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VALE Vale

Filed: 28 Oct 20, 8:00pm

 

 

 

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

 

October 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-F x 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 ¨ No x

 

(Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7))

 

(Check One) Yes ¨ No x

 

(Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.)

 

(Check One) Yes ¨ No x   

 

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

 

 

 

 

 

 

 

 

Interim Financial Statements

September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BRGAAP in R$ (English)

 

 

 

 

 

 

Vale S.A. Interim Financial Statements

Contents

 

 Page
Report on review of quarterly information2
Consolidated and Parent Company Income Statement4
Consolidated and Parent Company Statement of Comprehensive Income6
Consolidated and Parent Company Statement of Cash Flows7
Consolidated and Parent Company Statement of Financial Position9
Consolidated Statement of Changes in Equity10
Consolidated and Parent Company Value Added Statement11
Notes to the Interim Financial Statements12
1.  Corporate information12
2.  Basis of preparation of the interim financial statements12
3.  Significant events in the current period13
4.  Brumadinho’s dam failure15
5.  Information by business segment and by geographic area19
6.  Costs and expenses by nature24
7.  Financial results25
8.  Income taxes26
9.  Basic and diluted earnings (loss) per share27
10.    Accounts receivable27
11.    Inventories27
12.    Other financial assets and liabilities28
13.    Investments in associates and joint ventures28
14.    Intangibles31
15.    Property, plant and equipment32
16.    Loans, borrowings, cash and cash equivalents and short-term investments33
17.    Liabilities related to associates and joint ventures36
18.    Financial instruments classification37
19.    Fair value estimate38
20.    Derivative financial instruments39
21.    Provisions41
22.    Litigations41
23.    Employee post-retirement obligations44
24.    Stockholders’ equity45
25.    Related parties46
26.    Parent Company information (individual interim information)47
27.    Additional information about derivatives financial instruments50

 

  1 

 

 

 

 

(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 September 30, 2020, which comprises the statements of financial position as of September 30, 2020 and the respective income statements and the statements of comprehensive income for the three and nine-month periods then ended, of changes in equity for the nine-month period then ended, the parent company statement of cash flows for the nine-month period then ended and the consolidated statements of cash flows for the three and nine-month periods 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 the 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 - ITR, and presented in accordance with the standards issued by the CVM.

 

  2 

 

  

 

 

(A free translation of the original in Portuguese)

 

Vale S.A.

 

Emphasis of matter

 

Brumadinho’s dam failure

 

We draw attention to Note 4 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

 

The quarterly information referred to above includes the parent company and consolidated statements of value added for the nine-month period ended September 30, 2020. These statements are the responsibility of the Company's management and are presented as supplementary information under IAS 34. These statements have been subjected to review procedures performed together with the review of the interim accounting information for the purpose of concluding whether they are reconciled with the interim accounting information and accounting records, as applicable, and if their form and content are in accordance with the criteria defined in the accounting standard CPC 09 - "Statement of Value Added". Based on our review, nothing has come to our attention that causes us to believe that these statements of value added have not been properly prepared, in all material respects, in accordance with the criteria established in this accounting standard, and consistent with the parent company and consolidated interim accounting information taken as a whole.

 

Rio de Janeiro, October 28, 2020

 

PricewaterhouseCoopers Patricio Marques Roche
Auditores Independentes Contador CRC 1RJ081115/O-4
CRC 2SP000160/O-5  

 

  3 

 

 

 

 

Income Statement

In millions of Brazilian reais, except earnings per share data

 

    Consolidated 
    Three-month period ended
September 30,
  Nine-month period ended
September 30,
 
  Notes 2020  2019  2020  2019 
Net operating revenue  5(c)  57,906   40,664   129,591   107,621 
Cost of goods sold and services rendered  6(a)  (25,893)  (22,628)  (67,775)  (60,660)
Gross profit     32,013   18,036   61,816   46,961 
                    
Operating expenses                   
Selling and administrative expenses  6(b)  (684)  (504)  (1,864)  (1,349)
Research and evaluation expenses     (563)  (495)  (1,476)  (1,114)
Pre-operating and operational stoppage     (1,011)  (1,140)  (3,480)  (3,268)
Brumadinho event  4  (613)  (893)  (2,014)  (24,129)
Other operating expenses, net  6(c)  (612)  (492)  (2,161)  (963)
      (3,483)  (3,524)  (10,995)  (30,823)
Impairment and disposals of non-current assets  4, 13 and 15  (1,608)  (130)  (4,004)  (1,333)
Operating income     26,922   14,382   46,817   14,805 
                    
Financial income  7  370   525   1,576   1,368 
Financial expenses  7  (6,571)  (4,308)  (11,993)  (10,199)
Other financial items, net  7  (1,179)  (773)  (10,040)  (1,149)
Equity results and other results in associates and joint ventures  13 and 17  (211)  501   (3,763)  (2,047)
Income before income taxes     19,331   10,327   22,597   2,778 
                    
Income taxes  8                
Current tax     (4,018)  (3,382)  (7,352)  (5,770)
Deferred tax     (241)  (484)  5,341   2,489 
      (4,259)  (3,866)  (2,011)  (3,281)
                    
Net income (loss)     15,072   6,461   20,586   (503)
Loss attributable to noncontrolling interests     (543)  (81)  (1,302)  (239)
Net income (loss) attributable to Vale's stockholders     15,615   6,542   21,888   (264)
                    
Earnings (loss) per share attributable to Vale's stockholders:                   
Basic and diluted earnings (loss) per share:  9                
Common share (R$)     3.04   1.26   4.27   (0.05)

 

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

 

  4 

 

 

 

Income Statement

In millions of Brazilian reais, except earnings per share data

 

  Parent company 
  Three-month period ended September 30,  Nine-month period ended September 30, 
  2020  2019  2020  2019 
Net operating revenue  39,698   28,257   83,346   64,805 
Cost of goods sold and services rendered  (11,939)  (10,030)  (30,498)  (28,328)
Gross profit  27,759   18,227   52,848   36,477 
                 
Operating revenues (expenses)                
Selling and administrative expenses  (344)  (235)  (944)  (640)
Research and evaluation expenses  (241)  (217)  (621)  (552)
Pre-operating and operational stoppage  (957)  (1,126)  (3,118)  (3,171)
Equity results from subsidiaries  3,461   (2,147)  3,456   4,849 
Brumadinho event  (613)  (893)  (2,014)  (24,129)
Other operating expenses, net  (747)  (995)  (2,590)  (650)
   559   (5,613)  (5,831)  (24,293)
Impairment and disposals of non-current assets  (76)  (2)  (214)  (1,064)
Operating income  28,242   12,612   46,803   11,120 
                 
Financial income  74   130   626   298 
Financial expenses  (6,409)  (3,315)  (11,822)  (9,060)
Other financial items, net  (1,373)  (340)  (8,187)  (488)
Equity results and other results in associates and joint ventures  (211)  501   (3,763)  (2,047)
Income (loss) before income taxes  20,323   9,588   23,657   (177)
                 
Income taxes                
Current tax  (3,298)  (2,890)  (5,713)  (4,438)
Deferred tax  (1,410)  (156)  3,944   4,351 
   (4,708)  (3,046)  (1,769)  (87)
Net income (loss) attributable to Vale's stockholders  15,615   6,542   21,888   (264)
                 
Earnings (loss) per share attributable to Vale's stockholders:                
Basic and diluted earnings (loss) per share:                
Common share (R$)  3.04   1.26   4.27   (0.05)

 

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

 

  5 

 

 

 

 

Statement of Comprehensive Income

In millions of Brazilian reais

 

  Consolidated 
  Three-month period ended September 30,  Nine-month period ended September 30, 
  2020  2019  2020  2019 
Net income (loss)  15,072   6,461   20,586   (503)
Other comprehensive income (loss):                
Items that will not be subsequently reclassified to income statement                
Retirement benefit obligations  422   (291)  (624)  (840)
Fair value adjustment to investment in equity securities  815   (449)  312   (811)
Total items that will not be subsequently reclassified to income statement, net of tax  1,237   (740)  (312)  (1,651)
                 
Items that may be subsequently reclassified to income statement                
Translation adjustments  3,753   6,623   25,967   6,900 
Net investments hedge (note 20b)  (458)  (630)  (3,484)  (546)
Cash flow hedge (note 20b)  (299)  (4)  (291)  (4)
Total of items that may be subsequently reclassified to income statement, net of tax  2,996   5,989   22,192   6,350 
Total comprehensive income  19,305   11,710   42,466   4,196 
Comprehensive income (loss) attributable to noncontrolling interests  (726)  (49)  (2,976)  (216)
Comprehensive income attributable to Vale's stockholders  20,031   11,759   45,442   4,412 
                 

 

  Parent company 
  Three-month period ended September 30,  Nine-month period ended September 30, 
  2020  2019  2020  2019 
Net income (loss)  15,615   6,542   21,888   (264)
Other comprehensive income (loss):                
Items that will not be subsequently reclassified to income statement                
Retirement benefit obligations  210   (9)  191   (43)
Fair value adjustment to investment in equity securities  680   (368)  344   (656)
Equity results  347   (363)  (847)  (952)
Total items that will not be subsequently reclassified to income statement, net of tax  1,237   (740)  (312)  (1,651)
                 
Items that may be subsequently reclassified to income statement                
Translation adjustments  3,936   6,591   27,641   6,877 
Net investments hedge (note 20b)  (458)  (630)  (3,484)  (546)
Equity results  (299)  (4)  (291)  (4)
Total of items that may be subsequently reclassified to income statement, net of tax  3,179   5,957   23,866   6,327 
Total comprehensive income  20,031   11,759   45,442   4,412 

 

Items above are stated net of tax and the related taxes are disclosed in note 8.

 

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

 

  6 

 

 

 

 

Statement of Cash Flows

In millions of Brazilian reais

 

  Consolidated 
  Three-month period ended September 30,  Nine-month period ended September 30, 
  2020  2019  2020  2019 
Cash flow from operations (a)  29,919   20,496   50,107   46,237 
Interest on loans and borrowings paid (note 16)  (1,117)  (1,912)  (3,126)  (3,781)
Derivatives received (paid), net  (672)  (362)  62   (817)
Interest on participative stockholders' debentures paid  (3)  -   (472)  (351)
Income taxes (including settlement program)  (2,509)  (1,961)  (6,189)  (5,202)
Net cash provided by operating activities  25,618   16,261   40,382   36,086 
                 
Cash flow from investing activities:                
Investment fund applications  (172)  -   (672)  - 
Capital expenditures  (4,693)  (3,544)  (14,893)  (8,715)
Additions to investments  (1)  (281)  (366)  (283)
Acquisition of subsidiary, net of cash (note 13)  -   (1,570)  -   (3,454)
Proceeds from disposal of assets and investments  449   82   466   475 
Dividends received from associates and joint ventures  10   1   419   762 
Judicial deposits and restricted cash related to Brumadinho event (note 4)  50   6,683   (50)  (5,888)
Short-term investment  -   (3,770)  3,318   (3,820)
Other investments activities, net  (1,056)  232   (1,978)  (371)
Net cash used in investing activities  (5,413)  (2,167)  (13,756)  (21,294)
                 
Cash flow from financing activities:                
Loans and borrowings from third-parties (note 16)  9,585   3,784   34,004   11,886 
Payments of loans and borrowings from third-parties (note 16)  (29,368)  (7,013)  (31,674)  (14,213)
Payments of leasing  (244)  (206)  (726)  (507)
Dividends and interest on capital paid to stockholders  (18,492)  -   (18,492)  - 
Dividends and interest on capital paid to noncontrolling interest  (15)  (395)  (56)  (683)
Net cash used in financing activities  (38,534)  (3,830)  (16,944)  (3,517)
                 
Increase (decrease) in cash and cash equivalents  (18,329)  10,264   9,682   11,275 
Cash and cash equivalents in the beginning of the period  66,333   23,176   29,627   22,413 
Effect of exchange rate changes on cash and cash equivalents  1,885   2,204   10,580   1,956 
Cash and cash equivalents at end of the period  49,889   35,644   49,889   35,644 
                 
Non-cash transactions:                
Additions to property, plant and equipment - capitalized loans and borrowing costs  67   133   274   429 
                 
Cash flow from operating activities:                
Income before income taxes  19,331   10,327   22,597   2,778 
Adjusted for:                
Provisions related to Brumadinho event (note 4)  -   -   108   22,126 
Equity results and other results in associates and joint ventures  211   (501)  3,763   2,047 
Impairment and disposal of non-current assets  1,608   130   4,004   1,333 
Depreciation, depletion and amortization  4,162   3,690   12,174   10,505 
Financial results, net  7,380   4,556   20,457   9,980 
Changes in assets and liabilities:                
Accounts receivable  (1,513)  1,973   (4,031)  1,213 
Inventories  (1,626)  (214)  (3,157)  (1,019)
Suppliers and contractors (i)  1,064   1,635   (1,260)  3,198 
Provision - Payroll, related charges and other remunerations  792   737   538   (374)
Payments related to Brumadinho event (note 4) (ii)  (1,176)  (1,544)  (2,975)  (2,786)
Other assets and liabilities, net  (314)  (293)  (2,111)  (2,764)
Cash flow from operations (a)  29,919   20,496   50,107   46,237 

 

(i) Includes variable lease payments.

(ii) Additionally, the Company incurred in expenses in the amount of R$613 and R$1,906 for the three and nine-month periods ended September 30, 2020, respectively, and R$893 and R$1,906 for the three and nine-month periods ended September 30, 2019, 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 Cash Flows

In millions of Brazilian reais

 

  Parent company 
  Nine-month period ended September 30, 
  2020  2019 
Cash flow from operations (a)  34,147   31,350 
Interest on loans and borrowings paid  (4,426)  (3,801)
Derivatives received (paid), net  (735)  (946)
Interest on participative stockholders' debentures paid  (472)  (351)
Income taxes (including settlement program)  (5,379)  (3,852)
Net cash provided by operating activities  23,135   22,400 
         
Cash flow from investing activities:        
Capital expenditures  (7,534)  (4,548)
Additions to investments  (1,563)  (5,708)
Investment fund applications  (672)  - 
Proceeds from disposal of assets and investments  174   61 
Dividends received  422   1,650 
Judicial deposits and restricted cash related to Brumadinho event  (50)  (5,888)
Short-term investment  3,234   (3,435)
Other investments activities, net (i)  7,857   (3,413)
Net cash provided by (used in) investing activities  1,868   (21,281)
         
Cash flow from financing activities:        
Loans and borrowings from third-parties  25   2,894 
Payments of loans and borrowings from third-parties  (3,210)  (4,143)
Payments of leasing  (136)  (114)
Dividends and interest on capital paid to stockholders  (18,492)  - 
Net cash used in financing activities  (21,813)  (1,363)
         
Increase (decrease) in cash and cash equivalents  3,190   (244)
Cash and cash equivalents in the beginning of the period  9,597   4,835 
Effects of disposals of subsidiaries and merger, net of cash and cash equivalents  188   - 
Cash and cash equivalents at end of the period  12,975   4,591 
         
Non-cash transactions:        
Additions to property, plant and equipment - capitalized loans and borrowing costs  274   428 
         
Cash flow from operating activities:        
Income (loss) before income taxes  23,657   (177)
Adjusted for:        
Provisions related to Brumadinho event  108   22,126 
Equity results from subsidiaries  (3,456)  (4,849)
Equity results and other results in associates and joint ventures  3,763   2,047 
Impairment and disposal of non-current assets  214   1,064 
Depreciation, amortization and depletion  5,984   5,729 
Financial results, net  19,383   9,250 
Changes in assets and liabilities:        
Accounts receivable  (14,555)  (2,605)
Inventories  (853)  (532)
Suppliers and contractors  (116)  3,510 
Provision - Payroll, related charges and other remunerations  539   120 
Payments related to Brumadinho event (note 4)  (2,975)  (2,786)
Other assets and liabilities, net  2,454   (1,547)
Cash flow from operations (a)  34,147   31,350 

 

(i) Includes loans and advances from/to related parties.

