision to date.

 

Vale intends to defend against this action and mount a full defense against these claims. Based on the assessment of the Company´s legal consultants and given its preliminary status, the expectation of loss of this proceeding is classified as possible. However, given the preliminary status of the action, it is not possible at this time to determine a reliable estimate of the potential exposure.

 

16

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

g)    Insurance

 

The Company is negotiating with insurers under its operational risk and civil liability, but these negotiations are still at a preliminary stage. Any payment of insurance proceeds will depend on the coverage definitions under these policies and assessment of the amount of loss. Due to uncertainties, no indemnification to the Company was recognized in Vale’s interim financial statements.

 

Critical accounting estimates and judgments

 

The measurement of the provision requires the use of significant judgements, estimates and assumptions. The provision reflects the estimated costs to comply with Vale’s obligation in relation to the event.

 

The main critical assumptions and estimates applied in measuring the provision for de-characterization of the dams considers, among others: (i) volume of the waste to be removed based on historical data available and interpretation of the enacted laws and regulations; (ii) location availability for the tailings disposal; (iii) acceptance by the authorities of the proposed engineering methods and solution; and (iv) updates in the discount rate.

 

The provision for Framework Agreements and donations may be affected by factors including, but not limited to: (i) changes in laws and regulations; (ii) changes in the current estimated market price of the direct and indirect cost related to products and services, (iii) changes in timing for cash outflows, (iv) changes in the technology considered in measuring the provision, (v) number of individuals entitled to the indemnification payments, (vi) resolution of existing and potential legal claims, (vii) demographic assumptions, (viii) actuarial assumptions, and (ix) updates in the discount rate.

 

Therefore, future expenditures may differ from the amounts currently provided because the realized assumptions and various other factors are not always under the Company’s control. These changes to key assumptions could result in a material impact to the amount of the provision in future reporting periods. At each reporting period, the Company will reassess the key assumptions used in the preparation of the projected cash flows and will adjust the provision, if required.

 

17

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

4.        Information by business segment and by geographic area

 

The Company operated the following reportable segments during this quarter: Ferrous Minerals, Base Metals and Coal. The segments are aligned with products and reflect the structure used by Management to evaluate Company’s performance. The responsible bodies for making operational decisions, allocating resources and evaluating performance are the Executive Boards and the Board of Directors. The performance of the operating segments is assessed based on a measure of adjusted LAJIDA (EBITDA).

 

In 2019, due to the Brumadinho dam failure, the Company has created the Special Recovery and Development Board, which is in-charge of social, humanitarian, environmental and structural recovery measures that are implemented in Brumadinho and other affected areas. This Board reports to the CEO and is responsible to assess the costs related to the Brumadinho event. These costs are not directly related to the Company's operating activities and, therefore, were not allocated to any operating segment.

 

The Company allocate to “Others” the revenues and cost of other products, services, research and development, investments in joint ventures and associates of other business and unallocated corporate expenses.

 

a)    Adjusted LAJIDA (EBITDA)

 

The definition of Adjusted LAJIDA (EBITDA) for the Company is the operating income or loss plus dividends received and interest from associates and joint ventures, and excluding the amounts charged as (i) depreciation, depletion and amortization and (ii) impairment and disposal of non-current assets.

 

  Consolidated 
  Three-month period ended March 31, 2020 
  Net operating revenue  Cost of goods sold and services rendered  Sales, administrative and other operating expenses  Research and evaluation  Pre operating and operational stoppage  Dividends received and interest from associates and joint ventures  Adjusted LAJIDA (EBITDA) 
Ferrous minerals                            
Iron ore  19,375   (7,548)  (87)  (108)  (749)  -   10,883 
Iron ore pellets  3,824   (1,848)  48   (4)  (112)  -   1,908 
Ferroalloys and manganese  211   (223)  -   -   (5)  -   (17)
Other ferrous products and services  383   (317)  5   (3)  -   -   68 
   23,793   (9,936)  (34)  (115)  (866)  -   12,842 
                             
Base metals                            
Nickel and other products  4,653   (2,981)  (86)  (61)  -   -   1,525 
Copper  1,709   (924)  4   (77)  -   -   712 
   6,362   (3,905)  (82)  (138)  -   -   2,237 
                             
Coal  673   (1,684)  6   (40)  -   324   (721)
                             
Brumadinho event  -   -   (708)  -   -   -   (708)
                             
Others  423   (405)  (591)  (136)  (17)  -   (726)
Total  31,251   (15,930)  (1,409)  (429)  (883)  324   12,924 

 

18

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

  Consolidated 
  Three-month period ended March 31, 2019 
  Net operating revenue  Cost of goods sold and services rendered  Sales, administrative and other operating expenses  Research and evaluation  Pre operating and operational stoppage  Dividends received and interest from associates and joint ventures  Adjusted LAJIDA (EBITDA) 
Ferrous minerals                            
Iron ore  16,888   (6,204)  (49)  (71)  (601)  -   9,963 
Iron ore pellets  6,320   (2,845)  (14)  (17)  (37)  -   3,407 
Ferroalloys and manganese  324   (218)  (3)  (1)  -   -   102 
Other ferrous products and services  401   (287)  (3)  -   -   -   111 
   23,933   (9,554)  (69)  (89)  (638)  -   13,583 
                             
Base metals                            
Nickel and other products  3,701   (2,599)  (46)  (26)  (30)  -   1,000 
Copper  1,776   (853)  (1)  (20)  -   -   902 
   5,477   (3,452)  (47)  (46)  (30)  -   1,902 
                             
Coal  1,258   (1,601)  (4)  (22)  -   106   (263)
                             
Brumadinho event  -   -   (17,315)  -   -   -   (17,315)
                             
Others  284   (318)  (559)  (112)  -   -   (705)
Total  30,952   (14,925)  (17,994)  (269)  (668)  106   (2,798)

 

Adjusted LAJIDA (EBITDA) is reconciled to net income (loss) as follows:

 

  Consolidated 
  Three-month period ended March 31, 
  2020  2019 
Net income (loss) attributable to Vale's stockholders  984   (6,422)
Loss attributable to noncontrolling interests  (347)  (124)
Net income (loss)  637   (6,546)
Depreciation, depletion and amortization  3,676   3,029 
Income taxes  (3,102)  (2,444)
Financial results  10,486   2,590 
LAJIDA (EBITDA)  11,697   (3,371)
         
Items to reconciled adjusted LAJIDA (EBITDA)        
Equity results and other results in associates and joint ventures  767   (314)
Dividends received and interest from associates and joint ventures (i)  324   106 
Impairment and disposal of non-current assets  136   781 
Adjusted LAJIDA (EBITDA)  12,924   (2,798)

 

(i) Includes remuneration of the financial instrument in the coal segment. 

 

19

 

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

b)       Assets by segment

  

  Consolidated 
  March 31, 2020  December 31, 2019 
  Product inventory  Investments in associates and joint ventures  Property, plant and equipment and intangibles (i)  Product inventory  Investments in associates and joint ventures  Property, plant and equipment and intangibles (i) 
Ferrous minerals  10,047   6,860   138,483   7,880   6,970   135,143 
Base metals  6,903   51   94,558   5,457   56   80,181 
Coal  270   -   -   243   -   - 
Others  68   4,388   6,452   7   4,252   6,666 
Total  17,288   11,299   239,493   13,587   11,278   221,990 

 

  Consolidated 
  Three-month period ended March 31, 
  2020  2019 
  Capital expenditures (ii)     Capital expenditures (ii)    
  Sustaining capital  Project execution  Depreciation, depletion and amortization  Sustaining capital  Project execution  Depreciation, depletion and amortization 
Ferrous minerals  2,381   406   1,892   1,052   324   1,616 
Base metals  1,615   235   1,633   688   41   1,158 
Coal  345   -   83   190   -   185 
Others  6   11   68   2   8   70 
Total  4,347   652   3,676   1,932   373   3,029 

 

i) Goodwill is allocated mainly to ferrous minerals and base metals segments in the amount of R$7,133 and R$9,111 in March 31, 2020 and R$7,133 and R$7,495 in December 31, 2019, respectively.

 

(ii) Cash outflows. 

 

20

 

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

c)       Net operating revenue by geographic area

 

  Consolidated 
  Three-month period ended March 31, 2020 
  Ferrous minerals  Base metals  Coal  Others  Total 
Americas, except United States and Brazil  458   878   -   -   1,336 
United States of America  201   1,092   -   -   1,293 
Germany  826   865   -   -   1,691 
Europe, except Germany  1,276   1,689   219   -   3,184 
Middle East, Africa and Oceania  1,075   36   126   -   1,237 
Japan  1,692   424   55   -   2,171 
China  13,789   505   75   -   14,369 
Asia, except Japan and China  1,850   707   198   -   2,755 
Brazil  2,626   166   -   423   3,215 
Net operating revenue  23,793   6,362   673   423   31,251 

 

  Consolidated 
  Three-month period ended March 31, 2019 
  Ferrous minerals  Base metals  Coal  Others  Total 
Americas, except United States and Brazil  608   834   -   -   1,442 
United States of America  370   787   -   -   1,157 
Germany  987   439   -   -   1,426 
Europe, except Germany  1,554   1,497   400   -   3,451 
Middle East, Africa and Oceania  2,373   22   102   -   2,497 
Japan  1,802   333   246   -   2,381 
China  12,243   539   -   -   12,782 
Asia, except Japan and China  1,636   845   451   -   2,932 
Brazil  2,360   181   59   284   2,884 
Net operating revenue  23,933   5,477   1,258   284   30,952 

 

Provisionally priced commodities sales –The commodity price risk arises from volatility of iron ore, nickel, copper and coal prices. The Company is mostly exposed to the fluctuations in the iron ore and copper price. The selling price of these products can be measured reliably at each period, since the price is quoted in an active market. The final price of these sales will be determined during the second quarter of 2020.

 

The sensitivity of the Company’s risk on final settlement of its provisionally priced accounts receivables are presented below:

  

  March 31, 2020 
  Thousand metric tons  Provisional price (US$/tonne)  Change  

Effect on Revenue

(R$ million)

 
Iron ore  9,595   82.6   +/-10%   354 
Iron ore pellets  499   79.5   +/-10%   18 
Copper  84   6,577.0   +/-10%   246 

  

21

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

5.       Costs and expenses by nature

 

a)   Cost of goods sold and services rendered

 

  Consolidated 
  Three-month period ended March 31, 
  2020  2019 
Personnel  1,855   1,739 
Materials and services  3,631   3,601 
Fuel oil and gas  1,257   1,314 
Maintenance  3,003   2,372 
Energy  843   797 
Acquisition of products  266   402 
Depreciation and depletion  3,285   2,825 
Freight  3,117   2,874 
Others  1,958   1,826 
Total  19,215   17,750 
         
Cost of goods sold  18,499   17,142 
Cost of services rendered  716   608 
Total  19,215   17,750 

 

b)       Selling and administrative expenses

 

  Consolidated 
  Three-month period ended March 31, 
  2020  2019 
Selling  71   79 
Personnel  211   174 
Services  79   53 
Depreciation and amortization  82   56 
Others  73   56 
Total  516   418 

 

c)       Other operating expenses (income), net

 

  Consolidated 
  Three-month period ended March 31, 
  2020  2019 
Provision for litigations  89   299 
Profit sharing program  150   132 
Others  28   (113)
Total  267   318 

  

22

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

6.        Financial result

 

  Consolidated 
  Three-month period ended March 31, 
  2020  2019 
Financial income        
Short-term investments  231   173 
Others  261   191 
   492   364 
Financial expenses        
Loans and borrowings gross interest  (954)  (947)
Capitalized loans and borrowing costs  138   141 
Participative stockholders' debentures  (103)  (1,337)
Interest on REFIS  (109)  (160)
Interest on lease liabilities  (78)  (71)
Financial guarantees (note 12)  (703)  38 
Others  (481)  (625)
   (2,290)  (2,961)
Other financial items, net        
Net foreign exchange gains (losses) - Loans and borrowings  (4,785)  (49)
Derivative financial instruments (note 19)  (6,394)  340 
Other foreign exchange gains (losses), net  2,509   26 
Indexation losses, net  (18)  (310)
   (8,688)  7 
Total  (10,486)  (2,590)

  

7.        Income taxes

 

a) Deferred income tax assets and liabilities

 

Changes in deferred tax are as follows:

 

  Consolidated 
  Assets  Liabilities  Deferred taxes, net 
Balance at December 31, 2019  37,151   7,585   29,566 
Effect in income statement  4,468   (227)  4,695 
Transfers between asset and liabilities  186   186   - 
Translation adjustment  2,132   1,462   670 
Other comprehensive income  8,364   44   8,320 
Balance at March 31, 2020  52,301   9,050   43,251 

 

   Consolidated 
   Assets   Liabilities   Deferred taxes, net 
Balance at December 31, 2018  26,767   5,936   20,831 
Effect in income statement  3,283   (122)  3,405 
Translation adjustment  30   108   (78)
Other comprehensive income  (31)  16   (47)
Balance at March 31, 2019  30,049   5,938   24,111 
             

  

23

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

b)   Income tax reconciliation – Income statement

 

The total amount presented as income taxes in the income statement is reconciled to the statutory rate, as follows:

 

  Consolidated 
  Three-month period ended March 31, 
  2020  2019 
Loss before income taxes  (2,465)  (8,990)
Income taxes at statutory rate - 34%  838   3,057 
Adjustments that affect the basis of taxes:        
Tax incentives  1,379   121 
Equity results  (177)  135 
Addition (reversal) of tax loss carryforward (i)  1,015   (863)
Others  47   (6)
Income taxes  3,102   2,444 

 

(i) In the three-month period ended March 31, 2020, the positive change refers to the impact of the exchange variation on the foreign tax loss carryforward.