 

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

 

  8 

 

 

 

  

Statement of Financial Position

In millions of Brazilian reais

  

    Consolidated  Parent company 
  Notes September 30,
2020
  December 31,
2019
  September 30,
2020
  December 31,
2019
 
Assets              
Current assets                   
Cash and cash equivalents  16  49,889   29,627   12,975   9,597 
Short-term investments  16  707   3,329   707   3,309 
Accounts receivable  10  17,002   10,195   36,412   16,599 
Other financial assets  12  2,562   3,062   32   1,140 
Inventories  11  24,418   17,228   6,217   5,310 
Prepaid income taxes     660   1,492   301   648 
Recoverable taxes     2,011   2,227   657   929 
Others     1,707   1,538   2,133   1,569 
      98,956   68,698   59,434   39,101 
                    
Non-current assets                   
Judicial deposits  22(c)  11,504   12,629   11,181   12,242 
Other financial assets  12  13,938   11,074   3,970   3,972 
Prepaid income taxes     3,047   2,407   -   - 
Recoverable taxes     2,998   2,446   1,887   1,471 
Deferred income taxes  8(a)  54,210   37,151   41,513   28,770 
Others     3,416   1,998   976   937 
      89,113   67,705   59,527   47,392 
                    
Investments  13  11,482   11,278   187,665   144,594 
Intangibles  14  37,307   34,257   16,215   16,271 
Property, plant and equipment  15  214,280   187,733   109,116   105,875 
      352,182   300,973   372,523   314,132 
Total assets     451,138   369,671   431,957   353,233 

 

Liabilities              
Current liabilities                   
Suppliers and contractors     17,478   16,556   10,606   10,765 
Loans, borrowings and leases  16  5,775   5,805   3,735   4,323 
Other financial liabilities  12  10,062   5,658   10,956   6,678 
Taxes payable     4,554   2,065   3,585   1,062 
Settlement program ("REFIS")  8(c)  1,764   1,737   1,728   1,702 
Liabilities related to associates and joint ventures  17  3,880   2,079   3,880   2,079 
Provisions  21  5,732   4,956   3,567   3,210 
Liabilities related to Brumadinho  4  5,282   6,319   5,282   6,319 
De-characterization of dams  4  1,804   1,247   1,804   1,247 
Interest on capital     -   6,333   -   6,333 
Others     3,928   3,051   4,555   3,181 
      60,259   55,806   49,698   46,899 
Non-current liabilities                   
Loans, borrowings and leases  16  79,207   54,038   23,021   20,546 
Other financial liabilities  12  29,831   17,622   120,643   76,365 
Settlement program ("REFIS")  8(c)  12,899   14,012   12,643   13,733 
Deferred income taxes  8(a)  9,220   7,585   -   - 
Provisions  21  43,891   34,233   11,448   11,368 
Liabilities related to Brumadinho  4  3,463   5,703   3,463   5,703 
De-characterization of dams  4  7,071   8,787   7,071   8,787 
Liabilities related to associates and joint ventures  17  4,495   4,774   4,495   4,774 
Streaming transactions     11,379   8,313   -   - 
Others     2,061   1,649   4,835   3,578 
      203,517   156,716   187,619   144,854 
Total liabilities     263,776   212,522   237,317   191,753 
                    
Stockholders' equity  24                
Equity attributable to Vale's stockholders     194,640   161,480   194,640   161,480 
Equity attributable to noncontrolling interests     (7,278)  (4,331)  -   - 
Total stockholders' equity     187,362   157,149   194,640   161,480 
Total liabilities and stockholders' equity     451,138   369,671   431,957   353,233 

 

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

 

  9 

 

 

 

 

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)  -   -   -   -   -   -   21,888   21,888   (1,302)  20,586 
Other comprehensive income  -   -   -   -   (1,470)  25,024   -   23,554   (1,674)  21,880 
Dividends and interest on capital of Vale's stockholders  -   -   (12,350)  -   -   -   -   (12,350)  -   (12,350)
Dividends of noncontrolling interest  -   -   -   -   -   -   -   -   (42)  (42)
Capitalization of noncontrolling interest advances  -   -   -   -   -   -   -   -   71   71 
Assignment and transfer of shares (note 24)  -   -   -   68   -   -   -   68   -   68 
Balance at September 30, 2020  77,300   3,634   16,227   (6,452)  (7,143)  89,186   21,888   194,640   (7,278)  187,362 
                                         
   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  -   -   -   -   -   -   (264)  (264)  (239)  (503)
Other comprehensive income  -   -   -   -   (1,474)  6,150   -   4,676   23   4,699 
Dividends of noncontrolling interest  -   -   -   -   -   -   -   -   (331)  (331)
Capitalization of noncontrolling interest advances  -   -   -   -   -   -   -   -   76   76 
Assignment and transfer of shares (note 24)  -   -   -   84   -   -   -   84   -   84 
Balance at September 30, 2019  77,300   3,634   42,502   (6,520)  (7,386)  65,633   (264)  174,899   2,809   177,708 
                                         

 

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

 

  10 

 

 

 

 

Value Added Statement

In millions of Brazilian Reais

  

  Consolidated  Parent company 
  Nine-month period ended September 30, 
  2020  2019  2020  2019 
Generation of value added            
Gross revenue                
Revenue from products and services  130,618   108,680   84,263   65,722 
Revenue from the construction of own assets  4,194   4,772   1,617   2,595 
Other revenues  797   507   479   329 
Less:                
Cost of products, goods and services sold  (19,050)  (16,453)  (9,806)  (7,908)
Material, energy, third-party services and other  (27,572)  (26,152)  (8,203)  (8,391)
Impairment of non-current assets and others results  (4,004)  (1,333)  (214)  (1,064)
Brumadinho event  (2,014)  (24,129)  (2,014)  (24,129)
Other costs and expenses  (11,253)  (7,461)  (6,965)  (4,716)
Gross value added  71,716   38,431   59,157   22,438 
Depreciation, amortization and depletion  (12,174)  (10,505)  (5,984)  (5,729)
Net value added  59,542   27,926   53,173   16,709 
                 
Received from third parties                
Equity results from entities  (3,763)  (2,047)  (307)  2,802 
Financial income  9,159   3,041   7,622   2,349 
Total value added to be distributed  64,938   28,920   60,488   21,860 
                 
Personnel and charges  6,303   6,049   2,998   2,593 
Taxes and contributions  8,257   8,571   7,478   4,690 
Interest (net derivatives and monetary and exchange rate variation)  29,318   12,855   26,795   11,469 
Other remunerations of third party funds  474   1,948   1,329   3,372 
Dividends and interest on capital  12,350   -   12,350   - 
Reinvested net income (absorbed loss)  9,538   (264)  9,538   (264)
Loss attributable to noncontrolling interest  (1,302)  (239)  -   - 
Distributed value added  64,938   28,920   60,488   21,860 

 

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

 

  11 

 

 

 

Selected Notes to the Interim Financial Statements

Expressed in millions of Brazilian reais, unless otherwise stated

 

 

1.        Corporate information

 

Vale S.A. and its subsidiaries (“Vale” or the “Company”) are iron ore and iron ore pellets producers, key raw materials for steelmaking, and producers of nickel, which is used to produce stainless steel and metal alloys employed in the production process of several products. The Company also produces copper, metallurgical and thermal coal, manganese ore and, platinum group metals, gold, silver and cobalt. The information by segment is presented in note 5.

 

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 (Technical Pronouncement - CPC 21 (R1) Interim Statements) of the International Financial Reporting Standards (“IFRS”), as issued by International Accounting Standards Board (“IASB”) and also in accordance with accounting practices adopted in Brazil by the Brazilian Accounting Pronouncements Committee ("CPC"), that have been approved by the Brazilian Securities and Exchange Commission ("CVM"). All relevant information from its own interim financial statements, and only this information, are being presented and correspond to those used by management in the management of the Company.

 

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 selected notes of the Parent Company are presented in a summarized form in note 26.

 

These interim financial statements were authorized for issue by the Executive Board on October 28, 2020.

 

The interim financial statements of the Company 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  Nine-month period ended 
  September 30,
2020
  December 31,
2019
  September 30,
2020
  September 30,
2019
  September 30,
2020
  September 30,
2019
 
US Dollar ("US$")  5.6407   4.0307   5.3772   3.9684   5.0793   3.8887 
Canadian dollar ("CAD")  4.2344   3.1034   4.0366   3.0051   3.7505   2.9258 
Euro ("EUR" or "€")  6.6132   4.5305   6.2876   4.4123   5.7207   4.3679 

 

  12 

 

 

Selected Notes to the Interim Financial Statements

Expressed in millions of Brazilian reais, unless otherwise stated

 

 

3.        Significant events in the current period

 

a) Main events

 

The financial position, cash flows and performance of the Company were particularly affected by the following events and transactions during the three-month period ended September 30, 2020:

 

·As announced in September 2020, the exclusivity period to negotiate the sale of Vale Nouvelle-Calédonie S.A.S. (“VNC”) to New Century Resources Limited ended and the parties did not reach an agreement for the sale of VNC. Further details on the transaction and plans for such investment are presented in note 5(b).

 

·In September 2020, the Company entered into an agreement to sell its investment held in Biopalma, resulting in a loss of R$507 (note 5b).

 

·In September 2020, the Company decided to close its operations at the Simões Filho plant in Bahia, resulting in an impairment loss of R$404 (note 5b).

 

·In August 2020, the conditions precedent of the agreement to sell the Company's stake in Henan Longyu were concluded and until October 2020, the Company received R$608 out of the total agreed consideration in the amount of R$832 (note 13b).

 

·On September 30, 2020, the Company paid stockholders’ remuneration in the amount of R$12,350, see note 24.

 

·On October 7, 2020 (subsequent event), the Company concluded the agreement for the divestiture of PT Vale Indonesia Tbk (“PTVI”) and received R$1,560 (note 13b).

 

·On October 9, 2020 (subsequent event), the Company approved the incorporation of a joint venture to build and operate an expansion project for the Shulanghu Port facilities, located in China. Vale's capital contribution to the project is estimated to range from R$620 to R$903 (note 13b).

 

b) Coronavirus pandemic

 

Background - The coronavirus pandemic developed rapidly in 2020, with reports of several fatalities from COVID-19, including the locations of the Company's main operations. A significant portion of the Company's revenue comes from sales to customers in Asia and Europe, regions that have had their economic activities affected as a result of the pandemic. Vale also has an extensive logistics and supply chain, including several ports, distribution centers and suppliers that have operations in the affected regions.

 

The Company has taken several measures to monitor and prevent the effects of COVID-19, including health and safety measures for its employees (such as social distancing and remote working) and actions to secure the supply of materials essential to the Company's production process.

 

Vale has pledged more than R$538 to support humanitarian aid programs in the communities where the Company operates, with special focus on Brazil communities that have been more adversely affected by the pandemic. These resources are being used to purchase medical supplies and equipment, among other actions taken against COVID-19. This amount was recognized as "Other operating expenses" in the income statement for the three and nine-month periods ended September 30, 2020.

 

The Company is closely monitoring the impact of the COVID-19 on its business. To date, COVID-19 has not had a significant operational or financial impact on the Company, other than those already disclosed on these interim financial statements. However, if the pandemic continues for an extended period of time or increases in intensity in the regions where Vale operates, the Company's financial conditions or results of operations in 2020 may be adversely impacted.

 

Impairment and onerous contracts - The Company assessed whether there were any triggering events suggesting an impairment test for its non-financial assets and concluded there have been no changes in the circumstances that would indicate an impairment loss in the Company's cash generating units ("CGUs").

 

During this year, some of the Company's operations were temporarily suspended due to COVID-19. These operations have already been resumed and, therefore, the main long-term assumptions applied on the preparation of the cash flow models, such as commodity prices and production levels, remain unchanged for the impairment trigger assessment.

 

  13 

 

 

Selected Notes to the Interim Financial Statements

Expressed in millions of Brazilian reais, unless otherwise stated

 

 

Voisey's Bay, Nickel - On March 16, 2020, the Company reduced its Voisey's Bay mining operation and placed it in care and maintenance, as a precaution to avoid exposure when travelling to the remote site and to help to protect the health and well-being of Nunatsiavut and Innu indigenous communities in Labrador in face of the COVID-19 pandemic. On July 3, 2020, the Company resumed this operation, which reached its full operational capacity in August 2020.

 

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, in addition to the slowdown in the operational activities, the COVID-19 pandemic has caused travel and equipment transportation restrictions and so, the Company has revisited the plans for the Mozambique coal processing plant stoppage. The halting of the processing plants’ operations that was previously expected to start in the second quarter of 2020, will now take place in November 2020. Other than this, the plan for this CGU has not changed and, therefore, no further impact was recognized in the period ended September 30, 2020.

 

Liquidity - As a precautionary measure to increase its cash position and preserve financial flexibility considering the uncertainties resulting from the COVID-19 pandemic, in March 2020, Vale drew down its revolving credit lines in the amount of R$26,997 (US$5 billion) and discontinued the nickel hedge program, through the sale of option contracts for the total amount of R$1,123. In September 2020, the Company repaid in full the amount that was drawn from revolving credit lines (note 16).

 

Deferred tax liabilities - On March 31, 2020, the government of Indonesia issued a regulation ("PERPPU-1") to manage the economic impact of the global COVID-19 pandemic, which affects Indonesia's tax policies. The 25% income tax rate was reduced to 22% in fiscal years 2020 and 2021 and will later be reduced to 20% as of fiscal year 2022. Therefore, the Company has measured the deferred income tax of PT Vale Indonesia Tbk ("PTVI"), considering the effective promulgation of the new income tax rate. As a result, the Company recognized an income tax gain of R$393 in the nine-months period ended September 30, 2020.

 

Fair value of other assets and liabilities - At this time, the effects of the pandemic have not caused significant impacts on the fair value of the Company's assets and liabilities. However, unusual significant changes have occurred in the value of financial assets in many markets since the pandemic began. The effects of the pandemic remain uncertain, making it impossible to predict 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 value of assets and liabilities may change in subsequent periods.

 

  14 

 

 

Selected Notes to the Interim Financial Statements

Expressed in millions of Brazilian reais, unless otherwise stated

 

 

4.        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.

 

Vale has been taking the necessary actions to support the victims and to mitigate and recover the social and environmental damages resulting from the event, including indemnification and donations to those affected by the dam rupture. The Company has created the Special Recovery and Development Board, which is in-charge of those measures related to the Brumadinho dam rupture.

 

The Company has also informed the market and Brazilian authorities of its decision to speed up the plan to “de-characterize” its tailings dams built under the upstream method (same method as Brumadinho’s dam), certain “centerline structures” and dikes, located in Brazil. Therefore, the Company has a total provision to comply with these assumed obligations in the amount of R$17,620 as at September 30, 2020 (R$22,056 as at December 31, 2019).

 

a) De-characterization of the dams

 

The changes in the provision to carry out the de-characterization of the upstream structures, centerline structures and dikes for the nine-month periods ended September 30, 2020 and 2019 are as follows:

 

  Consolidated 
  2020  2019 
Balance at January 1,  10,034   - 
Provision recognized  -   7,515 
Disbursements  (980)  (62)
Present value valuation  (179)  280 
Balance at September 30,  8,875   7,733 

 

   September 30,
2020
   December 31,
2019
 
Current liabilities  1,804   1,247 
Non-current liabilities  7,071   8,787 
Liabilities  8,875   10,034 

 

In addition to the de-characterization projects of the upstream dams, which are already reserved as at September 30, 2020, the Company is assessing whether there are other structures that would meet the criteria to be de-characterized as well. In addition, at the current stage of studies and analysis, it is not yet possible to estimate if an additional provision for the de-characterization of other structures will be recorded in future reporting periods.

 

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.

 

On April 1, 2020, the judge of the 2nd Public Finance Court of Belo Horizonte released R$500 from the judicial deposits of the Company. On May 15, 2020, the judge released an additional amount of R$1,000. Both amounts were released to the State of Minas Gerais to be used by the State Government on actions against COVID-19 pandemic and were considered as compensation for part of the obligation assumed by the Company due to the Brumadinho dam rupture.

 

  15 

 

 

Selected Notes to the Interim Financial Statements

Expressed in millions of Brazilian reais, unless otherwise stated

 

 

The changes in the provision for the nine-month periods ended September 30, 2020 and 2019 are as follows:

 

  Consolidated 
  2020  2019 
Balance at January 1,  12,022   - 
Provision for social and economic compensation  108   14,239 
Disbursements (i)  (3,495)  (2,194)
Present value valuation  110   163 
Balance at September 30,  8,745   12,208 

 

  September 30,
2020
  December 31,
2019
 
Current liabilities  5,282   6,319 
Non-current liabilities  3,463   5,703 
Liabilities  8,745   12,022 

 

(i) Includes cash outflows of R$1,995 and the realization of judicial deposits of R$1,500.

 

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.

 

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 of approximately R$8 billion. All accounting impacts, if any, will be recorded in the period an agreement is reached. 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.

 

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$613 and R$1,906 for the three and nine-month periods ended September 30, 2020, respectively and R$893 and R$1,906 for the three and nine-month periods ended September 30, 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 its upstream dam structures. The Company has been recording losses in relation to the operational stoppage and idle capacity of the ferrous mineral segment in the amounts of R$600 and R$1,879 for the three and nine-month periods ended September 30, 2020, respectively, and R$704 and R$2,248 for the three and nine-month periods ended September 30, 2019, respectively. The Company is working on legal and technical measures to resume all operations at full capacity.

 

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$251 and R$836 as “Impairment and disposal of non-current assets” for the three and nine-month periods ended September 30, 2019 in relation to the assets written-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.

 

  16 

 

 

Selected Notes to the Interim Financial Statements

Expressed in millions of Brazilian reais, unless otherwise stated

 

 

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 additional provisions based on the updates on the stage of these claims.

 

Following these contingencies, approximately R$506 of the Company’s bank accounts are restricted and R$4,942 were converted into judicial deposits as at September 30,2020.

 

For the Brumadinho event, the Company has financial guarantees in the amount of R$5,819 in September 30, 2020. The expenses related to these financial guarantees in the amounts of R$10 and R$30 were recorded as financial expense in the Company's income statement for the three and nine-month periods ended September 30, 2020, respectively.

 

On August 26, 2020, the Public Prosecutor's Office of Minas Gerais (“MPMG”) and other plaintiffs of the Public Civil Actions presented a request for ruling condemning Vale to indemnify alleged economic losses of the State of Minas Gerais and collective moral damages, both claims already considered in said Public Civil Actions filed against Vale in January 2019 as a result of the Brumadinho dam rupture. In that submission, the plaintiffs also requested the immediate freezing of R$26.7 billion from the Company as a guarantee for the reimbursement of the alleged economic losses, which was dismissed by the judge of the 2nd Lower Court of Public Treasury of Belo Horizonte on October 6, 2020 (subsequent event). Said indemnification requests are still pending judgment and the Company is unable to estimate when a final decision will be issued.

 

On May 27, 2020, the MPMG requested the imposition of fines or forfeit of assets, rights and amounts of the Company, allegedly based on Article 5, item V of Brazilian Law 12.846/2013. According to the MPMG, Vale would have, through its employee’s actions, hindered the inspection activities of public agencies in the complex. The Company was not required to present any guarantees based on a judicial decision.

 

On October 20, 2020 (subsequent event), the Company was informed that the Brazilian Office of the Comptroller General (“CGU”) initiated an administrative proceeding based on the same allegations made by the MPMG.

 

Both proceedings are ongoing and the Company cannot estimate when a final decision will be issued. 

 

(f.i) Administrative sanctions

 

In 2019, 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.

 

On July 6, 2020, the Company signed an agreement with IBAMA, of which R$150 will be used in environmental projects in 7 parks in the state of Minas Gerais, covering an area of approximately 794 thousand hectares, and R$100 will be used in basic sanitation programs in the state of Minas Gerais. The total amount was deposited in court to be used in these environmental projects, subject to ratification of justice.

 

As at September 30, 2020, the administrative sanctions are recorded as “Liabilities related to Brumadinho“.

 

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

 

As detailed in note 3 to the financial statements for the year ended December 31, 2019 and updated in the interim financial statements for 2020, Vale is defending itself against a potential class action lawsuit before a New York Federal Court filed by holders of securities - American Depositary Receipts ("ADRs") - issued by Vale.

 

Following the decision of the Court, in May 2020, rejecting part of the preliminary defense presented by the Company, the Discovery phase has started and is expected to be concluded by June 2021.

 

Based on the evaluation of the Company's legal counsel and given the very preliminary stage, the expectation of loss of this process is classified as possible. However, considering the initial phase of the potential class action, it is not possible at this time to reliably estimate the amount of a potential loss.

 

(f.iii) Arbitration proceedings in Brazil filed by shareholders and a class association

 

In Brazil, Vale is a defendant in (i) one arbitration filed by 166 minority shareholders, and (ii) one arbitration filed by a class association allegedly representing all Vale’s minority shareholders.

 

In both proceedings, the Claimants argue Vale would be aware of the risks associated with the dam, and failed to disclose it to the shareholders, which would be required under the Brazilian applicable laws and the rules of Comissão de Valores Mobiliários (Securities and Exchange Commission of Brazil). Based on such argument, they claim compensation for losses caused by the decrease of the value of the shares.

 

(f.iv) Cooperation with the CVM and the SEC

 

The Company is cooperating with the SEC and the CVM by providing documents and other information concerning the failure of Dam I as requested by both agencies.

 

  17 

 

 

Selected Notes to the Interim Financial Statements

Expressed in millions of Brazilian reais, unless otherwise stated

 

 

Based on the evaluation of the Company's legal counsel and given the very preliminary stage, the expectation of loss of these proceedings is classified as possible. However, considering the initial phase of the arbitrations, it is not possible at this time to reliably estimate the amount of a potential loss.

 

g) Insurance

 

The Company is negotiating with insurers the payment of indemnification under its operational risk and civil liability. However, these negotiations are still at a preliminary stage, therefore 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 these interim financial statements.

 

Critical accounting estimates and judgments

 

The measurement of the provision requires the use of significant judgments, estimates and assumptions. The provision reflects the estimated costs to comply with Vale’s obligation in relation to the Brumadinho 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 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 the current estimated market price of the direct and indirect cost related to products and services, (ii) changes in timing for cash outflows, (iii) changes in the technology considered in measuring the provision, (iv) number of individuals entitled to the indemnification payments, (v) resolution of existing and potential legal claims, (vi) demographic assumptions, (vii) actuarial assumptions, and (viii) 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.

 

  18 

 

 

 

Selected Notes to the Interim Financial Statements

Expressed in millions of Brazilian reais, unless otherwise stated

 

5.        Information by business segment and by geographic area

 

The Company operates the following reportable segments: 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).

 

As disclosed on note 4 to these Interim Financial Statements, the Company has created the Special Recovery and Development Board that 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 allocates 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 September 30, 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  39,614   (11,110)  (270)  (164)  (649)  2   27,423 
Iron ore pellets  6,416   (2,313)  7   (8)  (89)  -   4,013 
Ferroalloys and manganese  274   (233)  (21)  (1)  (49)  -   (30)
Other ferrous products and services  436   (324)  2   (1)  -   8   121 
   46,740   (13,980)  (282)  (174)  (787)  10   31,527 
                             
Base metals                            
Nickel and other products  7,072   (4,804)  (121)  (55)  (1)  -   2,091 
Copper  3,156   (1,017)  (13)  (81)  (1)  -   2,044 
   10,228   (5,821)  (134)  (136)  (2)  -   4,135 
                             
Coal  551   (1,726)  (28)  (47)  -   110   (1,140)
                             
Brumadinho event  -   -   (613)  -   -   -   (613)
COVID-19  -   -   (76)  -   -   -   (76)
Others  387   (463)  (726)  (207)  (12)  -   (1,021)
Total  57,906   (21,990)  (1,859)  (564)  (801)  120   32,812 

 

  19 

 

 

Selected Notes to the Interim Financial Statements

Expressed in millions of Brazilian reais, unless otherwise stated

  

  Consolidated 
  Three-month period ended September 30, 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  26,118   (10,077)  (326)  (114)  (650)  -   14,951 
Iron ore pellets  6,362   (2,893)  (32)  (20)  (105)  -   3,312 
Ferroalloys and manganese  190   (153)  (6)  (2)  -   -   29 
Other ferrous products and services  466   (345)  -   (3)  -   -   118 
   33,136   (13,468)  (364)  (139)  (755)  -   18,410 
                             
Base metals                            
Nickel and other products  4,136   (2,681)  (47)  (43)  (64)  -   1,301 
Copper  1,966   (971)  (8)  (49)  -   -   938 
   6,102   (3,652)  (55)  (92)  (64)  -   2,239 
                             
Coal  954   (1,732)  19   (39)  -   114   (684)
                             
Brumadinho event  -   -   (893)  -   -   -   (893)
                             
Others  472   (441)  (548)  (225)  (14)  1   (755)
Total  40,664   (19,293)  (1,841)  (495)  (833)  115   18,317 

 

  Consolidated 
  Nine-month period ended September 30, 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  85,058   (28,001)  (677)  (402)  (2,054)  2��  53,926 
Iron ore pellets  15,098   (6,191)  65   (17)  (291)  283   8,947 
Ferroalloys and manganese  851   (682)  (21)  (6)  (105)  -   37 
Other ferrous products and services  1,222   (939)  10   (6)  -   8   295 
   102,229   (35,813)  (623)  (431)  (2,450)  293   63,205 
                             
Base metals                            
Nickel and other products  16,833   (11,276)  (294)  (177)  (156)  -   4,930 
Copper  7,674   (2,940)  (23)  (237)  (1)  -   4,473 
   24,507   (14,216)  (317)  (414)  (157)  -   9,403 
                             
Coal  1,734   (5,369)  (6)  (119)  -   434   (3,326)
                             
Brumadinho event  -   -   (2,014)  -   -   -   (2,014)
COVID-19  -   -   (545)  -   -   -   (545)
Others  1,121   (1,241)  (2,331)  (512)  (38)  126   (2,875)
Total  129,591   (56,639)  (5,836)  (1,476)  (2,645)  853   63,848 

 

  20 

 

 

Selected Notes to the Interim Financial Statements

Expressed in millions of Brazilian reais, unless otherwise stated

 

  Consolidated 
  Nine-month period ended September 30, 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  65,942   (24,490)  (947)  (280)  (2,174)  -   38,051 
Iron ore pellets  17,775   (7,992)  (60)  (59)  (193)  567   10,038 
Ferroalloys and manganese  784   (589)  (15)  (4)  -   -   176 
Other ferrous products and services  1,249   (955)  4   (6)  -   -   292 
   85,750   (34,026)  (1,018)  (349)  (2,367)  567   48,557 
                             
Base metals                            
Nickel and other products  12,044   (8,388)  (180)  (99)  (110)  -   3,267 
Copper  5,546   (2,745)  (20)  (96)  -   -   2,685 
   17,590   (11,133)  (200)  (195)  (110)  -   5,952 
                             
Coal  3,221   (4,850)  22   (85)  -   331   (1,361)
                             
Brumadinho event  -   -   (24,129)  -   -   -   (24,129)
                             
Others  1,060   (1,075)  (954)  (485)  (24)  195   (1,283)
Total  107,621   (51,084)  (26,279)  (1,114)  (2,501)  1,093   27,736 

 

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

 

  Consolidated 
  Three-month period ended September 30,  Nine-month period ended September 30, 
  2020  2019  2020  2019 
Net income (loss) attributable to Vale's stockholders  15,615   6,542   21,888   (264)
Loss attributable to noncontrolling interests  (543)  (81)  (1,302)  (239)
Net income (loss)  15,072   6,461   20,586   (503)
Depreciation, depletion and amortization  4,162   3,690   12,174   10,505 
Income taxes  4,259   3,866   2,011   3,281 
Financial results  7,380   4,556   20,457   9,980 
LAJIDA (EBITDA)  30,873   18,573   55,228   23,263 
                 
Items to reconciled adjusted LAJIDA (EBITDA)                
Equity results and other results in associates and joint ventures  211   (501)  3,763   2,047 
Dividends received and interest from associates and joint ventures (i)  120   115   853   1,093 
Impairment and disposal of non-current assets  1,608   130   4,004   1,333 
Adjusted LAJIDA (EBITDA)  32,812   18,317   63,848   27,736 

 

(i) Includes the remuneration of the financial instrument of the Coal segment.

 

  21 

 

 

Selected Notes to the Interim Financial Statements

Expressed in millions of Brazilian reais, unless otherwise stated

  

b)       Assets by segment

 

  Consolidated 
  September 30, 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  12,520   6,865   140,062   7,880   6,970   135,143 
Base metals  7,450   91   104,480   5,457   56   80,181 
Coal  309   -   -   243   -   - 
Others  -   4,526   7,045   7   4,252   6,666 
Total  20,279   11,482   251,587   13,587   11,278   221,990 

 

  Consolidated 
  Three-month period ended September 30, 
  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  2,160   198   2,160   1,595   361   2,173 
Base metals  1,802   378   1,932   1,071   175   1,179 
Coal  146   -   -   314   -   267 
Others  6   3   70   19   9   71 
Total  4,114   579   4,162   2,999   545   3,690 

 

  Consolidated 
  Nine-month period ended September 30, 
  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  7,136   919   6,620   3,875   1,025   5,874 
Base metals  5,187   951   5,270   2,774   379   3,733 
Coal  659       83   609   -   687 
Others  16   25   201   31   22   211 
Total  12,998   1,895   12,174   7,289   1,426   10,505 

 

i) Goodwill is allocated mainly to ferrous minerals and base metals segments in the amount of R$7,133 and R$10,430 in September 30, 2020 and R$7,133 and R$7,495 in December 31, 2019, respectively.

(ii) Cash outflows.

 

Impairment of assets

 

Ferrous minerals segment – Vale Manganês S.A. (“Vale Manganês”) - In September 2020, the Company decided to shut down the Simões Filho operation, in Bahia, a plant that is part of Vale Manganês S.A. business, which used to produce ferroalloys of manganese (part of the ferrous minerals segment). The Company will continue operating its other plants to produce manganese ore.

 

Therefore, the Company has carried out an impairment test for the cash-generating unit (“CGU”) of Manganese, resulting in the full impairment of inventories, other assets related to the Simões Filho plant and the Company recognized additional provisions required for the closure of the site. As a result, the Company recognized an impairment loss of R$404 as “Impairment and disposals of non-current assets” for the three and nine-month period ended September 30, 2020. The remaining carrying amount related to this CGU is R$171 as at September 30, 2020.

 

Base metals segment – Vale Nouvelle-Calédonie S.A.S. (“VNC”) – On May 25, 2020, the Company announced that it had entered into a non-binding agreement to negotiate with exclusivity the sale of its entire interest in VNC to New Century Resources Limited (“NCZ”) for an insignificant consideration.

 

As a result of this negotiation, VNC's assets and liabilities were classified as "held for sale" and measured at fair value resulting in the recognition of an impairment loss of R$295 and R$2,078 recognized in the income statement as "Impairment and disposal of non-current assets” for the three and nine-month period ended September 30, 2020, respectively.