 

Income tax expense is recognized based on the estimate of the weighted average effective tax rate expected for the full year, adjusted for the tax effect of certain items recognized in full in the interim period. Therefore, the effective tax rate in the interim financial statement may differ from management’s estimate of the effective tax rate for the annual financial statement.

 

c)        Income taxes - Settlement program (“REFIS”)

 

The balance mainly relates to REFIS to settle most of the claims related to the collection of income tax and social contribution on equity gains of foreign subsidiaries and affiliates from 2003 to 2012. At March 31, 2020, the balance of R$15,412 (R$1,748 classified as current liabilities and R$13,664 classified as non-current liabilities) is due in 103 remaining monthly installments, bearing the SELIC interest rate (Special System for Settlement and Custody), which is the Brazilian federal funds rate. As at March 31, 2020, the SELIC rate was 3.75% per annum. 

 

8.Basic and diluted earnings (loss) per share

 

The basic and diluted earnings (loss) per share are presented below:

 

  Three-month period ended March 31, 
  2020  2019 
Net income (loss) attributable to Vale's stockholders:        
Net income (loss)  984   (6,422)
         
Thousands of shares        
Weighted average number of shares outstanding - common shares  5,128,598   5,183,120 
         
Basic and diluted earnings (loss) per share:        
Common share (R$)  0.19   (1.24)

 

The Company does not have potential outstanding shares or other instruments with dilutive effect on the earnings per share computation.

  

24

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

9.Accounts receivable

 

  Consolidated 
  March 31, 2020  December 31, 2019 
Accounts receivable  11,142   10,448 
Expected credit loss  (246)  (253)
   10,896   10,195 
         
Revenue related to the steel sector - %  83.81%  87.33%

 

  Consolidated 
  Three-month period ended March 31, 
  2020  2019 
Impairment of accounts receivable recorded in the income statement  55   - 

 

There is no customer that individually represents more than 10% of the Company’s accounts receivable or revenues.

  

 10.

Inventories

 

  Consolidated 
  March 31, 2020  December 31, 2019 
Finished products 13,354  10,505 
Work in progress  3,934   3,082 
Consumable inventory  3,975   3,641 
Total  21,263   17,228 

 

  Consolidated 
  Three-month period ended March 31, 
  2020  2019 
Provision for net realizable value  314   69 

 

Finished and work in progress products inventories by segments are presented in note 4(b). 

 

11.       Other financial assets and liabilities

  

  Consolidated 
  Current  Non-Current 
  March 31, 2020  December 31, 2019  March 31, 2020  December 31, 2019 
Other financial assets                
Assets held for sale (note 12)  790   613   -   - 
Restricted cash  -   -   768   609 
Loans  -   -   398   350 
Derivative financial instruments (note 19)  442   1,160   315   742 
Investments in equity securities  -   -   1,922   2,925 
Related parties - Loans (note 24)  1,418   1,289   8,281   6,448 
   2,650   3,062   11,684   11,074 
Other financial liabilities                
Derivative financial instruments (note 19)  3,689   377   4,203   1,237 
Related parties - Loans (note 24)  4,450   3,951   5,152   3,853 
Financial guarantees  -   -   2,808   2,116 
Participative stockholders' debentures  -   -   10,519   10,416 
   8,139   4,328   22,682   17,622 

 

Participative stockholders’ debentures

 

On April 1, 2020 (subsequent event), the Company made available for withdrawal as remuneration the amount of R$506.

  

25

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

12.       Investments in associates and joint ventures

 

a) Changes during the period

 

Changes in investments in associates and joint ventures as follows:

 

  Consolidated 
  Total 
  2020  2019 
Balance at January 1,  11,278   12,495 
Additions (i)  364   1 
Translation adjustment  311   66 
Equity results in income statement  (521)  397 
Equity results in statement of comprehensive income  (6)  (13)
Dividends declared  (182)  (207)
Others  55   12 
Balance at March 31,  11,299   12,751 

 

(i) Refers to CSP’s capital increase.

 

The amount of investments by segments are presented in note 4(b).

 

b) Guarantees provided

 

As of March 31, 2020, corporate financial guarantees provided by Vale (within the limit of its direct or indirect interest) for certain associates and joint ventures were R$8,058 (December 31, 2019 R$6,671).

 

c) Acquisitions and divestitures

 

New Steel-On January 24, 2019 the Company acquired 100% of the share capital of New Steel Global N.V. (“New Steel”) and gained its control for the total cash consideration of R$1,884. New Steel is a company that develops processing and beneficiating technologies for iron ore through a completely dry process. The consideration paid is mainly attributable to the research and development project for processing and beneficiating iron ore, which is expected to be used on the Company’s pelletizing operation.

 

Henan Longyu – On December 27, 2019 the Company entered into an agreement to sell its 25% interest in Henan Longyu Energy Resources Co., Ltd, a company that operates two coal mines in the province of Henan, China, for the total consideration of R$613 (US$152 million). The closing is expected for the end of 2020 upon completion of conditions precedent. The investment is classified as held for sale as “other financial assets” on current assets.

 

Divestment agreement in compliance with PTVI's Contract of Work - The Company´s subsidiary, PT Vale Indonesia Tbk (“PTVI”), a public company in Indonesia, has an agreement in place with the government of the Republic of Indonesia to operate its mining licenses which includes a commitment to divest an additional 20% of PTVI’s shares to Indonesian participants.

 

The existing major shareholders, Vale and Sumitomo Metal Mining, Co., Ltd. ("SMM") have signed a Heads of Agreement with PT Indonesia Asahan Aluminium ("Inalum”), an Indonesian state-owned company, to satisfy the 20% interest divestment obligation in relation to PTVI, proportionally to their interest. The Company expects to set and sign the final terms and conditions in 2020 and complete its divestment during 2021.

 

26

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

Investments in associates and joint ventures (continued)

 

        Consolidated 
        Investments in associates and joint ventures  Equity results in the income statement  Dividends received 
              Three-month period ended March 31,  Three-month period
ended March 31,
 
Associates and joint ventures % ownership  % voting capital  March 31,
2020
  December 31,
2019
  2020  2019  2020  2019 
Ferrous minerals                                
Baovale Mineração S.A.  50.00   50.00   107   102   5   6   -   - 
Companhia Coreano-Brasileira de Pelotização  50.00   50.00   371   354   15   67   -   - 
Companhia Hispano-Brasileira de Pelotização (i)  50.89   50.89   296   284   12   47   -   - 
Companhia Ítalo-Brasileira de Pelotização (i)  50.90   51.00   286   262   24   31   -   - 
Companhia Nipo-Brasileira de Pelotização (i)  51.00   51.11   615   605   10   114   -   - 
MRS Logística S.A.  48.16   46.75   1,932   1,999   (9)  44   -   - 
VLI S.A.  37.60   37.60   3,139   3,273   (131)  3   -   - 
Zhuhai YPM Pellet Co.  25.00   25.00   114   91   -   -   -   - 
           6,860   6,970   (74)  312   -   - 
Coal                                
Henan Longyu Energy Resources Co., Ltd.  25.00   25.00   -   -   -   (21)  -   - 
           -   -   -   (21)  -   - 
Base metals                                
Korea Nickel Corp.  25.00   25.00   51   56   2   (2)  -   - 
           51   56   2   (2)  -   - 
Others                                
Aliança Geração de Energia S.A. (i)  55.00   55.00   1,814   1,894   46   54   -   - 
Aliança Norte Energia Participações S.A. (i)  51.00   51.00   642   646   (4)  7   -   - 
California Steel Industries, Inc.  50.00   50.00   1,223   975   (28)  62   -   - 
Companhia Siderúrgica do Pecém (ii)  50.00   50.00   -   -   (364)  -   -   - 
Mineração Rio do Norte S.A.  40.00   40.00   347   393   (46)  (4)  -   - 
Others          362   344   (53)  (11)  -   - 
           4,388   4,252   (449)  108   -   - 
Total          11,299   11,278   (521)  397   -   - 

 

(i) Although the Company held a majority of the voting capital, the entities are accounted under the equity method due to the stockholders' agreement where relevant decisions are shared with other parties.

(ii) Companhia Siderúrgica do Pecém (“CSP”) is a joint venture and its results are accounted for under the equity method, in which the accumulated losses are capped to the Company ́s interest in the investee’s capital based on the applicable

law and requirements. That is, after the investment is reduced to zero, the Company does not recognize further losses nor liabilities associated with the investee.

 

27

 

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

13.       Intangibles

 

Changes in intangibles are as follows:

 

  Consolidated 
  Goodwill  Concessions  Contract right  Software  Research and development project and patents (i)  Total 
Balance at December 31, 2019  14,628   16,005   563   304   2,757   34,257 
Additions  -   87   -   30   -   117 
Disposals  -   (5)  -   -   -   (5)
Amortization  -   (215)  (1)  (30)  -   (246)
Translation adjustment  1,616   -   86   25   2   1,729 
Balance at March 31, 2020  16,244   15,872   648   329   2,759   35,852 
Cost  16,244   20,578   1,135   3,809   2,759   44,525 
Accumulated amortization  -   (4,706)  (487)  (3,480)  -   (8,673)
Balance at March 31, 2020  16,244   15,872   648   329   2,759   35,852 

 

  Consolidated 
  Goodwill  Concessions  Contract right  Software  Research and development project and patents (i)  Total 
Balance at December 31, 2018  14,155   15,737   530   428   -   30,850 
Additions  -   816   -   61   1,888   2,765 
Disposals  -   (38)  -   -   -   (38)
Amortization  -   (419)  (2)  (75)  -   (496)
Translation adjustment  165   16   12   5   -   198 
Balance at March 31, 2019  14,320   16,112   540   419   1,888   33,279 
Cost  14,320   20,144   804   3,751   1,888   40,907 
Accumulated amortization  -   (4,032)  (264)  (3,332)  -   (7,628)
Balance at March 31, 2019  14,320   16,112   540   419   1,888   33,279 

 

(i) Refers mainly to the acquisition of New Steel Global N.V. (note 12c).

 

Concessions

 

The technical studies and legal documents on early extension of the Vitória Minas Railroad (EFVM) and Carajás Railroad (EFC) concessions are currently under review by the Federal Court of Audit. Vale awaits the end of the process in the public sphere to submit the proposal, with the required counterparts, to its Board of Directors.