 

  22 

 

 

 

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

 

In September 2020, NCZ's exclusivity period ended and the parties did not reach an agreement for the sale of VNC, thus, the Company has restarted the search for a potential buyer. In the meanwhile, Vale has initiated studies of all options available to exit the operation, including placing VNC in care and maintenance in preparation for a possible shut down of the operation, should no sustainable solution be found in the coming months.

 

These studies take into consideration the financing needs to continue VNC operations, including the commitment to make investments to convert the tailings deposition from wet to dry-stacking (“Project Lucy”), which will cost approximately R$2,820 (US$500 million). Therefore, depending on the conclusion of those studies mentioned above, and the exit alternative chosen by the Company, additional losses and new provisions may be required in future reporting periods.

 

Others – Biopalma da Amazônia S.A. (“Biopalma”) – In September 2020, the Company signed an agreement with Brasil Bio Fuels S.A. to sell its entire stake in Biopalma for an insignificant consideration. Biopalma is a company that cultivates a palm oil plantation to extract and sell that oil. As a result of this agreement, Biopalma's assets and liabilities were classified as "held for sale" and measured at fair value, resulting in a loss of R$507 recognized in the income statement as "Impairment and disposals of non-current assets" for the three and nine-months period ended September 30, 2020. The transaction is expected to be concluded by the end of 2020, subject to preceded conditions, including the approval of the Administrative Council for Economic Defense (CADE).

 

c)       Net operating revenue by geographic area

 

  Consolidated 
  Three-month period ended September 30, 2020 
  Ferrous minerals  Base metals  Coal  Others  Total 
Americas, except United States and Brazil  607   194   -   -   801 
United States of America  546   950   -   -   1,496 
Germany  231   2,146   -   -   2,377 
Europe, except Germany  1,466   3,621   65   -   5,152 
Middle East, Africa and Oceania  2,152   17   65   -   2,234 
Japan  2,499   504   -   -   3,003 
China  33,037   1,506   -   -   34,543 
Asia, except Japan and China  2,926   1,134   382   -   4,442 
Brazil  3,276   156   39   387   3,858 
Net operating revenue  46,740   10,228   551   387   57,906 

 

  Consolidated 
  Three-month period ended September 30, 2019 
  Ferrous minerals  Base metals  Coal  Others  Total 
Americas, except United States and Brazil  555   882   -   -   1,437 
United States of America  319   918   -   -   1,237 
Germany  1,149   356   -   -   1,505 
Europe, except Germany  1,205   1,877   363   -   3,445 
Middle East, Africa and Oceania  2,226   23   101   -   2,350 
Japan  1,836   455   24   -   2,315 
China  21,081   748   -   -   21,829 
Asia, except Japan and China  2,161   607   417   -   3,185 
Brazil  2,604   236   49   472   3,361 
Net operating revenue  33,136   6,102   954   472   40,664 

 

  Consolidated 
  Nine-month period ended September 30, 2020 
  Ferrous minerals  Base metals  Coal  Others  Total 
Americas, except United States and Brazil  1,136   1,341   -   -   2,477 
United States of America  903   2,844   -   -   3,747 
Germany  1,416   4,519   -   -   5,935 
Europe, except Germany  3,947   7,597   462   -   12,006 
Middle East, Africa and Oceania  4,745   79   308   -   5,132 
Japan  5,747   1,504   56   -   7,307 
China  69,168   2,900   75   -   72,143 
Asia, except Japan and China  6,997   3,164   771   -   10,932 
Brazil  8,170   559   62   1,121   9,912 
Net operating revenue  102,229   24,507   1,734   1,121   129,591 

 

  23 

 

 

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

 

  Consolidated 
  Nine-month period ended September 30, 2019 
  Ferrous minerals  Base metals  Coal  Others  Total 
Americas, except United States and Brazil  1,732   2,363   -   -   4,095 
United States of America  1,172   2,661   -   -   3,833 
Germany  3,344   1,370   -   -   4,714 
Europe, except Germany  4,595   5,018   931   -   10,544 
Middle East, Africa and Oceania  6,526   64   239   -   6,829 
Japan  5,483   1,129   386   -   6,998 
China  49,068   1,999   -   -   51,067 
Asia, except Japan and China  5,809   2,365   1,434   -   9,608 
Brazil  8,021   621   231   1,060   9,933 
Net operating revenue  85,750   17,590   3,221   1,060   107,621 

 

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 fourth quarter of 2020.

 

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

 

  September 30, 2020 
  Thousand
metric tons
  Provisional
price
(US$/tonne)
  Change  Effect on
Revenue
 
Iron ore  19,673   115.0   +/-10%   1,216 
Iron ore pellets  1,093   136.7   +/-10%   80 
Copper  64   8,678.3   +/-10%   300 

 

6.       Costs and expenses by nature

 

a)    Cost of goods sold and services rendered

 

  Consolidated 
  Three-month period ended September 30,  Nine-month period ended September 30, 
  2020  2019  2020  2019 
Personnel  2,221   2,005   6,025   5,821 
Materials and services  4,351   3,779   12,022   11,192 
Fuel oil and gas  1,167   1,407   3,531   4,040 
Maintenance  3,703   2,940   10,021   8,109 
Energy  948   892   2,584   2,478 
Acquisition of products  1,494   820   2,829   1,760 
Depreciation, depletion and amortization  3,903   3,335   11,136   9,576 
Freight  5,018   4,869   11,842   11,052 
Others  3,088   2,581   7,785   6,632 
Total  25,893   22,628   67,775   60,660 
                 
Cost of goods sold  25,140   21,863   65,632   58,615 
Cost of services rendered  753   765   2,143   2,045 
Total  25,893   22,628   67,775   60,660 

 

  24 

 

 

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

 

b)       Selling and administrative expenses

 

  Consolidated 
  Three-month period ended September 30,  Nine-month period ended September 30, 
  2020  2019  2020  2019 
Selling  110   92   293   267 
Personnel  271   177   695   514 
Services  151   97   405   201 
Depreciation and amortization  50   49   203   163 
Others  102   89   268   204 
Total  684   504   1,864   1,349 

 

c)       Other operating expenses (income), net

 

  Consolidated 
  Three-month period ended September 30,  Nine-month period ended September 30, 
  2020  2019  2020  2019 
Provision for litigations (i)  55   132   381   1,057 
Profit sharing program  184   86   402   283 
COVID-19 expenses  76   -   545   - 
Others (ii)  297   274   833   (377)
Total  612   492   2,161   963 

 

(i) In 2019, includes the change in the expected outcome of probable loss of the lawsuit related to the accident of ship loaders, at the Praia Mole maritime terminal, in Espírito Santo.

(ii) In 2019, includes the reversal of the amount provided for the legal proceedings related to the Rede Ferroviária Federal S.A lawsuit.

 

7.        Financial result

 

  Consolidated 
  Three-month period ended September 30,  Nine-month period ended September 30, 
  2020  2019  2020  2019 
Financial income                
Short-term investments  138   313   517   667 
Others (i)  232   212   1,059   701 
   370   525   1,576   1,368 
Financial expenses                
Loans and borrowings gross interest  (1,119)  (1,024)  (3,110)  (3,049)
Capitalized loans and borrowing costs  67   133   274   429 
Participative stockholders' debentures  (3,002)  (1,901)  (4,341)  (4,211)
Interest on REFIS  (50)  (163)  (228)  (488)
Interest on lease liabilities  (90)  (50)  (261)  (219)
Financial guarantees (note 13)  (1,905)  95   (2,771)  165 
Others (ii)  (472)  (1,398)  (1,556)  (2,826)
   (6,571)  (4,308)  (11,993)  (10,199)
Other financial items, net                
Net foreign exchange gains (losses)  (80)  91   (1,822)  151 
Derivative financial instruments (note 20)  (1,051)  (308)  (7,866)  287 
Indexation losses, net  (48)  (556)  (352)  (1,587)
   (1,179)  (773)  (10,040)  (1,149)
Total  (7,380)  (4,556)  (20,457)  (9,980)

 

(i) In 2020, includes amounts related to Eletrobrás' contingent assets in the amount of R$301, see note 22e.

(ii) Includes expenses with cash tender offer repurchased in the amount of R$1,014, for the three and nine-month period ended September 30, 2019.

 

  25 

 

 

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

 

8.        Income taxes

 

a)   Deferred income tax assets and liabilities

 

  Consolidated 
  Assets  Liabilities  Deferred taxes, net 
Balance at December 31, 2019  37,151   7,585   29,566 
Effect in income statement  4,931   (410)  5,341 
Translation adjustment  3,178   2,395   783 
Other comprehensive income  8,950   (350)  9,300 
Balance at September 30, 2020  54,210   9,220   44,990 

 

  Consolidated 
  Assets  Liabilities  Deferred taxes, net 
Balance at December 31, 2018  26,767   5,936   20,831 
Effect in income statement  2,701   212   2,489 
Acquisition of subsidiaries (i)  382   935   (553)
Translation adjustment  590   599   (9)
Other comprehensive income  1,985   (359)  2,344 
Balance at September 30, 2019  32,425   7,323   25,102 

 

(i) Refers to the acquisition of New Steel and Ferrous Resources Limited (note 13).

 

b)    Income tax reconciliation – Income statement

 

Income tax expense is recognized based on the estimate of the weighted average effective tax rate expected for the full year. The total amount presented as income taxes in the income statement is reconciled to the statutory rate, as follows:

 

  Consolidated 
  Three-month period ended September 30,  Nine-month period ended September 30, 
  2020  2019  2020  2019 
Income before income taxes  19,331   10,327   22,597   2,778 
Income taxes at statutory rate - 34%  (6,573)  (3,512)  (7,683)  (945)
Adjustments that affect the basis of taxes:                
Tax incentives  2,642   650   4,991   889 
Equity results  (10)  33   (110)  289 
Addition (reversal) of tax loss carryforward  596   (732)  2,555   (2,643)
Others  (914)  (305)  (1,764)  (871)
Income taxes  (4,259)  (3,866)  (2,011)  (3,281)

 

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

 

The balance mainly relates to the settlement program 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. As at September 30, 2020, the balance of R$14,663 (R$1,764 classified as current liabilities and R$12,899 classified as non-current liabilities) is due in 97 remaining monthly installments, bearing the SELIC interest rate (Special System for Settlement and Custody), which is the Brazilian federal funds rate. As at September 30, 2020, the SELIC rate was 2% per annum.

 

d)   Uncertain tax positions

 

In 2004, a definitive decision of the Federal Court of Appeals of the 2nd Region (“TRF”) granted to the Company the right to deduct the social security contributions on the net income (“CSLL”) from the taxable corporate income. In 2006, the Brazilian federal tax authorities commenced a rescission action (ação rescisória), seeking the reversal of the 2004 decision. In 2019, “TRF” decided in favor for the rescission action. Appeals were filed and the decisions are pending.

 

Due to the developments on this proceeding, the Company has decided to not deduct the “CSLL” from the taxable income prospectively from the 2019 year end. The Company determined that, based on its internal and external experts, the uncertainties associated to the deduction of the “CSLL”, which are not recognized in its interim financial statements, totaled R$783 and it is probable that the Company’s treatments will be accepted by the Brazilian tax authority.

 

  26 

 

 

 

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

 

9.        Basic and diluted earnings (loss) per share

 

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

 

  Three-month period ended September 30,  Nine-month period ended September 30, 
  2020  2019  2020  2019 
Net income (loss) attributable to Vale's stockholders:                
Net income (loss)  15,615   6,542   21,888   (264)
                 
Thousands of shares                
Weighted average number of shares outstanding - common shares  5,129,911   5,181,093   5,129,475   5,180,866 
                 
Basic and diluted earnings (loss) per share:                
Common share (R$)  3.04   1.26   4.27   (0.05)

 

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

 

10.        Accounts receivable

 

  Consolidated 
  September 30, 2020  December 31, 2019 
Accounts receivable  17,255   10,448 
Expected credit loss  (253)  (253)
   17,002   10,195 
         
Revenue related to the steel sector - %  88.10%  87.33%

 

  Consolidated 
  Three-month period ended September 30,  Nine-month period ended September 30, 
  2020  2019  2020  2019 
Impairment of accounts receivable recorded in the income statement  5   (7)  46   (19)

 

 

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

 

11.        Inventories

 

  Consolidated 
  September 30, 2020  December 31, 2019 
Finished products  16,627   10,505 
Work in progress  3,652   3,082 
Consumable inventory  4,139   3,641 
Total  24,418   17,228 

 

  Consolidated 
  Three-month period ended September 30,  Nine-month period ended September 30, 
  2020  2019  2020  2019 
Reversal (provision) for net realizable value  236   94   15   (132)

 

Finished and work in progress products inventories by segments are presented in note 5(b).

 

  27 

 

 

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

 

12.        Other financial assets and liabilities

 

  Consolidated 
  Current  Non-Current 
  September 30,
2020
  December 31,
2019
  September 30,
2020
  December 31,
2019
 
Other financial assets                
Assets held for sale (note 13)  470   613   -   - 
Restricted cash  -   -   787   609 
Loans  17   -   357   350 
Derivative financial instruments (note 20)  340   1,160   308   742 
Investments in equity securities  -   -   3,522   2,925 
Related parties - Loans (note 25)  1,735   1,289   8,964   6,448 
   2,562   3,062   13,938   11,074 
Other financial liabilities                
Derivative financial instruments (note 20)  2,531   377   5,370   1,237 
Related parties - Loans (note 25)  4,216   3,951   5,300   3,853 
Financial guarantees provided (note 13)  -   -   4,876   2,116 
Participative stockholders' debentures  -   -   14,285   10,416 
Advance receipts  3,315   1,330   -   - 
   10,062   5,658   29,831   17,622 

 

Participative stockholders’ debentures

 

At the time of its privatization in 1997, the Company issued a total of 388,559,056 debentures to then-existing stockholders, including the Brazilian Government. The debentures’ terms were set to ensure that pre-privatization stockholders would participate in potential future benefits that might be obtained from exploration of mineral resources. This obligation will cease when all the relevant mineral resources are exhausted, sold or otherwise disposed of by the Company.

 

Holders of participative stockholders’ debentures have the right to receive semi-annual payments equal to an agreed percentage of revenues less value-added tax, transport fee and insurance expenses related to the trading of the products, derived from these mineral resources. On October 1, 2020 (subsequent event), the Company made available for withdrawal as remuneration the amount of R$494, as disclosed on the “Shareholders’ debentures report” made available on the Company’s website

 

The participative stockholders’ debentures are measured at fair value through profit or loss based on the market approach. To calculate the fair value of the liabilities, the Company uses the weighted average price of the secondary market trades in the last month of the quarter.

 

 

13.        Investments in associates and joint ventures

 

a) Movements during the period

 

  Consolidated 
  Total 
  2020  2019 
Balance at January 1,  11,278   12,495 
Additions (i)  366   285 
Translation adjustment  484   148 
Equity results in income statement  (323)  850 
Equity results in statement of comprehensive income  (9)  (15)
Fair value adjustment (ii)  -   (630)
Dividends declared  (507)  (701)
Others  193   54 
Balance at September 30,  11,482   12,486 

 

(i) In 2020, refers mainly to Companhia Siderúrgica do Pecém’s capital increase.

(ii) In 2019, refers to fair value adjustment of the investment in Henan Longyu Energy Resources Co., Ltd., which was transferred later to assets held for sale.

 

The amount of investments by segments are presented in note 5(b).

 

  28 

 

 

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

 

b) Acquisitions and divestitures

 

Divestment agreement in compliance with PT Vale Indonesia Tbk (“PTVI”) Contract of Work - 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 include Indonesian participants in its shareholding structure. Following this commitment, on June 19, 2020, the Company signed together with Sumitomo Metal Mining Co., Ltd. ("SMM"), an agreement for the sale of 20% of their stake in PTVI to PT Indonesia Asahan Aluminium ("PT Inalum”), an Indonesia state-owned enterprise.

 

On October 7, 2020 (subsequent event), the Company concluded the transaction and received a cash consideration of R$1,560 (US$278 million). After the closing of the transaction, Vale and SMM have a stake of 44.3% and 15%, respectively, totaling a 59.3% interest in PTVI and, therefore, the Company continues consolidating PTVI in its financial statements based on the shareholders’ agreement signed by Vale and SMM at the closing of the transaction.

 

The transaction with non-controlling interests resulted in a loss of R$1,230, which will be recognized in Stockholders’ equity in the fourth quarter of 2020.

 

Henan Longyu Energy Resources Co., Ltd (“Henan Longyu”) - In December, 2019, the Company entered into an agreement to sell its 25% interest in Henan Longyu, a company that operates two coal mines in China, for a total amount of R$832 (US$152 million). In August 2020, the conditions precedent of the agreement were concluded and until October 2020, the Company received R$608 (US$110 million) as part of the consideration for the transaction. The payment of the remaining amount is expected by the end of 2020.

 

Ferrous Resources Limited (“Ferrous”) - On August 1, 2019, the Company acquired 100% of the share capital of Ferrous, a Company that operates iron ore mines nearby to the Company’s operations in Minas Gerais, Brazil for the amount of R$1,986 (US$525 million). The Company acquired Ferrous to obtain access to additional iron ore reserves.

 

New Steel Global N.V. (“New Steel”) - On January 24, 2019 the Company acquired 100% of the share capital of New Steel for the total amount of R$1,884. New Steel is a company that develops iron ore 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 are presented as “Intangibles” (note 14).

 

West III Project – On October 9, 2020 (subsequent event), the Company approved the incorporation of a joint venture with Ningbo Zhoushan Port Company Limited (“Ningbo Zhoushan Port”), to build and operate the project to expand the Shulanghu Port facilities, located in China. The Project secures strategic port capacity in China to further Vale’s shipping and distribution costs optimization.

 

Vale will own 50% of the joint venture and Vale's capital contribution to the project is estimated to range from R$620 (US$110 million) to R$903 (US$160 million). The construction of the project, which is expected to take up to three years, will start after both parties obtain the anti-trust and other regulatory approvals in China.

 

c) Financial guarantees provided

 

As of September 30, 2020, the notional value of corporate financial guarantees provided by Vale (within the limit of its direct or indirect interest) for certain associates and joint ventures were R$8,540 (R$6,671 on December 31, 2019). The fair value of these financial guarantees is shown in note 12.

 

  29 

 

 

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
September 30,
  Nine-month period ended
September 30,
  Three-month period ended
September 30,
  Nine-month period ended
September 30,
 
Associates and joint ventures %
ownership
  % voting
capital
  September 30,
2020
  December 31,
2019
  2020  2019  2020  2019  2020  2019  2020  2019 
Ferrous minerals                                                
Baovale Mineração S.A.  50.00   50.00   118   102   5   5   16   26   2   1   2   1 
Companhia Coreano-Brasileira de Pelotização  50.00   50.00   258   354   11   57   36   161   -   -   89   126 
Companhia Hispano-Brasileira de Pelotização (i)  50.89   50.89   224   284   25   50   41   129   -   -   72   148 
Companhia Ítalo-Brasileira de Pelotização (i)  50.90   51.00   251   262   (2)  49   49   106   -   -   119   109 
Companhia Nipo-Brasileira de Pelotização (i)  51.00   51.11   646   605   -   107   40   301   -   -   -   182 
MRS Logística S.A.  48.16   46.75   2,074   1,999   65   110   133   211   -   -   -   - 
VLI S.A.  37.60   37.60   3,164   3,273   (3)  (22)  (95)  8   8   -   8   - 
Zhuhai YPM Pellet Co.  25.00   25.00   130   91   -   -   -   -   -   -   -   - 
           6,865   6,970   101   356   220   942   10   1   290   566 
Base metals                                                
Korea Nickel Corp.  25.00   25.00   91   56   (3)  -   (2)  (2)  -   -   -   - 
           91   56   (3)  -   (2)  (2)  -   -   -   - 
Coal                                                
Henan Longyu Energy Resources Co., Ltd.  25.00   25.00   -   -   -   -   -   (6)  -   -   -   - 
           -   -   -   -   -   (6)  -   -   -   - 
Others                                                
Aliança Geração de Energia S.A. (i)  55.00   55.00   1,879   1,894   27   9   111   100   -   -   126   111 
Aliança Norte Energia Participações S.A. (i)  51.00   51.00   622   646   (9)  16   (24)  21   -   -   -   - 
California Steel Industries, Inc.  50.00   50.00   1,306   975   (44)  7   (46)  109   -   -   -   83 
Companhia Siderúrgica do Pecém (ii)  50.00   50.00   -   -   -   (285)  (364)  (285)  -   -   -   - 
Mineração Rio do Norte S.A.  40.00   40.00   345   393   27   22   (28)  35   -   -   -   - 
Others          374   344   (129)  (26)  (190)  (64)  -   -   3   2 
           4,526   4,252   (128)  (257)  (541)  (84)  -   -   129   196 
Total          11,482   11,278   (30)  99   (323)  850   10   1   419   762 

 

(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.

 

  30 

 

 

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

 

14.        Intangibles

 

a) Movements during the period

 

  Consolidated 
  Goodwill  Concessions  Contract right  Software  Research and
development
project and patents
  Total 
Balance at December 31, 2019  14,628   16,005   563   304   2,757   34,257 
Additions  -   629   -   62   -   691 
Disposals  -   (25)  -   (1)  -   (26)
Amortization  -   (683)  (4)  (84)  -   (771)
Translation adjustment  2,935   -   171   51   (1)  3,156 
Balance at September 30, 2020  17,563   15,926   730   332   2,756   37,307 
Cost  17,563   20,969   1,274   3,965   2,756   46,527 
Accumulated amortization  -   (5,043)  (544)  (3,633)  -   (9,220)
Balance at September 30, 2020  17,563   15,926   730   332   2,756   37,307 

 

  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  -   1,054   -   125   -   1,179 
Disposals  -   (54)  -   (1)  -   (55)
Amortization  -   (755)  (5)  (220)  -   (980)
Acquisition of subsidiary  -   12   -   6   2,757   2,775 
Translation adjustment  721   47   46   16   -   830 
Balance at September 30, 2019  14,876   16,041   571   354   2,757   34,599 
Cost  14,876   20,357   853   3,805   2,757   42,648 
Accumulated amortization  -   (4,316)  (282)  (3,451)  -   (8,049)
Balance at September 30, 2019  14,876   16,041   571   354   2,757   34,599 

 

(i) Refers mainly to the acquisition of New Steel Global N.V. (note 13b).

 

b) Early extensions of railway concessions

 

In 2018, the Company started the process for early extensions, for an additional period of 30 years, of the concession contracts for the Estrada de Ferro Vitória a Minas (“EFVM”) and the Estrada de Ferro Carajás (“EFC”), both granted until June 2027.

 

On July 29, 2020, the Federal Court of Audit approved to submit the proceedings of the anticipated renewal of the railway concessions to the National Land Transportation Agency (“ANTT”) and the Ministry of Infrastructure, for the evaluation of the technical studies and other legal documents related to the early extensions. After evaluating the proposed terms and conditions, the Company will submit the proposal, with the required counterparts, to its Board of Directors.

 

  31 

 

 

 

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

 

15.       Property, plant and equipment

 

a) Movements during the period

 

  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)  -   -   -   -   -   196   -   14,107   14,303 
Disposals  (4)  (31)  (194)  (8)  (38)  -   (47)  (161)  (483)
Assets retirement obligation  -   -   -   -   1,912   -   -   -   1,912 
Depreciation, depletion and amortization  -   (1,677)  (1,879)  (2,802)  (1,839)  (671)  (1,783)  -   (10,651)
Impairment (ii)  (14)  (802)  (1,653)  (78)  (785)  (3)  (439)  (800)  (4,574)
Translation adjustment  404   3,974   2,939   4,704   8,279   2,072   1,886   1,782   26,040 
Transfers  155   782   1,709   1,772   1,769   -   1,264   (7,451)  - 
Balance at September 30, 2020  3,422   42,502   39,635   26,509   42,600   8,413   26,082   25,117   214,280 
Cost  3,422   76,989   60,690   57,356   90,981   10,392   50,766   25,117   375,713 
Accumulated depreciation  -   (34,487)  (21,055)  (30,847)  (48,381)  (1,979)  (24,684)  -   (161,433)
Balance at September 30, 2020  3,422   42,502   39,635   26,509   42,600   8,413   26,082   25,117   214,280 

 

  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)  -   -   -   -   -   436   -   10,734   11,170 
Disposals  (85)  (308)  (143)  (206)  (627)  (24)  (819)  (53)  (2,265)
Assets retirement obligation  -   -   -   -   1,165   -   -   -   1,165 
Depreciation, depletion and amortization  -   (1,527)  (1,908)  (2,504)  (1,753)  (548)  (1,926)  -   (10,166)
Acquisition of subsidiary (iii)  233   56   156   173   1,044   6   2   186   1,856 
Translation adjustment  43   1,047   925   1,060   2,228   416   602   972   7,293 
Transfers  7   684   981   2,735   1,453   -   2,099   (7,959)  - 
Balance at September 30, 2019  2,657   42,386   43,547   26,084   36,441   7,264   28,133   17,000   203,512 
Cost  2,657   74,581   70,636   51,751   72,663   7,812   48,321   17,000   345,421 
Accumulated depreciation  -   (32,195)  (27,089)  (25,667)  (36,222)  (548)  (20,188)  -   (141,909)
Balance at September 30, 2019  2,657   42,386   43,547   26,084   36,441   7,264   28,133   17,000   203,512 

 

(i) Includes capitalized borrowing costs.

(ii) Includes the impairment of VNC assets, Simões Filho and Biopalma.

(iii) Refers mainly to the acquisition of Ferrous (note 13b).

 

b) Right-of-use assets (Leases)

 

  December 31,
2019
  Additions and contract
modifications
  Depreciation  Translation
adjustment
  September 30,
2020
 
Ports  2,958   3   (158)  1,013   3,816 
Vessels  2,341   -   (208)  936   3,069 
Pellets plants  676   156   (138)  -   694 
Properties  521   18   (104)  22   457 
Energy plants  250   -   (28)  88   310 
Locomotives  -   11   -   -   11 
Mining equipment  73   5   (35)  13   56 
Total  6,819   193   (671)  2,072   8,413 

 

c) Guarantees

 

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 16) compared to those disclosed in the financial statements as at December 31, 2019.

 

  32 

 

 

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

 

16.       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 
  September 30, 2020  December 31, 2019 
Debt contracts in the international markets  67,971   42,298 
Debt contracts in Brazil  7,864   10,327 
Total of loans and borrowings  75,835   52,625 
         
(-) Cash and cash equivalents  49,889   29,627 
(-) Short-term investments  707   3,329 
Net debt  25,239   19,669 

 

b)    Cash and cash equivalents

 

Cash and cash equivalents include cash, immediately redeemable deposits and short-term investments with an insignificant risk of change in value. They are readily convertible to cash, being R$14,294 denominated in R$, indexed to the Brazilian Interbank Interest rate (“DI Rate”or”CDI”), R$34,642 denominated in US$ and R$953 denominated in other currencies.

 

c)     Short-term investments

 

At September 30, 2020, the balance of R$707 is substantially comprised of investments in an exclusive investment fund immediately liquid, whose portfolio is composed of committed transactions and Financial Treasury Bills (“LFTs”), which are floating-rate securities issued by the Brazilian government. At December 31, 2019, the balance of R$3,329 is mainly comprised of investments directly in LFTs.

 

d)        Loans, borrowings and leases

 

i) Total debt

 

  Consolidated 
  Current liabilities  Non-current liabilities 
  September 30, 2020  December 31, 2019  September 30, 2020  December 31, 2019 
Debt contracts in the international markets                
Floating rates in:                
US$  946   456   16,499   11,294 
EUR  -   -   1,323   907 
Fixed rates in:                
US$  78   593   42,694   24,506 
EUR  -   -   4,960   3,398 
Other currencies  3   56   582   427 
Accrued charges  886   645   -   16 
   1,913   1,750   66,058   40,548 
Debt contracts in Brazil                
Floating rates in:                
R$, indexed to TJLP, TR, IPCA, IGP-M and CDI  2,170   2,620   5,014   6,759 
Basket of currencies and US$ indexed to LIBOR  252   177   126   226 
Fixed rates in:                
R$  111   174   98   181 
Accrued charges  93   174   -   16 
   2,626   3,145   5,238   7,182 
Total  4,539   4,895   71,296   47,730 

 

  33 

 

 

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

 

Future flows of debt payments, principal and interest

 

  Consolidated 
  Principal  

Estimated future

interest payments (i)

 
2020  332   783 
2021  3,626   3,640 
2022  6,794   3,408 
2023  6,721   3,252 
Between 2024 and 2028  24,461   12,751 
2029 onwards  32,922   15,895 
Total  74,856   39,729 

 

(i) Based on interest rate curves and foreign exchange rates applicable as at September 30, 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.

 

Average annual interest rates by currency

 

  Consolidated 
  Average interest rate (i)  Total debt 
Loans and borrowings        
US$  4.85%  61,304 
R$ (ii)  8.89%  7,484 
EUR (iii)  3.79%  6,455 
Other currencies  3.46%  592 
       75,835 

 

(i) In order to determine the average interest rate for debt contracts with floating rates, the Company used the rate applicable at September 30, 2020.

(ii) R$ denominated debt that bears interest at IPCA, IGP, CDI, TR or TJLP, plus spread. For a total of R$6,949 the Company entered into derivative transactions to mitigate the exposure to the cash flow variations of the floating rate debt denominated in R$, resulting in an average cost of 2.97% 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$.

 

Credit and financing lines

 

As a precautionary measure in order to increase the Company’s cash position due to the uncertainties resulting from the COVID-19 pandemic, Vale drew down its revolving credit lines in March 2020. These credit lines were fully paid in September 2020. Therefore as at September 30, 2020, the total amount available under credit lines is R$26,997 (US$5 billion), of which R$10,799 (US$2 billion) maturing in June 2022 and R$16,198 (US$3 billion) maturing in December 2024.

 

Funding

 

In July 2020, the Company issued through Vale Overseas Limited guaranteed notes due July 2030 totaling R$8,214 (US$1,500 million). The notes bear 3.750% coupon per year, payable semi-annually, and were sold at a price of 99.176% of the principal amount.

 

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 September 30, 2020.

 

  34 

 

 

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

 

Reconciliation of debt to cash flows arising from financing activities

 

  Consolidated 
  Loans and borrowings 
December 31, 2019  52,625 
Additions  34,004 
Repayments  (31,674)
Interest paid  (3,126)
Cash flow from financing activities  (796)
     
Effect of exchange rate  21,189 
Interest accretion  2,817 
Non-cash changes  24,006 
     
September 30, 2020  75,835 

 

ii) Lease liabilities

 

  December 31,
2019
  Additions and
contract
modifications
  Payments (i)  Interest (ii)  Translation
adjustment
  September 30,
2020
 
Ports  3,023   3   (283)  113   1,058   3,914 
Vessels  2,343   -   (270)  106   883   3,062 
Pellets plants  705   156   (38)  12   -   835 
Properties  614   18   (58)  10   109   693 
Energy plants  282   -   (7)  4   65   344 
Locomotives  154   11   (47)  11   68   197 
Mining equipment  97   5   (23)  5   18   102 
Total  7,218   193   (726)  261   2,201   9,147 

 

(i) 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 and nine-month periods ended September 30, 2020 was R$54 and R$253, respectively, and for the three and nine-month periods ended September 30, 2019 was R$729 and R$1,921, respectively.