 

28

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

14.       Property, plant and equipment

 

Changes in property, plant and equipment are as follows:

 

  Consolidated 
  Land  Building  Facilities  Equipment  Mineral properties  Right of use assets  Others  Constructions in progress  Total 
Balance at December 31, 2019  2,881   40,256   38,713   22,921   33,302   6,819   25,201   17,640   187,733 
Additions (i)  -   -   -   -   -   118   -   3,992   4,110 
Disposals  -   (1)  (13)  (22)  (19)  -   (4)  (187)  (246)
Assets retirement obligation  -   -   -   -   218   -   -   -   218 
Depreciation, amortization and depletion  -   (540)  (619)  (922)  (642)  (179)  (631)  -   (3,533)
Translation adjustment  155   2,616   1,465   3,407   4,336   1,444   1,331   605   15,359 
Transfers  83   (80)  355   275   1,383   -   304   (2,320)  - 
Balance at March 31, 2020  3,119   42,251   39,901   25,659   38,578   8,202   26,201   19,730   203,641 
Cost  3,119   81,343   76,067   54,363   84,602   9,221   50,108   19,730   378,553 
Accumulated depreciation  -   (39,092)  (36,166)  (28,704)  (46,024)  (1,019)  (23,907)  -   (174,912)
Balance at March 31, 2020  3,119   42,251   39,901   25,659   38,578   8,202   26,201   19,730   203,641 
   Consolidated                                 

 

  Land  Building  Facilities  Equipment  Mineral properties  Right of use assets  Others  Constructions in progress  Total 
Balance at December 31, 2018  2,459   42,434   43,536   24,826   32,931   -   28,175   13,120   187,481 
Effects of IFRS 16/CPC 06 (R2) adoption  -   -   -   -   -   6,978   -   -   6,978 
Additions (i)  -   -   -   -   -   -   -   3,032   3,032 
Disposals  (79)  (235)  (1)  (8)  (486)  -   (4)  (278)  (1,091)
Assets retirement obligation  -   -   -   -   472   -   -   -   472 
Depreciation, amortization and depletion  -   (501)  (610)  (798)  (603)  (180)  (847)  -   (3,539)
Translation adjustment  6   157   162   114   473   32   67   111   1,122 
Transfers  1   161   12   1,359   947   -   237   (2,717)  - 
Balance at March 31, 2019  2,387   42,016   43,099   25,493   33,734   6,830   27,628   13,268   194,455 
Cost  2,387   71,456   68,213   48,838   66,824   7,018   46,183   13,268   324,187 
Accumulated depreciation  -   (29,440)  (25,114)  (23,345)  (33,090)  (188)  (18,555)  -   (129,732)
Balance at March 31, 2019  2,387   42,016   43,099   25,493   33,734   6,830   27,628   13,268   194,455 

 

(i) Includes capitalized borrowing costs.

 

There are no material changes to the net book value of consolidated property, plant and equipment pledged to secure judicial claims and loans and borrowings (note 15) compared to those disclosed in the financial statements as at December 31, 2019.

 

29

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

Leases

 

Changes in the recognized right-of-use assets and leases liabilities are as follows:

 

  Assets 
  December 31, 2019  Additions and contract modifications  Depreciation  Translation adjustment  March 31, 2020 
Ports  2,958   3   (46)  723   3,638 
Vessels  2,341   -   (58)  669   2,952 
Pellets plants  676   115   (43)  -   748 
Properties  521   -   (21)  9   509 
Energy plants  250   -   (1)  -   249 
Mining equipment  73   -   (10)  43   106 
Total  6,819   118   (179)  1,444   8,202 

 

  Liabilities 
  December 31, 2019  Additions and contract modifications  Payments  Interest  Translation adjustment  March 31, 2020 
Ports  3,023   3   (85)  25   752   3,718 
Vessels  2,343   -   (86)  28   743   3,028 
Pellets plants  705   115   (5)  8   -   823 
Properties  614   -   (21)  5   35   633 
Energy plants  282   -   (1)  4   -   285 
Locomotives  154   -   (4)  4   35   189 
Mining equipment  97   -   (16)  4   43   128 
Total  7,218   118   (218)  78   1,608   8,804 

 

The annual minimum payments are presented as follows:

 

  2020  2021  2022  2023  2024 onwards  Total 
Ports  213   281   281   281   4,357   5,413 
Vessels  260   338   328   322   2,417   3,665 
Pellets plants  172   146   146   52   494   1,010 
Properties  140   156   94   73   250   713 
Energy plants  26   31   31   31   307   426 
Locomotives  31   42   42   42   120   277 
Mining equipment  36   36   26   5   -   103 
Total  878   1,030   948   806   7,945   11,607 

 

The amounts in the table above presents the undiscounted lease obligation by maturity date. The lease liability disclosed as “leases” in the balance sheet is measured at the present value of such obligations.

 

The total amount of the variable lease payments not included in the measurement of lease liabilities, which have been recognized straight to the income statement, for the three-month period ended March 31, 2020 and 2019 was R$147 and R$710, respectively. The interest accretion recognized in the income statement is disclosed in note 6.

 

30

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

15.       Loans, borrowings, cash and cash equivalents and short-term investments

 

a)       Net debt

 

The Company evaluates the net debt with the objective of ensuring the continuity of its business in the long term.

 

  Consolidated 
  

March 31,

2020

  December 31, 2019 
Debt contracts in the international markets  79,327   42,298 
Debt contracts in Brazil  9,442   10,327 
Total of loans and borrowings  88,769   52,625 
         
(-) Cash and cash equivalents  61,284   29,627 
(-) Short-term investments  2,488   3,329 
Net debt  24,997   19,669 

 

b)       Cash and cash equivalents

 

Cash and cash equivalents includes cash, immediately redeemable deposits and short-term investments with an insignificant risk of change in value. They are readily convertible to cash, being R$12,981 denominated in R$, indexed to the Brazilian Interbank Interest rate (“DI Rate”or”CDI”), R$47,092 denominated in US$, mainly time deposits and R$1,211 denominated in other currencies.

 

c)       Short-term investments

 

At March 31, 2020 and December 31, 2019, the balance of R$2,488 and R$ 3,329, respectively, is mainly comprised by investments in Financial Treasury Bills (“LFTs”), which are Brazilian government bonds, issued by the National Treasury. LFTs are floating-rate securities, liquid in the secondary markets.

 

d)        Loans and borrowings

 

i)        Total debt

 

  Consolidated 
  Current liabilities  Non-current liabilities 
  March 31,
2020
  December 31,
2019
  March 31,
2020
  December 31,
2019
 
Debt contracts in the international markets                
Floating rates in:                
US$  884   456   40,113   11,294 
EUR  -   -   1,144   907 
Fixed rates in:                
US$  73   593   31,551   24,506 
EUR  -   -   4,294   3,398 
Other currencies  66   56   505   427 
Accrued charges  697   645   -   16 
   1,720   1,750   77,607   40,548 
Debt contracts in Brazil                
Floating rates in:                
R$, indexed to TJLP, TR, IPCA, IGP-M and CDI  2,667   2,620   5,890   6,759 
Basket of currencies and US$ indexed to LIBOR  229   177   234   226 
Fixed rates in:                
R$  151   174   151   181 
Accrued charges  120   174   -   16 
   3,167   3,145   6,275   7,182 
Total  4,887   4,895   83,882   47,730 

 

 

31

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

The future flows of debt payments, principal and interest, are as follows:

 

  Consolidated 
  Principal  

Estimated future

interest payments (i)

 
2020  2,546   2,714 
2021  3,491   3,618 
2022  15,220   3,332 
2023  5,945   3,089 
Between 2024 and 2028  38,184   10,664 
2029 onwards  22,566   14,064 
Total  87,952   37,481 

 

(i) Based on interest rate curves and foreign exchange rates applicable as at March 31, 2020 and considering that the payments of principal will be made on their contracted payments dates. The amount includes the estimated interest not yet accrued and the interest already recognized in the interim financial statements.

 

At March 31, 2020, the average annual interest rates by currency are as follows:

 

  Consolidated 
  Average interest rate (i)  Total debt 
Loans and borrowings        
US$  4.32%  73,724 
R$ (ii)  8.98%  8,973 
EUR (iii)  3.76%  5,490 
Other currencies  3.59%  582 
       88,769 

 

(i) In order to determine the average interest rate for debt contracts with floating rates, the Company used the rate applicable at March 31, 2020.

(ii) R$ denominated debt that bears interest at IPCA, CDI, TR or TJLP, plus spread. For a total of R$8,796 the Company entered into derivative transactions to mitigate the exposure to the cash flow variations of the floating rate debt denominated in R$, resulting in an average cost of 3.01% per year in US$.

(iii) Eurobonds, for which the Company entered into derivatives to mitigate the exposure to the cash flow variations of the debt denominated in EUR, resulting in an average cost of 4.29% per year in US$.

 

ii) Reconciliation of debt to cash flows arising from financing activities

 

  Consolidated 
  Loans and borrowings 
December 31, 2019  52,625 
Additions  24,419 
Repayments  (1,678)
Interest paid  (1,077)
Cash flow from financing activities  21,664 
     
Effect of exchange rate  13,608 
Interest accretion  872 
Non-cash changes  14,480 
     
March 31, 2020  88,769 

 

32

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

iii) Credit and financing lines

 

To mitigate liquidity risk, Vale has two revolving credit facilities, in the amount of R$15,597 (US$3 billion) and R$10,397 (US$2 billion), which will mature in 2022 and 2024, respectively. In March 2020, the Company drew down all of its revolving credit facilities in the total amount of R$25,994 (US$5 billion) as a precautionary measure in order to increase its cash position and preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 outbreak.

 

iv) Guarantees

 

As at March 31, 2020 and December 31, 2019, loans and borrowings are secured by property, plant and equipment in the amount of R$936 and R$887, respectively.

 

The securities issued through Vale’s wholly-owned finance subsidiary Vale Overseas Limited are fully and unconditionally guaranteed by Vale.

 

v) Covenants

 

Some of the Company’s debt agreements with lenders contain financial covenants. The primary financial covenants in those agreements require maintaining certain ratios, such as debt to EBITDA (Earnings before Interest Taxes, Depreciation and Amortization) and interest coverage. The Company has not identified any instances of noncompliance as at March 31, 2020.

 

16.       Liabilities related to associates andjoint ventures

 

On November 5, 2015, a rupture occurred in the Fundão tailings dam, in Mariana (State of Minas Gerais), operated by Samarco Mineração S.A. (“Samarco”), a joint venture controlled by Vale S.A. and BHP Billiton Brasil Ltda. (“BHP”). In March 2016, Samarco and its shareholders entered into a Framework Agreement with governmental authorities, in which Samarco, Vale S.A. and BHP agreed to stablish the Fundação Renova, an entity responsible to develop and implement 42 long-term mitigation and compensation programs. In addition, the Company has recorded a provision for the de-characterization of the Germano dam during the second quarter of 2019, which was also built under the upstream method.

 

On October 25, 2019, Samarco obtained the Corrective Operation License for its operating activities in the Germano Complex. Following this authorization, Samarco has obtained all environmental licenses required to restart its operations. Samarco currently expects to restart its operations by the end of 2020.

 

The changes in the provision to meet the obligations under the agreement related to the Fundão dam rupture and to the de-characterization of Germano dam, in the period ended March 31, 2020 and 2019 are as follows:

 

  Consolidated 
  2020  2019 
Balance at January 1,  6,853   4,346 
Payments  (300)  (200)
Present value valuation  73   (73)
Balance at March 31,  6,626   4,073 

 

   March 31,
2020
   December 31,
2019
 
Current liabilities  2,356   2,079 
Non-current liabilities  4,270   4,774 
Liabilities  6,626   6,853 

 

Estimates of mitigation and compensation actions may vary according to the progress of the ongoing programs developed by the Fundação Renova and changes in scope. The amounts disclosed in these interim financial statements have been determined based on Management's best estimates and consider the facts and circumstances known to date.

 

The contingencies related to the Fundão dam rupture are disclosed in note 21.

 

33

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

Samarco’s working capital

 

In addition to the provision, Vale S.A. made available in the three-month period ended March 31, 2020 and 2019, the amount of R$246 (US$56 million) and R$115 (US$30 million), respectively, which was fully used to fund Samarco’s working capital. This amount was recognized in Vale´s income statement as an expense in “Equity results and other results in associates and joint ventures”.

 

During 2020, Vale S.A. may provide a short-term credit facility up to R$1,388 (US$267 million) to support Samarco’s cash needs, without any binding obligation to Samarco. The availability of funds by the shareholders – Vale S.A. and BHP – is subject to the fulfillment of certain conditions, being deliberated by the shareholders, in the same bases and concomitantly, if required.

 

Under Brazilian legislation and the terms of the joint venture agreement, Vale does not have an obligation to provide funding to Samarco. Accordingly, Vale’s investment in Samarco was fully impaired and no provision was recognized in relation to the Samarco’s negative equity.

 

Critical accounting estimates and judgments

 

The provision related to Fundação Renova requires the use of assumptions that may be mainly affected by: (i) changes in scope of work required under the Framework Agreement as a result of further technical analysis and the ongoing negotiations with the Federal Prosecution Office, (ii) resolution of uncertainty in respect of the resumption of Samarco´s operations; (iii) updates of the discount rate; and (iv) resolution of existing and potential legal claims.

 

Moreover, the main critical assumptions and estimates applied in the Germano dam provision considers, among others: (i) volume of the waste to be removed based on historical data available and interpretation of the enacted laws and regulations; (ii) location availability for the tailings disposal; and (iii) acceptance by the authorities of the proposed engineering methods and solution.