(ii) The interest accretion recognized in the income statement is disclosed in note 7.

 

Annual minimum payments

 

  2020  2021  2022  2023  2024 onwards  Total 
Ports  23   124   124   124   3,249   3,644 
Vessels  96   367   361   350   2,617   3,791 
Pellets plants  141   141   124   34   389   829 
Properties  73   147   96   73   226   615 
Energy plants  6   34   34   34   350   458 
Locomotives  11   51   51   51   130   294 
Mining equipment  6   34   28   17   11   96 
Total  356   898   818   683   6,972   9,727 

 

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

 

e) Guarantees

 

As at September 30, 2020 and December 31, 2019, loans and borrowings are secured by property, plant and equipment in the amount of R$897 and R$887, respectively. The securities issued through Vale’s wholly-owned finance subsidiary Vale Overseas Limited are fully and unconditionally guaranteed by Vale.

 

  35 

 

 

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

 

17.       Liabilities related to associates and joint 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 Brasil”). In March 2016, Samarco and its shareholders entered into a Framework Agreement with governmental authorities, in which Samarco, Vale and BHP Brasil agreed to establish the Renova Foundation, an entity responsible to develop and implement 42 long-term mitigation and compensation programs. In addition, the Company has a provision of R$1,001 for the de-characterization of the Germano dam.

 

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 and expects to start the gradual resumption of its operations at the end of 2020.

 

Movements during the period

 

  Consolidated 
  2020  2019 
Balance at January 1,  6,853   4,346 
Provision increase  2,939   2,470 
Payments  (1,586)  (729)
Present value valuation  169   397 
Balance at September 30,  8,375   6,484 

 

  September 30, 2020  December 31, 2019 
Current liabilities  3,880   2,079 
Non-current liabilities  4,495   4,774 
Liabilities  8,375   6,853 

 

Renova Foundation

 

During the second quarter of 2020, Fundação Renova reviewed the assumptions used on the preparation of the estimates incorporated into the mitigation and compensation programs. The periodic review, resulted in an additional provision of R$2,939 for the Company, which corresponds to its portion of the responsibility to support the Renova Foundation. The contingencies related to the Fundão dam rupture are disclosed in note 22.

 

Samarco’s working capital

 

In addition to the provision, Vale may provide a short-term credit facility up to R$1,201 (US$213 million), to support Samarco’s cash requirements, of which R$594 (US$119 million) has already been made available during the nine-month period ended September 30, 2020. This amount was recognized in Vale´s income statement as an expense in “Equity results and other results in associates and joint ventures”.

 

Insurance

 

Since the Fundão dam rupture, the Company has been negotiating with insurers the indemnification payments based on its general liability policies. During 2020, the Company received payments in the amount of R$75 (US$14 million) and recognized a gain in the income statement as “Equity results and other results in associates and joint ventures”.

 

  36 

 

 

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

 

Critical accounting estimates and judgments

 

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.

 

The provision related to Renova Foundation 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.

 

18.       Financial instruments classification

 

  Consolidated 
  September 30, 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  49,889   -   -   49,889   29,627   -   -   29,627 
Short-term investments  -   -   707   707   -   -   3,329   3,329 
Derivative financial instruments  -   -   340   340   -   -   1,160   1,160 
Accounts receivable  16,934   -   68   17,002   9,885   -   310   10,195 
Related parties  1,735   -   -   1,735   1,289   -   -   1,289 
   68,558   -   1,115   69,673   40,801   -   4,799   45,600 
Non-current                                
Judicial deposits  11,504   -   -   11,504   12,629   -   -   12,629 
Restricted cash  787   -   -   787   609   -   -   609 
Derivative financial instruments  -   -   308   308   -   -   742   742 
Investments in equity securities  -   3,522   -   3,522   -   2,925   -   2,925 
Loans  357   -   -   357   350   -   -   350 
Related parties  8,964   -   -   8,964   6,448   -   -   6,448 
   21,612   3,522   308   25,442   20,036   2,925   742   23,703 
Total of financial assets  90,170   3,522   1,423   95,115   60,837   2,925   5,541   69,303 
                                 
Financial liabilities                                
Current                                
Suppliers and contractors  17,478   -   -   17,478   16,556   -   -   16,556 
Derivative financial instruments  -   -   2,531   2,531   -   -   377   377 
Loans, borrowings and leases  5,775   -   -   5,775   5,805   -   -   5,805 
Interest on capital  -   -   -   -   6,333   -   -   6,333 
Related parties  4,216   -   -   4,216   3,951   -   -   3,951 
Advance receipts  3.315   -   -   3.315   1.330   -   -   1.330 
   30,784   -   2,531   33,315   33,975   -   377   34,352 
Non-current                                
Derivative financial instruments  -   -   5,370   5,370   -   -   1,237   1,237 
Loans, borrowings and leases  79,207   -   -   79,207   54,038   -   -   54,038 
Related parties  5,300   -   -   5,300   3,853   -   -   3,853 
Participative stockholders' debentures  -   -   14,285   14,285   -   -   10,416   10,416 
Financial guarantees  -   -   4,876   4,876   -   -   2,116   2,116 
   84,507   -   24,531   109,038   57,891   -   13,769   71,660 
Total of financial liabilities  115,291   -   27,062   142,353   91,866   -   14,146   106,012 

 

  37 

 

 

 

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

 

19.        Fair value estimate

 

a)Assets and liabilities measured and recognized at fair value

 

  Consolidated 
  September 30, 2020  December 31, 2019 
  Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3  Total 
Financial assets                                
Short-term investments  707   -   -   707   3,329   -   -   3,329 
Derivative financial instruments  -   525   123   648   -   1,806   96   1,902 
Accounts receivable  -   68   -   68   -   310   -   310 
Investments in equity securities  3,522   -   -   3,522   2,925   -   -   2,925 
Total  4,229   593   123   4,945   6,254   2,116   96   8,466 
                                 
Financial liabilities                                
Derivative financial instruments  -   7,245   656   7,901   -   1,130   484   1,614 
Participative stockholders' debentures  -   14,285   -   14,285   -   10,416   -   10,416 
Financial guarantees  -   4,876   -   4,876   -   2,116   -   2,116 
Total  -   26,406   656   27,062   -   13,662   484   14,146 

 

The methods and techniques of evaluation used to measure the fair value of assets and liabilities are described in note 27g. 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.

 

There were no transfers between Level 1 and Level 2, or between Level 2 and Level 3 for the nine-month period ended September 30, 2020.

 

Changes in Level 3 assets and liabilities during the period

 

  Consolidated 
  Derivative financial instruments 
  Financial assets  Financial liabilities 
Balance at December 31, 2019  96   484 
Gain and losses recognized in income statement  27   172 
Balance at September 30, 2020  123   656 

 

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

 

  Consolidated 
Financial liabilities Balance  Fair value  Level 1  Level 2 
September 30, 2020                
Debt principal  74,856   84,345   58,167   26,178 
                 
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.

 

  38 

 

 

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

 

20.       Derivative financial instruments

 

a)Derivatives effects on statement of financial position

 

  Consolidated 
  Assets 
  September 30, 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  28   186   337   474 
Pre-dollar swap  -   -   78   31 
Forward transactions  -   -   6   - 
   28   186   474   505 
Commodities price risk                
Gasoil, Brent and freight  279   10   80   - 
                 
Others  33   112   606   237 
   33   112   606   237 
Total  340   308   1,160   742 

 

  Consolidated 
  Liabilities 
  September 30, 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  735   3,675   196   322 
IPCA swap  514   646   52   150 
Eurobonds swap  27   142   24   117 
Pre-dollar swap  348   513   32   148 
Libor swap  8   54   -   - 
Forward transactions  97   -   -   - 
   1,729   5,030   304   737 
Commodities price risk                
Gasoil, Brent and freight  483   -   29   - 
                 
Others  319   340   44   500 
Total  2,531   5,370   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 
  Three-month period ended September 30,  Nine-month period ended September 30, 
  2020  2019  2020  2019 
Foreign exchange and interest rate risk                
CDI & TJLP vs. US$ fixed and floating rate swap  (312)  (423)  (4,407)  (386)
IPCA swap  (316)  191   (1,528)  300 
Eurobonds swap  137   (128)  30   (211)
Pre-dollar swap  (310)  (101)  (1,117)  (113)
Libor swap  (30)  -   (58)  - 
   (831)  (461)  (7,080)  (410)
Commodities price risk                
Gasoil, Brent and freight  200   (4)  (898)  103 
                 
Others (i)  (420)  157   112   594 
   (420)  157   112   594 
Total  (1,051)  (308)  (7,866)  287 
                 

 

(i) Mainly refers to the recognition in the current quarter of the fair value adjustment on the embedded derivative due to the renewal of a contract that guarantees a minimum return on a certain investment (note 27f ).

 

  39 

 

 

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

 

  Consolidated 
  Financial settlement inflows (outflows) 
  Three-month period ended September 30,  Nine-month period ended September 30, 
  2020  2019  2020  2019 
Foreign exchange and interest rate risk                
CDI & TJLP vs. US$ fixed and floating rate swap  (343)  (614)  (591)  (1,014)
IPCA swap  -   -   1   (101)
Eurobonds swap  -   -   (24)  (19)
Pre-dollar swap  (176)  (9)  (234)  46 
Libor swap  3   -   (1)  - 
   (516)  (623)  (849)  (1,088)
Commodities price risk                
Gasoil, Brent and freight  (183)  2   (880)  2 
                 
Others (i)  27   259   1,791   269 
Total  (672)  (362)  62   (817)

 

(i) Includes the settlement of the nickel hedge program in the amount of R$1,412 on April 1, 2020.

 

Hedge in foreign operations

 

The Company uses financial instruments to protect its exposure to certain market risks arising from operating, financing and investment activities. The Company adopts net investment and cash flow hedge:

 

Net investments hedge

 

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. As at September 30, 2020, the carrying value of the debts designated as instrument hedge of these investments are R$12,296 (US$2,180 million) and R$4,960 (EUR750 million). 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”.

 

Cash flow hedge

 

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. In April 2020, the hedge program was fully settled to increase the Company’s cash position due to the COVID-19 pandemic. The cumulative gain recognized in the cash flow hedge reserve until the settlement of the option contracts are being reclassified to the income statement as the Company recognizes the revenue from nickel sales (hedged item).

 

  Consolidated 
  Gain (loss) recognized in the other comprehensive income 
  Three-month period ended September 30,  Nine-month period ended September 30, 
  2020  2019  2020  2019 
Net investments hedge  (459)  (630)  (3,485)  (546)
Cash flow hedge  (299)  (4)  (291)  (4)

 

  40 

 

 

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

 

c)Maturity of the derivative financial instruments

 

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

 

21.        Provisions

 

  Consolidated 
  Current liabilities  Non-current liabilities 
  September 30, 2020  December 31, 2019  September 30, 2020  December 31, 2019 
Payroll, related charges and other remunerations  3,828   3,183   -   - 
Onerous contracts  274   229   4,798   3,489 
Environmental obligations  519   587   1,316   980 
Asset retirement obligations (i)  665   638   19,219   15,323 
Provisions for litigation (note 22)  -   -   6,295   5,895 
Employee postretirement obligations (note 23)  446   319   12,263   8,546 
Provisions  5,732   4,956   43,891   34,233 

 

(i)The Company has issued letters of credit and surety bonds for R$2,442 as at September 30, 2020 in connection with the Asset retirement obligations for its Base Metals operations.

 

22.        Litigations

 

a)Provision for legal proceedings

 

The Company recognizes provisions for probable losses of which a reliable estimate can be made. The Company has considered all information available to assess the likelihood of an outflow of resources and in the preparation on the estimate of the costs that may be required to settle the obligations.

 

  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  89   226   57   9   381 
Payments  (66)  (64)  (230)  -   (360)
Indexation and interest  72   78   88   3   241 
Translation adjustment  133   4   1   -   138 
Balance at September 30, 2020  3,032   1,457   1,751   55   6,295 

 

   Consolidated 
   Tax litigation (i)   Civil litigation   Labor litigation   Environmental
litigation
   Total of litigation
provision
 
Balance at December 31, 2018  2,680   644   1,921   13   5,258 
Additions and reversals, net (ii)  49   640   350   18   1,057 
Payments  (69)  (145)  (412)  -   (626)
Indexation and interest  15   135   50   5   205 
Translation adjustment  32   (10)  13   -   35 
Balance at September 30, 2019  2,707   1,264   1,922   36   5,929 

 

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

(ii) Includes the change in the expected outcome of probable loss of the lawsuit related to the accident of ship loaders, at the Praia Mole maritime terminal, in Espírito Santo.

 

  41 

 

 

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

 

b)Contingent liabilities

 

As at September 30, 2020, the contingent liabilities for which the likelihood of loss is not considered remote, are presented as follows:

 

  Consolidated 
  September 30, 2020  December 31, 2019 
Tax litigations  38,082   33,839 
Civil litigations  6,387   6,116 
Labor litigations  2,909   3,116 
Environmental litigations  4,633   4,410 
Brumadinho event  767   635 
Total  52,778   48,116 

 

i - Tax litigations - Refers to proceedings for: (i) corporate income tax (“IRPJ”) and social contributions on the net income (“CSLL”), (ii) PIS and COFINS tax credits, (iii) value added tax on the services and circulation of goods (“ICMS”), (iv) the mining royalty known as CFEM (Compensação Financeira pela Exploração de Recursos Minerais). The variation in the contingent liability for the nine-month period ended September 30, 2020 is mainly due to new proceedings related to CFEM, ICMS and PIS, associated with the changes in the stage of the proceedings and monetary updates of the judicial claims under discussion.

 

ii - Civil litigations - Refers to lawsuits for: (i) indemnities for losses, payments and contractual fines due to contractual imbalance or non-compliance that are alleged by suppliers, and (ii) land claims referring to real estate Vale's operational activities.

 

iii - Labor litigations - Refers to lawsuits for individual claims by in-house employees and service providers, primarily involving demands for additional compensation for overtime work, moral damages or health and safety conditions.

 

iv - Environmental litigations - Refers mainly to proceedings for environmental damages and issues related to environmental licensing.

 

c)Judicial deposits

 

  Consolidated 
  September 30, 2020  December 31, 2019 
Tax litigations  5,099   5,152 
Civil litigations  342   346 
Labor litigations  907   992 
Environmental litigations  214   163 
Brumadinho event (note 4)  4,942   5,976 
Total  11,504   12,629 

 

d)Guarantees contracted for legal proceedings

 

In addition to the above-mentioned tax, civil, labor and environmental judicial deposits, the Company contracted R$9.7 billion in guarantees for its lawsuits, as an alternative to judicial deposits. Additionally, the Company contracted guarantees in the amount of R$5.8 billion in connection with the Brumadinho event, which were presented in court according to agreements with Treasury Court of Minas Gerais and Public Prosecutor's Office.

 

e)Contingencies related to Samarco accident

 

As disclosed by the Company in note 28 to the Financial Statements for the year ended December 31, 2019 and in previous Financial Statements, Vale is involved in several legal proceedings and investigations relating to the rupture of Samarco's tailings dam.

 

These proceedings include public civil actions brought by Brazilian authorities and multiple proceedings involving claims for significant amounts of damages and remediation measures. The Company expects the Framework Agreements to represent the settlement of the public civil action brought by the MPF and other related proceedings. There are also putative securities class actions in the United States against Vale and some of its current and former officers and a criminal proceeding in Brazil. The main updates regarding the lawsuits in the period were as follows:

 

  42 

 

 

 

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

 

(e.i) Public Civil Action filed by the Federal Government and others and public civil action filed by the Federal Public Ministry ("MPF")

 

The Framework Agreement established a possible renegotiation of Renova Foundation's reparation programs upon the completion of studies carried by specialist engaged by the Public Prosecutor's Office in this process. The studies of the aforementioned specialists have not yet been concluded and, therefore, these negotiations have not started. In October 2020, MPF required the continuance of its public civil action of R$155 billion due to a deadlock in the hiring of Technical Assistants. The request will still be analyzed by the Judge of the 12th Federal Court after a statement by Samarco and its shareholders Vale and BHP. Depending on the conclusion of those experts and the decision to be issued in this regard, the Company may recognize additional provisions to comply with the requirements set the Framework Agreement.

 

(e.ii) Class Actions in the United States

 

In March 2017, the holders of securities issued by Samarco Mineração S.A. filed a collective action in the New York Federal Court against Samarco, Vale, BHP Billiton Limited, BHP Billiton PLC and BHP Brasil Ltda. based on U.S. Federal Securities laws.

 

After the appeal filed by the Plaintiff, the judgment is expected to be scheduled. The New York State Court of Appeals may rule the case during 2020. Based on the assessment of the Company´s legal consultants, Vale has good arguments to oppose the appeal. Therefore, the expectation of loss of this case is classified as possible. However, considering the phase of the class action, it is not possible at this time to reliably estimate the amount of an eventual loss.

 

(e.iii) Class actions filed by holders of American Depositary Receipts

 

Vale and some of its executives have been named as defendants in class actions relating to securities before the New York Federal Court, filed by investors holding American Depositary Receipts ("ADRs") issued by the Company, based on the U.S. Federal Securities laws.

 

In June 2020, the case was closed as a result of the agreement reached by the parties, whereby the defendants agreed to pay the amount of R$137, which was accepted by the Court. This amount was recognized in income as "Equity in earnings of affiliates and joint ventures.

 

(e.iv) Criminal proceeding

 

In September 2019, the federal court of Ponte Nova dismissed all criminal charges against Vale representatives relating to the first group of charges, but the second group of charges against Vale S.A. and one of the Company’s employees remains ongoing. In March 2020, the judge scheduled a number of hearings to collect defense witnesses’ testimonies and intent letters were issued for the same purpose. The Company cannot estimate when a final decision on the case will be issued.

 

f) Contingent Assets

 

(f.i) Compulsory Loan

 

In 2015, the Company requested for the enforcement of the judicial decision 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 recognized by Eletrobrás as due and such requirement was granted by the court. In August 2020, the Company received R$301 and the remaining amount are estimated at R$380 is still under evaluation and, therefore, the asset was not recognized in the Company's interim financial statements.

 

(f.ii) ICMS in the PIS and COFINS calculation basis

 

Vale has 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 has not reached the res judicata yet. The gain from both proceedings are estimated at R$600. However, Vale is waiting for a final decision on the leading case that will be issued by Supreme Court, that may impact the outcome of these proceedings or the method of measuring this asset. Therefore, the Company did not record this asset in its interim financial statement.

 

  43 

 

 

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

 

(f.iii) Tax Litigation in Canada

 

Vale Canada Limited ("VCL") and the Canadian tax agency, affiliated with the Canadian Department of Justice, have signed an agreement on a tax dispute related to the tax treatment of receipts and expenses incurred by the VCL in merger and acquisition transactions that occurred in 2006. In 2019, the Company recognized an asset in the amount of R$889 (CAD221 million), which corresponded to the amount due from the income tax refund, including estimated interest. In 2020, the Company recognized an additional amount of R$84 (CAD21 million) related to interest. The total amount has been paid in full to the company.

 

(f.iv) Arbitration related to Simandou

 

In 2010, the Company acquired a 51% interest in BSG Resources Limited G ("BSGR"), which held concession rights and permits for iron ore exploration in the Republic of Guinea. In 2014, the Republic of Guinea revoked these concessions based on evidence 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.

 

The arbitral tribunal in London ruled in Vale’s favor and ordered BSGR to pay to Vale the amount of approximately R$11,281 (US$2 billion) (with interest and costs). 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.

 

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 interim financial statements.

 

23.       Employee post-retirement obligations

 

Reconciliation of net liabilities recognized in the statement of financial position

 

  Consolidated 
  September 30, 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  (15,428)  (25,005)  (8,379)  (16,148)  (17,818)  (6,066)
Fair value of assets  19,386   20,675   -   21,380   15,019   - 
Effect of the asset ceiling  (3,958)  -   -   (5,232)  -   - 
Liabilities  -   (4,330)  (8,379)  -   (2,799)  (6,066)
                         
Current liabilities  -   (51)  (395)  -   (50)  (269)
Non-current liabilities  -   (4,279)  (7,984)  -   (2,749)  (5,797)
Liabilities  -   (4,330)  (8,379)  -   (2,799)  (6,066)

 

  44 

 

 

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

 

24.        Stockholders’ equity

 

a) Share capital

 

As at September 30, 2020, the share capital was R$77,300 corresponding to 5,284,474,782 shares issued and fully paid without par value.

 

  September 30, 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.  188,496,276   -   188,496,276 
Bradespar S.A.  293,907,266   -   293,907,266 
Mitsui & Co., Ltd  286,347,055   -   286,347,055 
Foreign investors - ADRs  1,120,264,293   -   1,120,264,293 
Foreign institutional investors in local market  1,303,467,605   -   1,303,467,605 
FMP - FGTS  44,933,987   -   44,933,987 
PIBB - Fund  3,555,545   -   3,555,545 
Institutional investors  973,136,217   -   973,136,217 
Retail investors in Brazil  321,237,134   -   321,237,134 
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

 

The Company used 1,628,485 and 2,024,059 treasury shares, for the share based payment program of its eligible executives (Matching program), in the amount of R$68 and R$84 recognized as “assignment and transfer of shares” for the nine-month periods ended September 30, 2020 and 2019, respectively.

 

c) Remuneration to the Company´s stockholders

 

On July 29, 2020, the Board of Directors approved the resumption of the stockholders´ remuneration policy, which was suspended as a result of the Brumadinho dam failure. This policy, formerly approved in March 2018, set a semi-annual payment that is calculated by applying 30% of Adjusted EBITDA less sustaining capital expenditures, subject to availability of profit reserves as required by the Brazilian corporate law. In addition, the Board of Directors approved the payment of interest on capital in the total gross amount of R$7,253, equivalent to R$1.414364369 per share, declared in December 2019 based on profit reserves.

 

On September 30, 2020, the Company paid stockholders’ remuneration in the amount of R$12,350, R$2,407510720 per share, R$5,116 based on the interest on capital and R$7,234 based on dividends, approved by Board of Directors on September 10, 2020. This amount will be reduced from the minimum mandatory remuneration for the year ended 2020 and deducted from the profit reserve, if necessary.

 

  45 

 

 

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

 

25.        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.

 

a)       Transactions with related parties

 

  Consolidated 
  Three-month period ended September 30, 
  2020  2019 
  Joint
Ventures
  Associates  Major
stockholders
  Total  Joint
Ventures
  Associates  Major
stockholders
  Total 
Net operating revenue  590   320   259   1,169   488   308   211   1,007 
Cost and operating expenses  (1,199)  (37)  -   (1,236)  (1,846)  (48)  -   (1,894)
Financial result  26   (6)  (215)  (195)  217   -   (140)  77 

 

  Consolidated 
  Nine-month period ended September 30, 
  2020  2019 
  Joint
Ventures
  Associates  Major
stockholders
  Total  Joint
Ventures
  Associates  Major
stockholders
  Total 
Net operating revenue  1,268   897   697   2,862   1,108   830   556   2,494 
Cost and operating expenses  (3,811)  (90)  -   (3,901)  (5,283)  (104)  -   (5,387)
Financial result  102   10   (382)  (270)  184   (2)  (260)  (78)

 

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 
  September 30, 2020  December 31, 2019 
  Joint
Ventures
  Associates  Major
stockholders
(iii)
  Total  Joint
Ventures
  Associates  Major
stockholders
(iii)
  Total 
Assets                        
Cash and cash equivalents  -   -   6,943   6,943   -   -   5,578   5,578 
Accounts receivable  698   80   17   795   367   88   19   474 
Dividends receivable  412   45   -   457   335   25   -   360 
Loans (i)  10,699   -   -   10,699   7,737   -   -   7,737 
Derivatives financial instruments  -   -   -   -   -   -   169   169 
Other assets  427   -   -   427   262   -   -   262 
                                 
Liabilities                                
Supplier and contractors  690   26   133   849   1,218   113   149   1,480 
Loans (ii)  -   7,943   5,223   13,166   -   5,511   6,804   12,315 
Derivatives financial instruments  -   -   2,164   2,164   -   -   259   259 
Other liabilities  1,573   134   -   1,707   2,293   -   -   2,293 

 

(i) Refers to the loan with Nacala BV.

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

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

 

  46 

 

 

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

 

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

 

a)       Other financial assets and liabilities

 

  Parent company 
  Current  Non-Current 
  September 30, 2020  December 31, 2019  September 30, 2020  December 31, 2019 
Other financial assets                
Restricted cash  -   -   527   530 
Loans  -   -   18   18 
Derivative financial instruments  32   450   307   593 
Investments in equity securities  -   -   3,077   2,555 
Related parties - Loans  -   690   41   276 
   32   1,140   3,970   3,972 
Other financial liabilities                
Derivative financial instruments  1,731   280   4,556   972 
Related parties - Loans  9,215   6,392   96,926   62,861 
Financial guarantees  -   -   4,876   2,116 
Participative stockholders' debentures  -   -   14,285   10,416 
Advance receipts  10   6   -   - 
   10,956   6,678   120,643   76,365 

 

b)        Investments

 

  Parent company 
  2020  2019 
Balance at January 1st,  144,594   139,510 
Additions and Capitalizations  2,039   5,708 
Disposals  (117)  (84)
Translation adjustment  41,834   9,289 
Equity results in income statement  3,141   5,070 
Equity results in statement of comprehensive income  (1,150)  (955)
Dividends declared  (1,304)  (1,083)
Merger (i)  (2,105)  - 
Others  733   86 
Balance at September 30,  187,665   157,541 

 

(i) On April 30, 2020 the incorporation of the wholly owned subsidiary Ferrous Resources do Brasil S.A. was approved at the General Shareholders' Meeting.

 

c)        Intangibles

 

  Parent company 
  Concessions  Right of use  Software  Total 
Balance at December 31, 2019  15,993   99   179   16,271 
Additions  640   -   53   693 
Disposals  (24)  -   -   (24)
Amortization  (683)  (4)  (43)  (730)
Merger of Ferrous  -   -   5   5 
Balance at September 30, 2020  15,926   95   194   16,215 
Cost  20,969   223   2,581   23,773 
Accumulated amortization  (5,043)  (128)  (2,387)  (7,558)
Balance at September 30, 2020  15,926   95   194   16,215 

 

  Parent company 
  Concessions  Right of use  Software  Total 
Balance at December 31, 2018  15,240   105   277   15,622 
Additions  1,054   -   75   1,129 
Disposals  (54)  -   -   (54)
Amortization  (685)  (4)  (179)  (868)
Balance at September 30, 2019  15,555   101   173   15,829 
Cost  19,830   223   2,492   22,545 
Accumulated amortization  (4,275)  (122)  (2,319)  (6,716)
Balance at September 30, 2019  15,555   101   173   15,829 

 

  47 

 

 

 

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)  -   -   -   -   -   163   -   6,991   7,154 
Disposals  (4)  (2)  (139)  (8)  (30)  -   (17)  (4)  (204)
Assets retirement obligation  -   -   -   -   (247)  -   -   -   (247)
Depreciation, amortization and depletion  -   (909)  (1,341)  (1,056)  (373)  (272)  (1,451)  -   (5,402)
Merger of Ferrous  577   102   325   73   990   3   6   (136)  1,940 
Transfers  131   312   1,545   861   1,170   -   1,334   (5,353)  - 
Balance at September 30, 2020  2,501   26,058   30,609   10,083   8,663   2,008   19,478   9,716   109,116 
Cost  2,501   34,957   41,277   19,481   11,647   2,588   34,175   9,716   156,342 
Accumulated depreciation  -   (8,899)  (10,668)  (9,398)  (2,984)  (580)  (14,697)  -   (47,226)
Balance at September 30, 2020  2,501   26,058   30,609   10,083   8,663   2,008   19,478   9,716   109,116 

 

   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  -   -   -   -   -   2,415   -   -   2,415 
Additions (i)  -   -   -   -   -   -   -   4,496   4,496 
Disposals  (7)  (299)  (130)  (172)  (178)  -   (712)  (35)  (1,533)
Assets retirement obligation  -   -   -   -   556   -   -   -   556 
Depreciation, amortization and depletion  -   (757)  (1,088)  (1,020)  (438)  (226)  (1,469)  -   (4,998)
Transfers  8   761   841   1,327   (351)  -   2,096   (4,682)  - 
Balance at September 30, 2019  1,736   26,264   30,216   10,139   7,278   2,189   19,155   7,775   104,752 
Cost  1,736   33,830   39,019   18,318   9,762   2,415   32,203   7,775   145,058 
Accumulated depreciation  -   (7,566)  (8,803)  (8,179)  (2,484)  (226)  (13,048)  -   (40,306)
Balance at September 30, 2019  1,736   26,264   30,216   10,139   7,278   2,189   19,155   7,775   104,752 

 

(i) Includes capitalized borrowing costs.

 

e)Loans and borrowings

 

  Parent company 
  Current liabilities  Non-current liabilities 
  September 30, 2020  December 31, 2019  September 30, 2020  December 31, 2019 
Debt contracts in the international markets                
Floating rates in:                
US$  945   445   8,038   6,419 
Fixed rates in:                
US$  -   536   2,935   2,098 
EUR  -   -   4,960   3,398 
Accrued charges  204   238   -   - 
   1,149   1,219   15,933   11,915 
Debt contracts in Brazil                
Floating rates in:                
R$, indexed to TJLP, TR, IPCA, IGP-M and CDI  1,747   2,279   5,014   6,418 
Basket of currencies and US$ indexed to LIBOR  252   180   126   225 
Fixed rates in:                
R$  88   151   91   155 
Accrued charges  79   157   -   - 
   2,166   2,767   5,231   6,798 
Total  3,315   3,986   21,164   18,713 

 

  48 

 

 

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  325 
2021  3,028 
2022  3,531 
2023  6,584 
Between 2024 and 2028  7,707 
2029 onwards  3,021 
   24,196 

 

f)Provisions

 

  Parent company 
  Current liabilities  Non-current liabilities 
  September 30, 2020  December 31, 2019  September 30, 2020  December 31, 2019 
Payroll, related charges and other remunerations  2,526   2,124   -   - 
Environmental obligations  428   490   689   585 
Asset retirement obligations  463   488   3,351   3,567 
Provisions for litigation  -   -   5,289   5,102 
Employee postretirement obligations  150   108   2,119   2,114 
Provisions  3,567   3,210   11,448   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  90   96   93   7   286 
Payments  (54)  (42)  (213)  -   (309)
Indexation and interest  38   75   86   2   201 
Merger Ferrous  1   3   3   2   9 
Balance at September 30, 2020  2,400   1,136   1,703   50   5,289 

 

   Parent company 
   Tax litigation (i)   Civil litigation   Labor litigation   Environmental
litigation
   Total of
litigation
provision
 
Balance at December 31, 2018  2,240   467   1,767   9   4,483 
Additions and reversals, net (ii)  51   529   314   18   912 
Payments  (22)  (100)  (290)  -   (412)
Indexation and interest  19   107   49   6   181 
Balance at September 30, 2019  2,288   1,003   1,840   33   5,164 

 

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

(ii) Includes the change in the expected outcome of probable loss of the lawsuit related to the accident of ship loaders, at the Praia Mole maritime terminal, in Espírito Santo.