 

As a result, future expenditures may differ from the amounts currently provided and changes to key assumptions could result in a material impact to the amount of the provision in future reporting periods. At each reporting period, the Company reassess the key assumptions used by Samarco in the preparation of the projected cash flows and adjust the provision, if required.

 

34

 

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

17.       Financial instruments classification

 

  Consolidated 
  March 31, 2020  December 31, 2019 
Financial assets  Amortized cost   At fair value through OCI   

At fair value through

profit or loss

   Total   Amortized cost   At fair value through OCI   

At fair value through

profit or loss

   Total 
Current                                
Cash and cash equivalents  61,284   -   -   61,284   29,627   -   -   29,627 
Short-term investments  -   -   2,488   2,488   -   -   3,329   3,329 
Derivative financial instruments  -   -   442   442   -   -   1,160   1,160 
Accounts receivable  10,761   -   135   10,896   9,885   -   310   10,195 
Related parties  1,418   -   -   1,418   1,289   -   -   1,289 
   73,463   -   3,065   76,528   40,801   -   4,799   45,600 
Non-current                                
Judicial deposits  12,664   -   -   12,664   12,629   -   -   12,629 
Restricted cash  768   -   -   768   609   -   -   609 
Derivative financial instruments  -   -   315   315   -   -   742   742 
Investments in equity securities  -   1,922   -   1,922   -   2,925   -   2,925 
Loans  398   -   -   398   350   -   -   350 
Related parties  8,281   -   -   8,281   6,448   -   -   6,448 
   22,111   1,922   315   24,348   20,036   2,925   742   23,703 
Total of financial assets  95,574   1,922   3,380   100,876   60,837   2,925   5,541   69,303 
                                 
Financial liabilities                                
Current                                
Suppliers and contractors  15,642   -   -   15,642   16,556   -   -   16,556 
Leases  1,173   -   -   1,173   910   -   -   910 
Derivative financial instruments  -   -   3,689   3,689   -   -   377   377 
Loans and borrowings  4,887   -   -   4,887   4,895   -   -   4,895 
Interest on capital  6,333   -   -   6,333   6,333   -   -   6,333 
Related parties  4,450   -   -   4,450   3,951   -   -   3,951 
   32,485   -   3,689   36,174   32,645   -   377   33,022 
Non-current                                
Leases  7,631   -   -   7,631   6,308   -   -   6,308 
Derivative financial instruments  -   -   4,203   4,203   -   -   1,237   1,237 
Loans and borrowings  83,882   -   -   83,882   47,730   -   -   47,730 
Related parties  5,152   -   -   5,152   3,853   -   -   3,853 
Participative stockholders' debentures  -   -   10,519   10,519   -   -   10,416   10,416 
Financial guarantees  -   -   2,808   2,808   -   -   2,116   2,116 
   96,665   -   17,530   114,195   57,891   -   13,769   71,660 
Total of financial liabilities  129,150   -   21,219   150,369   90,536   -   14,146   104,682 

 

18.       Fair value estimate

 

a)    Assets and liabilities measured and recognized at fair value:

 

 Consolidated 
 March 31, 2020  December 31, 2019 
  Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3  Total 
Financial assets                                
Short-term investments  2,488   -   -   2,488   3,329   -   -   3,329 
Derivative financial instruments  -   632   125   757   -   1,806   96   1,902 
Accounts receivable  -   135   -   135   -   310   -   310 
Investments in equity securities  1,922   -   -   1,922   2,925   -   -   2,925 
Total  4,410   767   125   5,302   6,254   2,116   96   8,466 
                                 
Financial liabilities                                
Derivative financial instruments  -   7,364   528   7,892   -   1,130   484   1,614 
Participative stockholders' debentures  -   10,519   -   10,519   -   10,416   -   10,416 
Financial guarantees  -   2,808   -   2,808   -   2,116   -   2,116 
Total  -   20,691   528   21,219   -   13,662   484   14,146 

 

There were no transfers between Level 1 and Level 2, or between Level 2 and Level 3 for the three-month period ended in March 31, 2020.

 

35

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

 

The following table presents the changes in Level 3 assets and liabilities for the three-month period ended in March 31, 2020:

 

  Consolidated 
  Derivative financial instruments 
  Financial
assets
  Financial
liabilities
 
Balance at December 31, 2019  96   484 
 Gain and losses recognized in income statement  29   44 
Balance at March 31, 2020  125   528 

 

Methods and techniques of evaluation

 

i) Derivative financial instruments

 

Derivative financial instruments are evaluated through the use of market curves and prices impacting each instrument at the closing dates, detailed in the item "market curves” (note 26).

 

For the pricing of options, the Company often uses the Black & Scholes model. In this model, the fair value of the derivative is determined basically as a function of the volatility and the price of the underlying asset, the strike price of the option, the risk-free interest rate and the option maturity. In the case of options where payoff is a function of the average price of the underlying asset over a certain period during the life of the option, the Company uses Turnbull & Wakeman model. In this model, in addition to the factors that influence the option price in the Black-Scholes model, the formation period of the average price is also considered.

 

In the case of swaps, both the present value of the long and short positions are estimated by discounting their cash flows by the interest rate in the related currency. The fair value is determined by the difference between the present value of the long and short positions of the swap in the reference currency.

 

For the swaps indexed to TJLP, the calculation of the fair value assumes that TJLP is constant, that is, the projections of future cash flows in Brazilian Reais are made considering the last TJLP disclosed.

 

Forward and future contracts are priced using the future curves of their corresponding underlying assets. Typically, these curves are obtained on the stock exchanges where these assets are traded, such as the London Metals Exchange (“LME”), the Commodity Exchange (“COMEX”) or other providers of market prices. When there is no price for the desired maturity, Vale uses an interpolation between the available maturities.

 

The fair value of derivatives within level 3 is estimated using discounted cash flows and option model valuation techniques with unobservable inputs of discount rates, stock prices and commodities prices.

 

b)       Fair value of financial instruments not measured at fair value

 

The fair values and carrying amounts of loans and borrowings are as follows:

 

 

  Consolidated 
Financial liabilities Balance  Fair value  Level 1  Level 2 
March 31, 2020                
Debt principal  87,952   90,131   41,065   49,066 
                 
December 31, 2019                
Debt principal  51,774   58,784   36,208   22,576 

 

Due to the short-term cycle, the fair value of cash and cash equivalents balances, financial investments, accounts receivable and accounts payable approximate their book values.

 

Coronavirus outbreak - At this time, the outbreak has not caused any significant impact on the fair value of the Company’s assets and liabilities. However, abnormally large changes have occurred in the valuation of financial assets across many markets since the outbreak. The outbreak continues to be uncertain, making it impossible to forecast the final impact it could have on the economy, and in turn, on the Company’s business, liquidity, and financial position meaning that the fair values of the Company’s assets and liabilities may change in later periods.

 

36

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

 

19.Derivative financial instruments

 

a)       Derivatives effects on statement of financial position

 

  Consolidated 
  Assets 
  March 31, 2020  December 31, 2019 
  Current  Non-current  Current  Non-current 
Foreign exchange and interest rate risk                
CDI & TJLP vs. US$ fixed and floating rate swap  -   -   53   - 
IPCA swap  238   180   337   474 
Pre-dollar swap  74   -   84   31 
   312   180   474   505 
Commodities price risk                
Nickel (i)  53   -   606   36 
Bunker oil, Gasoil and Brent  16   -   76   - 
   69   -   682   36 
                 
Others  61   135   4   201 
   61   135   4   201 
Total  442   315   1,160   742 
                 

(i) The nickel hedge accounting program was fully settled on April 1,2020.

 

  Consolidated 
  Liabilities 
  March 31, 2020  December 31, 2019 
  Current  Non-current  Current  Non-current 
Foreign exchange and interest rate risk                
CDI & TJLP vs. US$ fixed and floating rate swap  876   2,715   196   322 
IPCA swap  455   462   52   150 
Eurobonds swap  31   294   24   117 
Pre-dollar swap  191   514   32   148 
   1,553   3,985   304   737 
Commodities price risk                
Nickel  11   -   13   16 
Bunker oil, Gasoil and Brent  1,746   -   29   - 
   1,757   -   42   16 
                 
Conversion options - VLI  360   168   -   484 
Others  19   50   31   - 
   379   218   31   484 
Total  3,689   4,203   377   1,237 

 

b)       Effects of derivatives on the income statement, cash flow and other comprehensive income

 

  Consolidated 
  Gain (loss) recognized in the income statement  Financial settlement inflows (outflows)  Gain recognized in other comprehensive income 
  Three-month period ended March 31, 
  2020  2019  2020  2019  2020  2019 
Foreign exchange and interest rate risk                        
CDI & TJLP vs. US$ fixed and floating rate swap  (3,126)  (28)  (80)  (324)  -   - 
IPCA swap  (1,089)  46   1   (101)  -   - 
Eurobonds swap  (145)  (72)  (24)  (19)  -   - 
Pre-dollar swap  (661)  8   (100)  (8)  -   - 
   (5,021)  (46)  (203)  (452)  -   - 
Commodities price risk                        
Nickel  -   74   1,243   13   277   - 
Bunker oil, Gasoil and Brent  (1,638)  108   (4)  -   -   - 
   (1,638)  182   1,239   13   277   - 
                         
Options - MBR  -   7   -   -   -   - 
Conversion options - VLI  (44)  114   -   -   -   - 
Others  309   83   296   (1)  -   - 
   265   204   296   (1)  -   - 
Total  (6,394)  340   1,332   (440)  277   - 

 

37

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

The maturity dates of the derivative financial instruments are as follows:

 

  Last maturity dates
Currencies and interest rates September 2029
Palladium March 2021
Nickel April 2020
Brent December 2020
Gasoil December 2020
VLI December 2027
Others December 2022

 

c)        Hedge in foreign operations

 

In January 2017, the Company implemented hedge accounting for the foreign currency risk arising from Vale S.A.’s net investments in Vale International S.A. and Vale Holding BV. Under the hedge accounting program, the Company’s debt denominated in U.S. dollars and Euros serves as a hedge instrument for these investments. With the program, the impact of exchange rate variations on debt denominated in U.S. dollars and Euros has been partially recorded in other comprehensive income, in the “Cumulative translation adjustments”. As at March 31, 2020, the carrying value of the debts designated as instrument hedge of these investments are R$11,930 (US$2,295 million) and R$4,295 (EUR750 million).

 

  Loss recognized in the other comprehensive income 
  Consolidated 
  Three-month period ended March 31, 
   2020   2019 
Hedge in foreign operation, net of tax  (2,394)  (44)

 

 

20.        Provisions

 

  Consolidated 
  Current liabilities  Non-current liabilities 
  March 31, 2020  December 31, 2019  March 31, 2020  December 31, 2019 
Payroll, related charges and other remunerations  2,266   3,183   -   - 
Onerous contracts  257   229   4,473   3,489 
Environmental obligations  561   587   1,238   980 
Asset retirement obligations  637   638   17,414   15,323 
Provisions for litigation (note 21)  -   -   6,042   5,895 
Employee postretirement obligations (note 22)  371   319   9,709   8,546 
Provisions  4,092   4,956   38,876   34,233 
                 

  

38

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

21.       Litigations

 

a)        Provision for litigations

 

Vale is party to labor, civil, tax and other ongoing lawsuits, at administrative and court levels. Provisions for losses resulting from lawsuits are estimated and updated by the Company, based on analysis from the Company’s legal consultants.

 

Changes in provision for litigations are as follows: 

 

  Consolidated 
  Tax litigation  Civil litigation  Labor litigation  Environmental litigation  Total of litigation provision 
Balance at December 31, 2019  2,804   1,213   1,835   43   5,895 
Additions and reversals, net  23   14   49   3   89 
Payments  (3)  (48)  (89)  -   (140)
Indexation and interest  57   39   24   2   122 
Translation adjustment  66   10   -   -   76 
Balance at March 31, 2020  2,947   1,228   1,819   48   6,042 

 

   Consolidated
   Tax litigation (i)   Civil litigation   Labor litigation   Environmental litigation   Total of litigation
provision
 
Balance at December 31, 2018  2,816   644   1,785   13   5,258 
Additions and reversals, net  27   174   79   19   299 
Payments  (65)  (46)  (100)  -   (211)
Indexation and interest  (30)  63   30   5   68 
Translation adjustment  -   (5)  -   -   (5)
Balance at March 31, 2019  2,748   830   1,794   37   5,409 
(i)Includes amounts regarding to social security claims that were classified as labor claims.

 

b)       Contingent liabilities

 

The Company has contingent liabilities where claims are debated in both administrative and judicial claims and whose expected loss is classified as possible, and for which the recognition of a provision is not considered necessary by the Company.

 

Based in the legal opinions, the presentation of the litigations classified with expected loss as possible are presented as follow:

 

  Consolidated 
  March 31, 2020  December 31, 2019 
Tax litigations  37,876   33,839 
Civil litigations  5,702   6,116 
Labor litigations  2,747   3,116 
Environmental litigations  4,433   4,410 
Brumadinho event  698   635 
Total  51,456   48,116 

 

i - Tax litigations -The most relevant contingent tax liabilities are associated with proceedings related to the (i) collection of IRPJ and CSLL, (ii) challenges of PIS and COFINS tax credits, (iii) assessments related to mining royalties (CFEM), and (iv) collection of ICMS, in particular related to credits claimed in connection with the sale and transmission of electricity; collection of ICMS in connection with goods that enter into the State of Pará and collection of ICMS and penalties over the transportation of iron ore by Vale itself. The variation over the period is mainly due to the new proceedings related to CFEM, IPI, ICMS and penalty, the termination of the proceedings regarding PIS and fees, the changes in the amount involved in the ISSQN cases, as well as the imposition of the interest and monetary updated on the amounts in dispute.

 

ii - Civil litigations -Most of those claims have been filed by suppliers for indemnification under construction contracts, primarily relating to certain alleged damages, payments and contractual penalties. A number of other claims related to contractual disputes regarding inflation index.

 

iii - Labor litigations -Represents individual claims by employees and service providers, primarily involving demands for additional compensation for overtime work, time spent commuting or health and safety conditions.

 

39

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

iv - Environmental litigations -The most significant claims concern alleged procedural deficiencies in licensing processes, non-compliance with existing environmental licenses or damage to the environment.

 

c)   Judicial deposits

 

In addition to the provisions and contingent liabilities, the Company is required, by law, to make judicial deposits to secure a potential adverse outcome of certain lawsuits. These court-ordered deposits are monetarily adjusted and reported as non-current assets until a judicial decision to draw the deposit occurs.

 

  Consolidated 
  March 31, 2020  December 31, 2019 
Tax litigations  5,132   5,152 
Civil litigations (i)  330   346 
Labor litigations  968   992 
Environmental litigations  170   163 
Brumadinho event (note 3)  6,064   5,976 
Total  12,664   12,629 
         
(i)Amounts of blocked financial investments reclassified to restricted cash in “other financial assets”.

 

In addition to the above-mentioned tax, civil, labor and environmental judicial deposits, the Company contracted R$9.5 billion in guarantees for its lawsuits, as an alternative to judicial deposits. For the Brumadinho event, the Company contracted guarantees in the amount of R$5.7 billion which were presented in court according agreement with Treasury Court of Minas Gerais and Public Prosecutor's Office.

 

d) Contingencies related to Samarco accident

 

(i) Public civil claim filed by the Federal Government and others and Public civil claim filed by Federal Prosecution Office (“MPF”)

 

In 2016, the federal government, the Brazilian states of Espírito Santo and Minas Gerais and other governmental authorities have initiated a public civil lawsuit against Samarco and its shareholders, with an estimated value indicated by the plaintiffs of R$20.2 billion. In the same year, MPF filed a public civil action against Samarco and its shareholders and presented several claims, including: (i) the adoption of measures for mitigating the social, economic and environmental impacts resulting from the dam failure and other emergency measures; (ii) the payment of compensation to the community; and (iii) payments for the collective moral damage. The action value indicated by MPF is R$155 billion.

 

In June 2018, the parties entered into an agreement (“Term of Adjustment of Conduct”), which extinguishes (i) the public civil claim of R$20.2 billion filed by the Federal Government and others; and (ii) part of the claims included in the public civil claim of R$155 billion filed by MPF. The agreement also establishes a possible renegotiation of Fundação Renova's repair programs after the conclusion of the specialist’s studies hired to advise the Public Prosecutor's Office in this process. These negotiations are expected to occur during 2020.

 

In September 2019, the Court approved the list of entities selected by the community to provide it with technical assistance to assure its participation on the debates regarding the measures to be adopted for mitigate the impacts, accordingly to the referred agreement.

 

In January 2020, the Court issued an order for the Brazilian Mining Authority (“ANM”) ratifying the revocation of the decision issued on the public civil actions filed by the Brazilian Federal Government and others, determine the immediate revocation of the restrictions on Vale's mining concessions.

 

In January 2020, the Court also determined the commencement of 10 specific proceedings to address the controverted and pendent topics of the settlement agreements signed by the parties (TTAC and TacGov), according to priority aspects of said agreements (the “Priority Topics”), namely: Topic 1 - Environmental Recovery Extra and Intra Channel; Topic 2 – Risks to Human Health and Ecologic Risks; Topic 3 - Resettlement of Affected Communities; Topic 4 - Infrastructure and Development; Topic 5 - Operational Return of HPP Risoleta Neves; Topic 6 - Performance Measurement and Monitoring; Topic 7 – Registration; Topic 8 – Reestablishment of economic activities; Topic 9 - Water Supply for Human Consumption; and Topic 10 - Technical Assistants to the affected communities. The Court has been establishing specific obligations in each of the Topics for the public authorities, Renova Foundation and the companies Vale, Samarco and BHP, with the purpose of overcoming the pending and controverted topics of each subject.

 

 

40

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

(ii) United States class action lawsuits

 

In March 2017, holders of bonds issued by Samarco Mineração S.A., filed a class action suit in the Federal Court in New York against Samarco Mineração S.A., Vale S.A., BHP Billiton Limited, BHP Billiton PLC and BHP Brasil Ltda. under U.S. federal securities laws. The plaintiffs allege that Vale S.A. made false and misleading statements or did not make disclosures concerning the risks and dangers of the operations of Samarco's Fundão dam and the adequacy of related programs and procedures.

 

In June 2019, the Court issued a decision and order dismissing with prejudice the putative federal securities class action. In December 2019 the plaintiffs filed a Notice of Appeal to the Court of Appeals. On March 10, 2020, the plaintiff filed its opening appeal brief. A letter with the court requesting a deadline for our brief was filed on March 20, 2020. On the same day, the Court of Appeals for the Second Circuit accepted our request and has set June 8, 2020 as the deadline for the filing of our brief. Based on the assessment of the Company´s legal consultants, Vale has good arguments to oppose the appeal.

 

(iii) Class action lawsuits related to Vale’s American Depositary Receipts

 

With respect to litigation in the United States concerning Samarco’s Fundão dam, Vale and certain of our officers have been named as defendants in securities class action suits in the Federal Court in New York brought by holders of Vale’s American Depositary Receipts under U.S. federal securities laws. The suit was brought as a putative class action on behalf of holders of Vale’s American Depositary Receipts (“ADRs”), alleging violations of the U.S. Federal Securities laws on the basis of alleged false and misleading statements or omissions concerning the risks of operations of Samarco’s Fundão dam and the adequacy of the related programs and procedures.    

 

On March 23, 2017 the judge issued a decision rejecting a significant portion of the claims against Vale S.A. and the individual defendants, determining the prosecution of the action with respect to more limited claims. The portion of plaintiffs' case that remains is related to certain statements about procedures, policies and risk mitigation plans contained in Vale S.A.'s sustainability reports in 2013 and 2014, and certain statements regarding to the responsibility of Vale S.A. for the Fundão dam failure made in a conference call in November 2015. 

 

Fact and Expert discovery was totally concluded in October 2019. On September 27, 2019, the Court denied class certification.  On December 26, 2019, the Court issued an Order stating that the parties had informed the Court that the parties had reached a settlement in principle.  The Court directed the parties to submit a motion to approve a proposed settlement no later than February 07, 2020. On February 07, 2020, the parties have filed to the Court an “Stipulation and Agreement of Settlement”. On February 22, 2020, the court signed our proposed order preliminarily approving the settlement in the total amount of R$130 (US$25 million) and has also set a settlement conference for June 10, 2020 to discuss final approval of the settlement.

 

(iv) Criminal lawsuit

 

In 2016, the MPF brought a criminal lawsuit against Samarco and its shareholders, VogBr Recursos Hídricos e Geotecnia Ltda. and 22 individuals for the consequences related to Fundão dam failure. Currently, the progress of the criminal action is paralyzed due to the judgment of Habeas Corpus, with no decision.

 

On April 23, 2019, the Federal Court from the 1st Region (“TRF1”) issued an Habeas Corpus writ and granted it to dismiss the criminal charges of homicide and physical injuries committed by oblique intent held against one of the defendants on the criminal action. At the same opportunity, the Court extended the writ’s issuance to all other defendants on the case as the criminal information does not describe the crimes of homicide and physical injury, but the crime of flooding qualified by the result of death and physical injury as a consequence of the Fundão dam’s failure. Therefore, the Court dismissed the homicide and physical injuries charges held against all defendants.

 

After acknowledging the Court’s decisions, the Ponte Nova Court changed the process, withdrawing the case from the grand jury and putting it in the ordinary processing. In the same opportunity, the judge ruled to determine the parties to manifest themselves about this process alteration and, after the Federal Prosecution and the defenses presented their petitions, the judge withdrew the charges against Vale and BHP executives and the accusation withheld for trial for the two companies together with Samarco and its representatives. The accusation of crimes committed against the Environmental Public Administration by Vale and one of its executives also remained unaltered. Additionally, the judge determined precatory letters to be sent to collect the defense witnesses testimonies and opened a 60 day term for the defenses to present a list of questions to be put together with the international cooperation for the testimony of the accusation witnesses residing in Canada.

 

41

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

In March, 2020, the Lower Court at Ponte Nova scheduled hearings to take place in April and May, 2020, to take depositions of those defense witnesses who were able to attend it, but due to the new coronavirus pandemic, all hearings in the country which were previously scheduled to take place in April have been cancelled by an express determination from the National Justice Council. Vale are currently waiting a confirmation from the Courts whether hearings previously scheduled to take place in the next months will be maintained or not.

 

(v) Tax proceedings

 

In 2018, the Office of the Attorney General for the National Treasury (PGFN) requested a judicial order to secure the payment of alleged federal tax and social security debts regarding Samarco. In May 2019, a favorable decision was issued dismissing the claim without prejudice, due to lack of procedural interest. The PGFN filed an appeal to the Local Court. The Company is waiting for the Court ruling.

 

e) Contingent Assets

 

(i) Compulsory loan

 

In 2015, the Company requested for the enforcement of the judicial decision in the amount of R$524 related to a favorable unappealable decision which partially recognized its right to refund the differences of monetary adjustments and interests due over to the third convertible bonds issued by Eletrobrás shares in the period within 1987 to 1993. In November 2019, the Company requested for the payment of the amount of R$297 recognized by Eletrobrás as due and awaits judicial analysis of the surplus amount. Therefore, it has not possible yet to determine the amount to be refunded and, consequently, the asset has not been registered in the Company's interim financial statements.

 

(ii) ICMS included in PIS and COFINS tax base

 

Vale had been discussing the issue regarding the exclusion of ICMS in PIS and COFINS tax basis in two judicial proceedings, related to taxable events after December 2001.  In one of the proceedings, the company has obtained a definitive favorable decision (res judicata). In the second proceeding the current decision is also favorable to the Company, but this proceeding did not reach the res judicata. Vale is waiting for a final decision on the leading that will be issued by Supreme Court in order to calculate the amount to be refunded arising from both proceedings. The Company did not record this asset in its interim financial statements.

 

(iii)Arbitral award related to Simandou

 

In 2010, Vale acquired a 51% stake in VBG - Vale BSGR Limited ("VBG") (formerly BSG Resources (Guinea) Limited), which had iron ore concession rights in Simandou South ("Zogota") and iron ore exploration permits over the areas known as Simandou Blocks 1 & 2 in Guinea. In 2014, the Republic of Guinea revoked those rights after a finding that BSGR had obtained them through bribery of Guinean government officials. The Republic of Guinea did not make any finding of any involvement or responsibility on Vale’s part.

 

Vale commenced arbitration proceedings against BSG Resources Limited (“BSGR”) in April 2014, and in April 2019, the arbitral tribunal in London ruled in Vale’s favor and ordered BSGR to pay to Vale the amount of R$6,238 (US$1.2 billion) plus costs and interest (with interest and costs, the award exceeds R$10,397 (US$2.0 billion)).  The arbitral tribunal ruled that BSGR had defrauded Vale by inducing Vale to enter into the joint venture. On September 20, 2019, the English High Court ruled that Vale can proceed with enforcement of its R$10,397 (US$2.0 billion) arbitration award.