 

h)Contingent liabilities

 

  Parent company 
  September 30, 2020  December 31, 2019 
Tax litigation  35,017   30,905 
Civil litigation  4,733   4,589 
Labor litigation  2,806   3,025 
Environmental litigation  3,750   4,239 
Brumadinho event  767   635 
Total  47,073   43,393 

 

  49 

 

 

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 
  Nine-month period ended September 30, 
   2020   2019 
Income (loss) before income taxes  23,657   (177)
Income taxes at statutory rates - 34%  (8,043)  60 
Adjustments that affect the basis of taxes:        
Tax incentives  4,438   535 
Equity results  1,068   1,724 
Others (i)  768   (2,406)
Income taxes  (1,769)  (87)

 

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

 

27.        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 September 30, 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 September 30,
2020
  December 31,
2019
  Index  Average
rate
  September 30,
2020
  December 31,
2019
  September 30,
2020
  September 30,
2020
  2020  2021  2022+ 
CDI vs. US$ fixed rate swap                  (3,308)  (155)  (105)  235   (103)  (445)  (2,761)
Receivable  R$9,754   R$2,115   CDI   100.18%                            
Payable  US$2.285   US$558   Fix   1.97%                            
                                             
TJLP vs. US$ fixed rate swap                  (1,102)  (304)  (98)  55   (86)  (317)  (699)
Receivable  R$1,791   R$2,111   TJLP +   1.14%                            
Payable  US$501   US$601   Fix   3.02%                            
                                             
R$ fixed rate vs. US$ fixed rate swap                  (861)  (73)  (57)  63   (19)  (442)  (401)
Receivable  R$2,541   R$2,173   Fix   5.69%                            
Payable  US$630   US$604   Fix   0.22%                            
                                             
IPCA vs. US$ fixed rate swap                  (1,161)  185   (48)  69   (1)  (527)  (634)
Receivable  R$2,401   R$2,826   IPCA +   5.08%                            
Payable  US$636   US$759   Fix   0.04%                            
                                             
IPCA vs. CDI swap                  215   424   -   5   -   32   183 
Receivable  R$678   R$1,634   IPCA +   6.63%                            
Payable  R$678   R$1,350   CDI   98.76%                            

 

  50 

 

 

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

 

  Notional        Fair value  Value at Risk  Fair value by
year
 
Flow September 30,
2020
  December 31,
2019
  Bought / Sold  Average
rate
(BRL/USD)
  September 30,
2020
  December 31,
2019
  September 30,
2020
  2020+ 
Forward  R$916   R$121   B   5.96   (97)  6   23   (97)

 

(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 September 30,
2020
  December 31,
2019
  Index  Average
rate
  September 30,
2020
  December 31,
2019
  September 30,
2020
  September 30,
2020
  2020  2021  2022+ 
EUR fixed rate vs. US$ fixed rate swap                 (169)  (141)  (24)  26   -   (26)  (143)
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  Financial
Settlement
Inflows
(Outflows)
  Value at
Risk
  Fair value by year 
Flow September 30,
2020
  December 31,
2019
  Index Average
rate
  September 30,
2020
  December 31,
2019
  September 30,
2020
  September 30,
2020
  2020  2021  2022+ 
Libor vs. US$ fixed rate swap               (62)  -   -   19   -   (7)  (54)
Receivable US$950   -  Libor (i)  0.13%                            
Payable US$950   -  Fix  0.48%                            

 

(i) Including Libor 3M and Libor 6M

 

  51 

 

 

 

 

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

 

b) Commodities derivative positions and freight 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 (bbl)       Fair value  Financial
settlement
Inflows
(Outflows)
  Value at
Risk
  Fair value
by year
 
Flow September 30,
2020
  December 31,
2019
  Bought / Sold Average strike
(US$/bbl)
  September 30,
2020
  December 31,
2019
  September 30,
2020
  September 30,
2020
  2020+ 
Call options  12,352,494   7,048,500  B  60   226   45   -   22   226 
Put options  12,352,494   7,048,500  S  34   (190)  (14)  (319)  30   (189)
Total                36   31   (319)  52   37 

 

Gasoil Options

 

  Notional (bbl)       Fair value  Financial
settlement
Inflows
(Outflows)
  Value at
Risk
  Fair value
by year
 
Flow September 30,
2020
  December 31,
2019
  Bought / Sold Average strike
(US$/bbl)
  September 30,
2020
  December 31,
2019
  September 30,
2020
  September 30,
2020
  2020 
Call options  4,246,500   7,710,750  B  87   1   26   -   -   1 
Put options  4,246,500   7,710,750  S  55   (278)  (10)  (552)  26   (278)
Total                (277)  16   (552)  26   (277)

 

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 price 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 September 30,
2020
  December 31,
2019
  Bought / Sold Average strike
(US$/day)
  September 30,
2020
  December 31,
2019
  September 30,
2020
  September 30,
2020
  2020+ 
Freight forwards  3,610   1,050  B  13,949   47   1   (12)  14   47 

 

  52 

 

 

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

 

(ii) Protection programs for base metals products

 

Operational Hedging Programs

 

In the operational hedging program for nickel sales at fixed prices, derivatives transactions were implemented, usually through the purchase of nickel forwards, to convert into floating prices the contracts with clients that required a fixed price.

 

  Notional (ton)       Fair value  Financial
settlement
Inflows
(Outflows)
  Value at
Risk
  Fair value
by year
 
Flow September 30,
2020
  December 31,
2019
  Bought / Sold Average strike
(US$/ton)
  September 30,
2020
  December 31,
2019
  September 30,
2020
  September 30,
2020
  2020  2021 
Fixed price sales protection                                      
Nickel forwards  2,216         -  B  12,289   30         -   18         4   21   9 
Total                30   -   18   4   21   9 

 

Nickel Revenue Hedging Program

 

The Company implemented a Nickel Revenue Hedging Program in 2019, which has been discontinued in April 2020 to increase the Company's cash position as a result of COVID-19 pandemic. The cumulative gain recognized in the cash flow hedge reserve until the settlement are being reclassified to the income statement as the Company recognizes the revenue from nickel sales (hedged item).

 

  Notional (ton)    Fair value  Financial
settlement
Inflows
(Outflows)
  Value at
Risk
  Fair value
by year
 
Flow September 30,
2020
  December 31,
2019
  Bought / Sold September 30,
2020
  December 31,
2019
  September 30,
2020
  September 30,
2020
  2020  2021 
Nickel Revenue Hedging Program                                  
Call options        -   75,984  S        -   (49)  -         -         -         - 
Put options  -   75,984  B  -   652   1,412   -   -   - 
Total            -   603   1,412   -   -   - 

 

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 September 30,
2020
  December 31,
2019
  Bought / Sold Average strike
(US$/t oz)
  September 30,
2020
  December 31,
2019
  September 30,
2020
  September 30,
2020
  2020  2021 
Palladium Revenue Hedging Program                                      
Palladium Forwards  2,400        -  S  2,214   (1)       -        17        -   (1)  - 
                                       
Call Options  14,400   -  S  2,387   (13)  -   -   4   (3)  (10)
Put Options  14,400   -  B  2,050   5   -   -   2   1   4 
Total                (9)  -   17   6   (3)  (6)

 

  53 

 

 

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

 

Embedded derivatives in contracts

 

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 September 30,
2020
  December 31,
2019
  Bought / Sold Average strike
(US$/ton)
  September 30,
2020
  December 31,
2019
  September 30,
2020
  September 30,
2020
  2020 
Nickel forwards  708   1,497  S  14,576   (1)  9   -   2   (1)
Copper forwards  544   1,009  S  6,527   (1)  (1)  -   -   (1)
Total                (2)  8   -   2   (2)

 

c) 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 September 30,
2020
  December 31,
2019
  Bought / Sold Average strike
(US$/share)
  September 30,
2020
  December 31,
2019
  September 30,
2020
  September 30,
2020
  2023 
Call options        -   10,000,000  B       -        -   105   110        -        - 

 

d) Call options associated to debentures convertible into shares

 

The Company has debentures which lenders have the option to convert the outstanding debt into a specified quantity of an associate’s shares, held by the Company. This option may be fully, or partly 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, until the maturity date of the debentures. The creditor also has the right to reconstitute the amount of shares required to achieve a total stake of 8% in this associate’shares, at a pre-established price in the option contract, which may be exercised up to December 15th, 2020, subject to the full exercise of the options associated with the debentures.

 

  Notional (quantity)       Fair value  Financial
settlement
Inflows
(Outflows)
  Value at
Risk
  Fair value
by year
 
Flow September 30,
2020
  December 31,
2019
  Bought / Sold Average strike
(R$/share)
  September 30,
2020
  December 31,
2019
  September 30,
2020
  September 30,
2020
  2027 
Conversion options  140,239   140,239  S  8,436   (337)  (206)  -   15   (337)

 

  54 

 

 

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

 

e) Option related to a Special Purpose Entity “SPE”

 

The Company acquired in January 2019 a call option related to shares of certain special purpose entities, which are part of a wind farm located in Bahia, Brazil. This option was acquired in the context of the Company's signing of electric power purchase and sale agreements with an SPE, supplied by this wind farm.

 

  Notional (quantity)       Fair value  Financial
settlement
Inflows
(Outflows)
  Value at
Risk
  Fair value
by year
 
Flow September 30,
2020
  December 31,
2019
  Bought / Sold Average strike
(R$/share)
  September 30,
2020
  December 31,
2019
  September 30,
2020
  September 30,
2020
  2022 
Call option  137,751,623   137,751,623  B  2.74   123   96   -   12   123 

 

f) Embedded derivatives in contracts

 

In 2014, the Company sold part of its stake in an associate to an investment fund, of which sales contract establishes, under certain conditions, a minimum return guarantee on the investment whose maturity was extended to December 2021 during this quarter. This is considered an embedded derivative, with payoff equivalent to a put option.

 

  Notional (quantity)       Fair value  Financial
settlement
Inflows
(Outflows)
  Value at
Risk
  Fair value
by year
 
Flow September 30,
2020
  December 31,
2019
  Bought / Sold Average strike
(R$/share)
  September 30,
2020
  December 31,
2019
  September 30,
2020
  September 30,
2020
  2021 
Put option  1,105,070,863   1,105,070,863  S  4.17   (319)  (278)  -   42   (319)

 

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 September 30,
2020
  December 31,
2019
  Bought / Sold Average strike
(US$/ton)
  September 30,
2020
  December 31,
2019
  September 30,
2020
  September 30,
2020
  2020  2021+ 
Call options  746,667   746,667  S  233   (1)  (3)  -   -   -   (1)

 

  55 

 

 

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

 

g) Methods and techniques of evaluation

 

Derivative financial instruments are evaluated through the use of market curves and prices impacting each instrument at the closing dates.

 

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.

 

  56 

 

 

 

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 September 30, 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  (3,308)  (6,617)  (9,926)
  US$ interest rate inside Brazil decrease  (3,308)  (3,473)  (3,644)
  Brazilian interest rate increase  (3,308)  (3,471)  (3,642)
Protected item: R$ denominated liabilities R$ depreciation   n.a.   -   - 
               
TJLP vs. US$ fixed rate swap R$ depreciation  (1,102)  (1,853)  (2,604)
  US$ interest rate inside Brazil decrease  (1,102)  (1,124)  (1,146)
  Brazilian interest rate increase  (1,102)  (1,162)  (1,216)
  TJLP interest rate decrease  (1,102)  (1,157)  (1,212)
Protected item: R$ denominated debt R$ depreciation   n.a.   -   - 
               
R$ fixed rate vs. US$ fixed rate swap R$ depreciation  (861)  (1,734)  (2,607)
  US$ interest rate inside Brazil decrease  (861)  (881)  (901)
  Brazilian interest rate increase  (861)  (921)  (977)
Protected item: R$ denominated debt R$ depreciation   n.a.   -   - 
               
IPCA vs. US$ fixed rate swap R$ depreciation  (1,161)  (2,131)  (3,101)
  US$ interest rate inside Brazil decrease  (1,161)  (1,197)  (1,235)
  Brazilian interest rate increase  (1,161)  (1,257)  (1,350)
  IPCA index decrease  (1,161)  (1,229)  (1,297)
Protected item: R$ denominated debt R$ depreciation   n.a.   -   - 
               
IPCA vs. CDI swap Brazilian interest rate increase  215   202   189 
  IPCA index decrease  215   202   189 
Protected item: R$ denominated debt linked to IPCA IPCA index decrease   n.a.   (202)  (189)
               
EUR fixed rate vs. US$ fixed rate swap EUR depreciation  (169)  (1,097)  (2,026)
  Euribor increase  (169)  (174)  (179)
  US$ Libor decrease  (169)  (174)  (179)
Protected item: EUR denominated debt EUR depreciation  n.a.   1,097   2,026 
               
US$ floating rate vs. US$ fixed rate swap US$ Libor decrease  (61)  (79)  (97)
Protected item: Libor US$ indexed debt US$ Libor decrease   n.a.   79   97 
               
NDF BRL/USD R$ depreciation  (97)  (356)  (616)
  US$ interest rate inside Brazil decrease  (97)  (109)  (121)
  Brazilian interest rate increase  (97)  (152)  (209)
Protected item: R$ denominated liabilities R$ depreciation   n.a.   -   - 

 

  57 

 

 

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  (236)  (737)  (1,305)
Protected item: Part of costs linked to fuel oil prices Price input decrease  n.a.   737   1,305 
               
Maritime Freight protection              
Forwards Freight price decrease  47   (20)  (87)
Protected item: Part of costs linked to maritime freight prices Freight price decrease  n.a.   20   87 
               
Nickel sales fixed price protection              
Forwards Nickel price decrease  -   -   - 
Protected item: Part of nickel revenues with fixed prices Nickel price decrease  n.a.   -   - 
               
Palladium Revenue Hedging Program              
Options Palladium price increase  (8)  (46)  (92)
Protected item: Part of palladium future revenues Palladium price increase  n.a.   46   92 
               
Conversion options Stock value increase  (337)  (583)  (889)
               
Option - SPCs SPCs stock value decrease  123   53   11 

 

Instrument Main risks Probable  Scenario I  Scenario II 
Embedded derivatives - Raw material purchase (nickel) Nickel price increase  (1)  (16)  (31)
Embedded derivatives - Raw material purchase (copper) Copper price increase  (1)  (6)  (11)
Embedded derivatives - Gas purchase Pellet price increase  (1)  (2)  (5)
Embedded derivatives - Guaranteed minimum return Stock value decrease  (319)  (840)  (1,827)

 

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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 Itaú Unibanco Ba3 BB-
Banco Safra Ba3 BB-
Banco Santander A2 A
Banco Votorantim Ba3 BB-
Bank Mandiri Baa2 BBB-
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 of Tokyo Mitsubishi UFJ A1 A-
Bank Rakyat Indonesia (BRI) Baa2 BBB-
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
Intesa Sanpaolo Spa Baa1 BBB
Banco Itaú Unibanco Ba3 BB-
JP Morgan Chase & Co A2 A-
Macquarie Group Ltd A3 BBB+
Mega International Commercial Bank A1 A
Millenium BIM A1 A-
Mitsui & Co A1 A-
Mizuho Financial A1 A-
Morgan Stanley A3 *+ BBB+
Muscat Bank B1 BB-
National Australia Bank Aa3 AA-
National Bank of Canada Aa3 A
National Bank of Oman B1 -
Natixis A1 A+
Royal Bank of Canada Aa2 AA-
Rabobank Aa3 A+
Société Générale 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

 

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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: October 28, 2020By:/s/ Ivan Fadel
  Head of Investor Relations

 

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