 

BSGR went into administration in March 2018, and Vale has commenced legal proceedings against BSGR before courts in London, England and in the United States District Court for the Southern District of New York to enforce the arbitral award against BSGR.

 

BSGR challenged the award before the English High Court, and its challenge was dismissed on November 29, 2019. BSGR has also applied to the United States Bankruptcy Court to have its administration recognized in the United States.

 

On December 3, 2019, Vale and two of its affiliates filed new litigation proceedings in the English High Court, claiming damages of approximately R$9,618 (US$1.85 billion), against certain individuals and related parties to BSGR.

 

Vale intends to pursue the enforcement of the award and collection of the amounts due by all legally available means, but since there can be no assurance as to the timing and amount of any collections, the asset was not recognized in its financial statements.

 

42

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

(iv)Canadian Tax Litigation Matter

 

Vale Canada Limited (“VCL”) and the Canadian Department of Justice - Canada Revenue Agency signed an agreement regarding a tax litigation matter related to the appropriate tax treatment of certain receipts received and expenditures incurred by VCL in respect of merger and acquisition transactions in 2006. In 2019, the Company recognized a contingent asset in the amount of R$813 (CAD 221 million) for the agreed tax refund including interest and recognized in 2020 an additional amount of R$77 (CAD21 million) related to interest.  On the date of the issue of this interim financial statement the Company received the total amount due to this contingent asset.

 

22.       Employee postretirement obligations

 

Reconciliation of net liabilities recognized in the statement of financial position

 

  Consolidated 
  March 31, 2020  December 31, 2019 
  Overfunded pension plans  Underfunded pension plans  Other benefits  Overfunded pension plans  Underfunded pension plans  Other benefits 
Amount recognized in the statement of financial position                        
Present value of actuarial liabilities  (15,545)  (19,779)  (6,636)  (16,148)  (17,818)  (6,066)
Fair value of assets  18,882   16,335   -   21,380   15,019   - 
Effect of the asset ceiling  (3,337)  -   -   (5,232)  -   - 
Liabilities  -   (3,444)  (6,636)  -   (2,799)  (6,066)
                         
Current liabilities  -   (38)  (333)  -   (50)  (306)
Non-current liabilities  -   (3,406)  (6,303)  -   (2,749)  (5,760)
Liabilities  -   (3,444)  (6,636)  -   (2,799)  (6,066)

  

23.Stockholders’ equity

 

a) Share capital

 

As at March 31, 2020, the share capital was R$77,300 corresponding to 5,284,474,782 shares issued and fully paid without par value.

 

  March 31, 2020 
Stockholders Common shares  Golden shares  Total 
Litel Participações S.A. and Litela Participações S.A.  594,565,564   -   594,565,564 
BNDES Participações S.A.  323,496,276   -   323,496,276 
Bradespar S.A.  293,907,266   -   293,907,266 
Mitsui & Co., Ltd  286,347,055   -   286,347,055 
Foreign investors - ADRs  1,114,014,119   -   1,114,014,119 
Foreign institutional investors in local market  1,127,547,619   -   1,127,547,619 
FMP - FGTS  45,331,663   -   45,331,663 
PIBB - Fund  2,840,426   -   2,840,426 
Institutional investors  1,017,710,153   -   1,017,710,153 
Retail investors in Brazil  324,150,801   -   324,150,801 
Brazilian Government (Golden Share)  -   12   12 
Shares outstanding  5,129,910,942   12   5,129,910,954 
Shares in treasury  154,563,828   -   154,563,828 
Total issued shares  5,284,474,770   12   5,284,474,782 
             
Share capital per class of shares (in millions)  77,300   -   77,300 
             
Total authorized shares  7,000,000,000   -   7,000,000,000 

 

b) Shares in treasury

 

In March 2020 and 2019, the Company used 1,628,485 and 2,024,059 treasury shares, respectively, to pay the Matching program of its eligible executives, in the amount of R$68 and R$84, respectively, recognized as “assignment and transfer of shares”.

  

43

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

24.        Related parties

 

The Company’s related parties are subsidiaries, joint ventures, associates, stockholders and its related entities and key management personnel of the Company. Transactions between the parent company and its subsidiaries are eliminated on consolidation and are not disclosed in this note.

 

Related party transactions were made by the Company on terms equivalent to those that prevail in arm´s-length transactions, with respect to price and market conditions that are no less favorable to the Company than those arranged with third parties.

 

Purchases, accounts receivable and other assets, and accounts payable and other liabilities relate largely to amounts charged by joint ventures and associates related to the pelletizing plants operational lease and railway transportation services.

 

Information about related party transactions and effects on the financial statements is set out below:

 

a)       Transactions with related parties

 

  Consolidated 
  Three-month period ended March 31, 
  2020  2019 
  Joint Ventures  Associates  Major stockholders  Total  Joint Ventures  Associates  Major stockholders  Total 
Net operating revenue  308   274   142   724   243   255   165   663 
Cost and operating expenses  (1,201)  (28)  -   (1,229)  (1,882)  (30)  -   (1,912)
Financial result  33   8   (106)  (65)  12   (1)  (116)  (105)
                                 

Net operating revenue relates to sale of iron ore to the steelmakers and right to use capacity on railroads. Cost and operating expenses mostly relates to the variable lease payments of the pelletizing plants and the logistical costs for using the Nacala Logistic Corridor.

 

b)       Outstanding balances with related parties

 

  Consolidated 
  March 31, 2020  December 31, 2019 
  Joint Ventures  Associates  Major stockholders  Total  Joint Ventures  Associates  Major stockholders  Total 
Assets                                
Cash and cash equivalents  -   -   7,153   7,153   -   -   5,578   5,578 
Accounts receivable  353   614   11   978   367   88   19   474 
Dividends receivable  524   25   -   549   335   25   -   360 
Loans (i)  9,699   -   -   9,699   7,737   -   -   7,737 
Derivatives financial instruments  -   -   -   -   -   -   169   169 
Other assets  416   -   -   416   262   -   -   262 
                                 
Liabilities                                
Supplier and contractors  478   49   124   651   1,218   113   149   1,480 
Loans (ii)  -   7,136   5,739   12,875   -   5,511   6,804   12,315 
Derivatives financial instruments  -   -   418   418   -   -   259   259 
Other liabilities  2,466   384   -   2,850   2,293   -   -   2,293 
                                 

(i) Refers to the loan with Nacala BV.

(ii) Mainly relates to the loan from Pangea Emirates Ltd.

 

Major stockholders

 

Refers to regular financial instruments with large financial institutions of which the stockholders are part of the controlling “shareholders’ agreement”.

 

44

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

25.       Select notes to Parent Company information (individual interim information)

 

a)       Other financial assets and liabilities

 

  Parent company 
  Current  Non-Current 
  March 31,
2020
  December 31,
2019
  March 31,
2020
  December 31,
2019
 
Other financial assets                
Restricted cash  -   -   527   530 
Loans  -   -   18   18 
Derivative financial instruments  312   450   305   593 
Investments in equity securities  -   -   1,679   2,555 
Related parties - Loans  307   690   227   276 
   619   1,140   2,756   3,972 
Other financial liabilities                
Derivative financial instruments  1,273   280   3,722   972 
Related parties - Loans  6,448   6,392   84,387   62,861 
Financial guarantees  -   -   2,808   2,116 
Participative stockholders' debentures  -   -   10,519   10,416 
   7,721   6,672   101,436   76,365 

 

b)        Investments

 

  Parent company 
  2020  2019 
Balance at January 1st,  144,594   139,510 
Additions and Capitalizations  1,104   2,092 
Disposals  (118)  (84)
Translation adjustment  28,920   1,366 
Equity results in income statement  (2,208)  4,472 
Equity results in statement of comprehensive income  157   16 
Dividends declared  (535)  (164)
Others  522   (18)
Balance at March 31,  172,436   147,190 

 

c)        Intangibles

 

  Parent company 
  Concessions  Right of use  Software  Total 
Balance at December 31, 2019  15,993   99   179   16,271 
Additions  87   -   28   115 
Disposals  (5)  -   -   (5)
Amortization  (215)  (1)  (14)  (230)
Balance at March 31, 2020  15,860   98   193   16,151 
Cost  20,566   223   2,533   23,322 
Accumulated amortization  (4,706)  (125)  (2,340)  (7,171)
Balance at March 31, 2020  15,860   98   193   16,151 

 

  Parent company 
  Concessions  Right of use  Software  Total 
Balance at December 31, 2018  15,240   105   277   15,622 
Additions  815   -   24   839 
Disposals  (38)  -   -   (38)
Amortization  (360)  (1)  (62)  (423)
Balance at March 31, 2019  15,657   104   239   16,000 
Cost  19,662   223   2,567   22,452 
Accumulated amortization  (4,005)  (119)  (2,328)  (6,452)
Balance at March 31, 2019  15,657   104   239   16,000 

 

45

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

d)        Property, plant and equipment

 

  Parent company 
  Land  Building  Facilities  Equipment  Mineral properties  Leasing agreements  Others  Constructions in progress  Total 
Balance at December 31, 2019  1,797   26,555   30,219   10,213   7,153   2,114   19,606   8,218   105,875 
Additions (i)  -   -   -   -   -   117   -   1,980   2,097 
Disposals  -   -   (9)  (2)  (19)  -   (3)  (7)  (40)
Assets retirement obligation  -   -   -   -   (383)  -   -   -   (383)
Depreciation, amortization and depletion  -   (271)  (395)  (354)  (159)  (87)  (492)  -   (1,758)
Transfers  84   (79)  368   273   935   -   424   (2,005)  - 
Balance at March 31, 2020  1,881   26,205   30,183   10,130   7,527   2,144   19,535   8,186   105,791 
Cost  1,881   34,377   39,725   18,827   10,148   2,539   33,400   8,186   149,083 
Accumulated depreciation  -   (8,172)  (9,542)  (8,697)  (2,621)  (395)  (13,865)  -   (43,292)
Balance at March 31, 2020  1,881   26,205   30,183   10,130   7,527   2,144   19,535   8,186   105,791 

 

  Parent company 
  Land  Building  Facilities  Equipment  Mineral properties  Leasing agreements  Others  Constructions in progress  Total 
Balance at December 31, 2018  1,735   26,559   30,593   10,004   7,689   -   19,240   7,996   103,816 
Effects of IFRS 16/CPC 06 (R2) adoption  -   -   -   -   -   2,058   -   -   2,058 
Additions (i)  -   -   -   -   -   -   -   997   997 
Disposals  (2)  (229)  -   (3)  (92)  -   (4)  (276)  (606)
Assets retirement obligation  -   -   -   -   208   -   -   -   208 
Depreciation, amortization and depletion  -   (248)  (346)  (327)  (136)  (76)  (705)  -   (1,838)
Transfers  1   437   63   374   (11)  -   519   (1,383)  - 
Balance at March 31, 2019  1,734   26,519   30,310   10,048   7,658   1,982   19,050   7,334   104,635 
Cost  1,734   33,442   38,422   17,598   9,850   2,058   31,161   7,334   141,599 
Accumulated depreciation  -   (6,923)  (8,112)  (7,550)  (2,192)  (76)  (12,111)  -   (36,964)
Balance at March 31, 2019  1,734   26,519   30,310   10,048   7,658   1,982   19,050   7,334   104,635 

 

(i) Includes capitalized borrowing costs.

 

e)        Loans and borrowings

 

  Parent company 
  Current liabilities  Non-current liabilities 
   March 31,
2020
   December 31,
2019
   March 31,
2020
   December 31,
2019
 
Debt contracts in the international markets                
Floating rates in:                
US$  898   445   7,863   6,419 
Fixed rates in:                
US$  -   536   2,705   2,098 
EUR  -   -   4,295   3,398 
Accrued charges  121   238   -   - 
   1,019   1,219   14,863   11,915 
Debt contracts in Brazil                
Floating rates in:                
R$, indexed to TJLP, TR, IPCA, IGP-M and CDI  2,301   2,279   5,892   6,418 
Basket of currencies and US$ indexed to LIBOR  232   180   232   225 
Fixed rates in:                
R$  126   151   132   155 
Accrued charges  117   157   -   - 
   2,776   2,767   6,256   6,798 
Total  3,795   3,986   21,119   18,713 

 

46

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

The future flows of debt payments (principal) are as follows:

 

  Parent company 
   Debt principal 
2020  2,465 
2021  2,917 
2022  3,386 
2023  5,830 
Between 2024 and 2028  7,287 
2029 onwards  2,791 
   24,676 

 

f)        Provisions

 

  Parent company 
  Current liabilities  Non-current liabilities 
  March 31,
2020
  December 31, 2019  March 31,
2020
  December 31,
2019
 
Payroll, related charges and other remunerations  1,418   2,124   -   - 
Environmental obligations  469   490   656   585 
Asset retirement obligations  479   488   3,172   3,567 
Provisions for litigation  -   -   5,158   5,102 
Employee postretirement obligations  119   108   2,117   2,114 
Provisions  2,485   3,210   11,103   11,368 

 

g)        Provisions for litigation

 

  Parent company 
  Tax litigation  Civil litigation  Labor litigation  Environmental litigation  Total of litigation provision 
Balance at December 31, 2019  2,325   1,004   1,734   39   5,102 
Additions and reversals, net  14   14   55   3   86 
Payments  (2)  (26)  (87)  -   (115)
Indexation and interest  25   33   25   2   85 
Balance at March 31, 2020  2,362   1,025   1,727   44   5,158 

 

  Parent company 
  Tax litigation (i)  Civil litigation  Labor litigation  Environmental litigation  Total of litigation provision 
Balance at December 31, 2018  2,347   467   1,660   9   4,483 
Additions and reversals, net  26   76   60   19   181 
Payments  (8)  (1)  (89)  5   (93)
Indexation and interest  (31)  38   26   -   33 
Balance at March 31, 2019  2,334   580   1,657   33   4,604 

 

(i) Includes amounts regarding to social security claims that were classified as labor claims.

 

h)        Contingent liabilities

 

  Parent company 
  March 31,
2020
  December 31,
2019
 
Tax litigation  34,698   30,905 
Civil litigation  4,068   4,589 
Labor litigation  2,667   3,025 
Environmental litigation  3,604   4,239 
Brumadinho event  698   635 
Total  45,735   43,393 

 

47

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

i)        Income taxes

 

The total amount presented as income taxes in the income statement is reconciled to the rate established by law, as follows:

  

  Parent company 
  Three-month period ended March 31, 
  2020  2019 
Loss before income taxes  (3,114)  (10,305)
Income taxes at statutory rates - 34%  1,059   3,504 
Adjustments that affect the basis of taxes:        
Tax incentives  1,225   8 
Equity results  (751)  1,521 
Others (i)  2,565   (1,150)
Income taxes  4,098   3,883 

 

(i) Refers to the impact on the parent company of the profit of the subsidiaries abroad taxed in Brazil.

   

48

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

26.       Additional information about derivatives financial instruments

  

The risk of the derivatives portfolio is measured using the delta-Normal parametric approach and considers that the future distribution of the risk factors and its correlations tends to present the same statistic properties verified in the historical data. The value at risk estimate considers a 95% confidence level for a one-business day time horizon.

 

The following tables detail the derivatives positions for Vale and its controlled companies as of March 31, 2020, with the following information: notional amount, fair value including credit risk, gains or losses in the period, value at risk and the fair value breakdown by year of maturity.

 

a)Foreign exchange and interest rates derivative positions

 

(i)Protection programs for the R$ denominated debt instruments and other liabilities

 

To reduce cash flow volatility, swap and forward transactions were implemented to convert into US$ the cash flows from certain liabilities denominated in R$ with interest rates linked mainly to CDI, TJLP and IPCA. In those swaps, Vale pays fixed or floating rates in US$ and receives payments in R$ linked to the interest rates of the protected liabilities.

 

The swap and forward transactions were negotiated over-the-counter and the protected items are the cash flows from debt instruments and other liabilities linked to R$. These programs transform into US$ the obligations linked to R$ to achieve a currency offset in the Company’s cash flows, by matching its receivables - mainly linked to US$ - with its payables.

  

  Notional  Fair value  Financial Settlement Inflows (Outflows)  Value at Risk  Fair value by year 
Flow March 31, 2020  December 31, 2019  Index  Average rate  March 31, 2020  December 31, 2019  March 31, 2020  March 31, 2020  2020  2021  2022+ 
CDI vs. US$ fixed rate swap                  (2,626)  (155)  (21)  213   (568)  (293)  (1,765)
Receivable  R$11,167   R$2,115   CDI   100.08%                            
Payable  US$2,652   US$558   Fix   2.07%                            
                                             
TJLP vs. US$ fixed rate swap                  (964)  (304)  (16)  50   (183)  (250)  (531)
Receivable  R$2,027   R$2,111   TJLP +   1.15%                            
Payable  US$572   US$601   Fix   2.99%                            
                                             
R$ fixed rate vs. US$ fixed rate swap                  (592)  (72)  (11)  42   11   (329)  (274)
Receivable  R$2,060   R$2,173   Fix   6.11%                            
Payable  US$551   US$604   Fix   0.24%                            
                                             
IPCA vs. US$ fixed rate swap                  (916)  185   (26)  59   (50)  (418)  (448)
Receivable  R$2,507   R$2,826   IPCA +   5.06%                            
Payable  US$662   US$759   Fix   4.01%                            
                                             
IPCA vs. CDI swap                  418   422   -   11   238   24   156 
Receivable  R$1,660   R$1,634   IPCA +   6.62%                            
Payable  R$1,350   R$1,350   CDI   98.57%                            

 

  Notional        Fair value  Value at Risk  Fair value by year 
Flow March 31,
2020
  December 31,
2019
  Bought / Sold  Average rate  March 31,
2020
  December 31,
2019
  March 31,
2020
  2020+ 
Forward  R$659   R$121   B   5.81   (40)  6   14   (40)

   

49

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

(ii) Protection program for EUR denominated debt instruments

 

To reduce the cash flow volatility, swap transactions were implemented to convert into US$ the cash flows from certain debt instruments issued in Euros by Vale. In those swaps, Vale receives fixed rates in EUR and pays fixed rates in US$.

 

The swap transactions were negotiated over-the-counter and the protected items are the cash flows from debt instruments linked to EUR. The financial settlement inflows/outflows are offset by the protected items’ losses/gains due to EUR/US$ exchange rate.

 

  Notional        Fair value  Financial Settlement Inflows (Outflows)  Value at Risk  Fair value by year 
Flow March 31, 2020  December 31, 2019  Index  Average rate  March 31, 2020  December 31, 2019  March 31, 2020  March 31, 2020  2020  2021  2022+ 
EUR fixed rate vs. US$ fixed rate swap                  (325)  (142)  (24)  24   -   (30)  (295)
Receivable 500  500   Fix   3.75%                            
Payable  US$613   US$613   Fix   4.29%                            

  

(iii) Protection program for Libor floating interest rate US$ denominated debt

 

To reduce the cash flow volatility, swap transactions were implemented to convert Libor floating interest rate cash flows from certain debt instruments issued by Vale into fixed interest rate. In those swaps, Vale receives floating rates and pays fixed rates in US$.

  

  Notional        Fair value  Value at Risk  Fair value by year 
Flow March 31, 2020  December 31, 2019  Index  Average rate  March 31, 2020  December 31, 2019  March 31, 2020  2020  2021  2022+ 
Libor vs. US$ fixed rate swap                  -   -   2   1   (1)  - 
Receivable  US$100   -   Libor 3M   -                         
Payable  US$100   -   Fix   0.50%                        

 

b) Commodities derivative positions

 

(i)Protection program for the purchase of fuel oil used on ships

 

In order to reduce the impact of fluctuations in fuel oil prices on the hiring and availability of maritime freight and, consequently, to reduce the Company’s cash flow volatility, hedging operations were carried out through options contracts on Brent Crude Oil and Gasoil (10ppm) for different portions of the exposure.

 

The derivative transactions were negotiated over-the-counter and the protected item is part of the Vale’s costs linked to the price of fuel oil used on ships. The financial settlement inflows/outflows are offset by the protected items’ losses/gains.

 

Brent Crude Oil Options

 

  Notional (ton)        Fair value  Financial settlement Inflows (Outflows)  Value at Risk  Fair value by year 
Flow March 31, 2020  December 31, 2019  Bought / Sold  Average strike (US$/bbl)  March 31, 2020  December 31, 2019  March 31, 2020  March 31, 2020  2020 
Call options  9,906,000   7,048,500   B   71   13   45   -   2   13 
Put options  9,906,000   7,048,500   S   46   (734)  (15)  (71)  42   (734)
Total                  (721)  30   (71)  44   (721)

  

50

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

Gasoil Options

 

  Notional (ton)       Fair value  Financial settlement Inflows (Outflows)  Value at Risk  Fair value by year 
Flow March 31, 2020  December 31, 2019  Bought / Sold Average strike (US$/bbl.)  March 31, 2020  December 31, 2019  March 31, 2020  March 31, 2020  2020 
Call options  9,610,500   7,710,750  B  89   4   24   -   1   4 
Put options  9,610,500   7,710,750  S  57   (835)  (10)  (100)  54   (835)
Total                (831)  14   (100)  55   (831)
                                   

 

(ii) Protection programs for base metals raw materials and products

 

Nickel Revenue Hedging Program

 

In 2019, to reduce the volatility of its future cash flows arising from changes in nickel prices, the company implemented a Nickel Revenue Hedging Program. Under this program, hedge operations were executed using option contracts to protect a portion of the highly probable forecast sales at floating prices, thus establishing a cushion to guarantee prices above our Nickel Average Unit Cash Cost and investments for the hedged volumes and hedge accounting treatment is given to this program.

 

In March 2020, 73,734 options were sold, leading to the partial discontinuation of the hedge accounting program. The cumulative gain recognized in the cash flow hedge reserve until the settlement of the option contracts will be reclassified to the income statement as the Company recognizes the revenue from nickel sales (hedged item).

 

On April 1, 2020 (subsequent event), the nickel hedge accounting program was fully settled.

 

  Notional (ton)       Fair value  Financial settlement Inflows (Outflows)  Value at Risk  Fair value by year 
Flow March 31, 2020  December 31, 2019  Bought / Sold Average strike (US$/ton)  March 31, 2020  December 31, 2019  March 31, 2020  March 31, 2020  2020  2021 
Nickel Revenue Hedging Program                                      
Call options  2,250   75,984  S  19,188   -   (49)  -   -   -   - 
Put options  2,250   75,984  B  16,000   53   652   1,359   4   53   - 
Total                53   603   1,359   4   53   - 

 

51

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

Palladium Revenue Hedging Program

 

To reduce the volatility of its future cash flows arising from changes in palladium prices, the Company implemented a Palladium Revenue Hedging Program. Under this program, hedge operations were executed using forwards and option contracts to protect a portion of the highly probable forecast sales at floating prices. A hedge accounting treatment is given to this program.

 

The derivative transactions under the program are negotiated over-the-counter and the financial settlement inflows/outflows are offset by the protected items’ losses/gains due to palladium price changes.

 

  Notional (t oz)       Fair value  Financial settlement Inflows (Outflows)  Value at Risk  Fair value by year 
Flow March 31,
2020
  December 31,
2019
  Bought /
Sold
 Average
strike
(US$/t oz)
  March 31,
2020
  December 31,
2019
  March 31,
2020
  March 31,
2020
  2020  2021 
Palladium Revenue Hedging Program                                      
Palladium Forwards  14,400   -  S  2,249   (3)  -   2   7   (3)  - 
                                       
Call Options  14,400   -  S  2,387   (45)  -   -   5   (21)  (24)
Put Options  14,400   -  B  2,050   38   -   -   2   18   20 
Total                (10)  -   2   14   (6)  (4)

 

c) Freight derivative positions

 

To reduce the impact of maritime freight price volatility on the Company’s cash flow, freight hedging transactions were implemented, through Forward Freight Agreements (FFAs). The protected item is part of Vale’s costs linked to maritime freight spot prices. The financial settlement inflows/outflows of the FFAs are offset by the protected items’ losses/gains due to freight prices changes.

 

The FFAs are contracts traded over the counter and can be cleared through a Clearing House, in this case subject to margin requirements.

 

  Notional (days)       Fair value  Financial Settlement Inflows (Outflows)  Value at Risk  Fair value by year 
Flow March 31, 2020  December 31, 2019  Bought / Sold Average strike (US$/day)  March 31, 2020  December 31, 2019  March 31, 2020  March 31, 2020  2020+ 
Freight forwards  1,870   1,050  B  12,035   -   1   (17)  4   - 

 

 

52

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

d) Wheaton Precious Metals Corp. warrants

 

The Company owned warrants issued by Wheaton Precious Metals Corp. (WPM), a Canadian company with stocks negotiated on the Toronto Stock Exchange and the New York Stock Exchange. Such warrants have payoff similar to that of an American call option and were received as part of the payment regarding the sale of part of gold payable flows produced as a sub product from Salobo copper mine and some nickel mines in Sudbury. In February 2020, the Company sold all of its warrants of Wheaton (equivalent to 10,000,000 common shares) for US$2.50 per warrant, totaling R$110 (US$25 million).

 

  Notional (quantity of warranties)       Fair value  Financial settlement Inflows (Outflows)  Value at Risk  Fair value by year 
Flow March 31, 2020  December 31, 2019  Bought / Sold Average strike (US$/share)  March 31, 2020  December 31, 2019  March 31, 2020  March 31, 2020  2023 
Call options  -   10,000,000  B  -   -   105   110   -   - 

 

e) Debentures convertible into shares of Valor da Logística Integrada (“VLI”)

 

The Company has debentures which lenders have the option to convert the outstanding debt into a specified quantity of VLI’s shares, owned by the Company. This option may be fully, or part exercised, upon payment to the Company of the strike price, considering the terms, conditions and other limitations existing in the agreement, at any time and at the discretion of the creditor, as of December 2017 until the maturity date of the debentures, December 2027.

 

  Notional (quantity)       Fair value  Financial settlement Inflows (Outflows)  Value at Risk  Fair value by year 
Flow March 31, 2020  December 31, 2019  Bought / Sold Average strike (R$/share)  March 31, 2020  December 31, 2019  March 31, 2020  March 31, 2020  2027 
Conversion options  140,239   140,239  S  7,221   (168)  (206)  -   10   (168)

 

f) Option related to SPCs Casa dos Ventos

 

The Company acquired in January 2019 a call option related to shares of the special purpose companies Ventos de São Bento Energias Renováveis, Ventos São Galvão Energias Renováveis and Ventos de Santo Eloy Energias Renováveis ​​(SPCs Casa dos Ventos), which are part of the wind farm of Folha Larga Sul project, in Campo Formoso, Bahia. This option was acquired in the context of the Company's signing of electric power purchase and sale agreements with Casa dos Ventos, supplied by this wind farm.

 

  Notional (quantity)       Fair value  Financial settlement Inflows (Outflows)  Value at Risk  Fair value by year 
Flow March 31, 2020  December 31, 2019  Bought / Sold Average strike (R$/share)  March 31, 2020  December 31, 2019  March 31, 2020  March 31, 2020  2022 
Call option  137,751,623   137,751,623  B  2.69   125   96   -   11   125 

 

53

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of Brazilian reais, unless otherwise stated
 

 

g) Embedded derivatives in contracts

 

In August 2014 the Company sold part of its stake in Valor da Logística Integrada (“VLI”) to an investment fund managed by Brookfield Asset Management ("Brookfield"). The sales contract includes a clause that establishes, under certain conditions, a minimum return guarantee on Brookfield's investment until August 2020. This clause is considered an embedded derivative, with payoff equivalent to that of a put option.

 

  Notional (quantity)       Fair value  Financial settlement Inflows (Outflows)  Value at Risk  Fair value by year 
Flow March 31, 2020  December 31, 2019  Bought / Sold Average strike (R$/share)  March 31, 2020  December 31, 2019  March 31, 2020  March 31, 2020  2027 
Put option  1,105,070,863   1,105,070,863  S  4.04   (360)  (279)  -   163   (360)

 

The Company has some nickel concentrate and raw materials purchase agreements in which there are provisions based on nickel and copper future prices behavior. These provisions are considered as embedded derivatives.

  Notional (ton)       Fair value  Financial settlement Inflows (Outflows)  Value at Risk  Fair value by year 
Flow March 31, 2020  December 31, 2019  Bought / Sold Average strike (US$/ton)  March 31, 2020  December 31, 2019  March 31, 2020  March 31, 2020  2020 
Nickel forwards  1,533   1,497  S  12,691   7   9   -   3   7 
Copper forwards  881   1,009  S  5,637   2   (1)  -   -   2 
Total                9   8   -   3   9 

 

The Company has also a natural gas purchase agreement in which there´s a clause that defines that a premium can be charged if the Company’s pellet sales prices trade above a pre-defined level. This clause is considered an embedded derivative.

 

  Notional (volume/month)       Fair value  Financial settlement Inflows (Outflows)  Value at Risk  Fair value by year 
Flow March 31, 2020  December 31, 2019  Bought / Sold Average strike (US$/ton)  March 31, 2020  December 31, 2019  March 31, 2020  March 31, 2020  2020  2021+ 
Call options  746,667   746,667  S  233   (1)  (3)  -   1   -   - 

 

54

 

 

 

 

 

 

Selected Notes to the Interim Financial Statements

Expressed in millions of Brazilian reais, unless otherwise stated

 

h) Sensitivity analysis of derivative financial instruments

 

The following tables present the potential value of the instruments given hypothetical stress scenarios for the main market risk factors that impact the derivatives positions. The scenarios were defined as follows:

 

- Probable: the probable scenario was defined as the fair value of the derivative instruments as at March 31, 2020

-Scenario I: fair value estimated considering a 25% deterioration in the associated risk variables
-Scenario II: fair value estimated considering a 50% deterioration in the associated risk variables

  

Instrument Instrument's main risk events Probable  Scenario I  Scenario II 
CDI vs. US$ fixed rate swap R$ depreciation  (2,626)  (6,101)  (9,577)
  US$ interest rate inside Brazil decrease  (2,626)  (2,838)  (3,062)
  Brazilian interest rate increase  (2,626)  (2,809)  (3,002)
Protected item: R$ denominated liabilities R$ depreciation   n.a.   -   - 
               
TJLP vs. US$ fixed rate swap R$ depreciation  (964)  (1,749)  (2,533)
  US$ interest rate inside Brazil decrease  (964)  (992)  (1,022)
  Brazilian interest rate increase  (964)  (1,036)  (1,101)
  TJLP interest rate decrease  (964)  (1,031)  (1,098)
Protected item: R$ denominated debt R$ depreciation   n.a.   -   - 
               
R$ fixed rate vs. US$ fixed rate swap R$ depreciation  (592)  (1,293)  (1,995)
  US$ interest rate inside Brazil decrease  (592)  (607)  (623)
  Brazilian interest rate increase  (592)  (633)  (672)
Protected item: R$ denominated debt R$ depreciation   n.a.   -   - 
               
IPCA vs. US$ fixed rate swap R$ depreciation  (916)  (1,840)  (2,765)
  US$ interest rate inside Brazil decrease  (916)  (963)  (1,013)
  Brazilian interest rate increase  (916)  (1,027)  (1,135)
  IPCA index decrease  (916)  (973)  (1,029)
Protected item: R$ denominated debt R$ depreciation   n.a.   -   - 
               
IPCA vs. CDI swap Brazilian interest rate increase  418   396   374 
  IPCA index decrease  418   407   395 
Protected item: R$ denominated debt linked to IPCA IPCA index decrease   n.a.   (407)  (395)
               
EUR fixed rate vs. US$ fixed rate swap EUR depreciation  (325)  (1,124)  (1,923)
  Euribor increase  (325)  (326)  (326)
  US$ Libor decrease  (325)  (326)  (348)
Protected item: EUR denominated debt EUR depreciation  n.a.   1,124   1,923 
               
US$ floating rate vs. US$ fixed rate swap US$ Libor decrease  -   (3)  (6)
Protected item: Libor US$ indexed debt US$ Libor decrease  n.a.   3   6 
               
NDF BRL/USD R$ depreciation  (40)  (218)  (396)
  US$ interest rate inside Brazil decrease  (40)  (49)  (59)
  Brazilian interest rate increase  (40)  (79)  (119)
Protected item: R$ denominated liabilities R$ depreciation  n.a.   -   - 

  

55

 

 

 

  

Selected Notes to the Interim Financial Statements

Expressed in millions of Brazilian reais, unless otherwise stated

 

Instrument Instrument's main risk events Probable  Scenario I  Scenario II 
Fuel oil protection              
Options Price input decrease  (1,552)  (2,386)  (3,297)
Protected item: Part of costs linked to bunker oil prices Price input decrease  n.a.   2,386   3,297 
               
Maritime Freight protection              
Forwards Freight price decrease  -   (29)  (59)
Protected item: Part of costs linked to maritime freight prices Freight price decrease  n.a.   29   59 
               
Nickel Revenue Hedging Program              
Options Nickel price increase  53   22   1 
Protected item: Part of nickel future revenues Nickel price increase  n.a.   (22)  (1)
               
Palladium Revenue Hedging Program              
Options Palladium price increase  (10)  (92)  (174)
Protected item: Part of palladium future revenues Palladium price increase  n.a.   2   174 
               
Conversion options - VLI VLI stock value increase  (168)  (273)  (415)
               
Option - SPCs Casa dos Ventos SPCs Casa dos Ventos stock value decrease  125   56   13 

 

Instrument Main risks Probable  Scenario I  Scenario II 
Embedded derivatives - Raw material purchase (nickel) Nickel price increase  7   (17)  (41)
Embedded derivatives - Raw material purchase (copper) Copper price increase  2   (4)  (10)
Embedded derivatives - Gas purchase Pellet price increase  (1)  (2)  (6)
Embedded derivatives - Guaranteed minimum return (VLI) VLI stock value decrease  (360)  (1,387)  (2,414)

  

56

 

  

 

 

 

Selected Notes to the Interim Financial Statements

Expressed in millions of Brazilian reais, unless otherwise stated

 

i) Financial counterparties’ ratings

 

The transactions of derivative instruments, cash and cash equivalents as well as short-term investments are held with financial institutions whose exposure limits are periodically reviewed and approved by the delegated authority. The financial institutions credit risk is performed through a methodology that considers, among other information, ratings provided by international rating agencies.

 

The table below presents the ratings published by agencies Moody’s and S&P regarding the main financial institutions that we hire derivative instruments, cash and cash equivalents transactions

   

Long term ratings by counterparty Moody’s S&P
ABN Amro A1 A
Agricultural Bank of China A1 A
ANZ Australia and New Zealand Banking Aa3 AA-
Banco ABC Ba3 BB-
Banco Bradesco Ba3 BB-
Banco do Brasil Ba3 BB-
Banco do Nordeste do Brasil SA Ba3 BB-
Banco Itaú Unibanco Ba3 BB-
Bank Mandiri Baa2 BBB-
Banco Santander A2 A
Banco Votorantim Ba3 BB-
Bancolombia Baa2 BB+
Bank of America A2 A-
Bank of China A1 A
Bank of Montreal Aa2 A+
Bank of Nova Scotia A2 A+
Bank of Shanghai Baa2 -
Bank Rakyat Indonesia (BRI) Baa2 BBB-
Banpara - BB-
Barclays Baa2 BBB
BBVA Banco Bilbao Vizcaya Argentaria A3 A-
BNP Paribas Aa3 A+
BTG Pactual Ba3 BB-
Caixa Econômica Federal Ba3 BB-
Calyon Aa3 A+
China Construction Bank A1 A
CIBC Canadian Imperial Bank Aa2 A+
CIMB Bank Baa1 A-
Citigroup A3 BBB+
Credit Suisse Baa2 BBB+
Deutsche Bank A3 BBB+
Goldman Sachs A3 BBB+
HSBC A2 A
Industrial and Commercial Bank of China A1 A
ING Baa1 BBB
Intesa Sanpaolo Spa Baa1 BBB
JP Morgan Chase & Co A2 A-
Macquarie Group Ltd A3 BBB+
Mega International Commercial Bank A1 A
Millenium BIM A1 A-
Bank of Tokyo Mitsubishi UFJ A1 A-
Mitsui & Co A1 A-
Mizuho Financial A1 A-
Morgan Stanley A3 BBB+
Muscat Bank Ba3 BB-
National Australia Bank Aa3 AA-
National Bank of Canada Aa3 A
National Bank of Oman Ba3 -
Natixis A1 A+
Rabobank Aa3 A+
Royal Bank of Canada Aa2 AA-
Banco Safra Ba3 BB-
Societe Generale A1 A
Standard Bank Group Ba2 -
Standard Chartered A2 BBB+
Sumitomo Mitsui Financial A1 A-
Toronto Dominion Bank Aa3 AA-
UBS Aa3 A-
Unicredit Baa1 BBB
United Overseas Bank Aa1 AA-

  

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Signatures

 

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

 

 Vale S.A.
 (Registrant)
  
Date: April 28, 2020By:/s/ Ivan Fadel
  Head of Investor Relations

 

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