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Article Excerpt
PARTICIPANTS
. Roger Agnelli, Vale, CEO . Fabio Barbosa, Vale, CFO . Eduardo Bartolomeo, Vale, Executive Officer for Logistics, Engineering and Project Management . Jose Carlos Martins, Vale, Executive Officer for Ferrous Minerals . Felipe Hirai, Bank of America, Analyst . Roger Downey, Credit Suisse, Analyst . Jorge Beristain, Deutsche Bank, Analyst . Rafael Biderman, Bradesco Bank, Analyst . Carlos De Alba, Morgan Stanley, Analyst
OVERVIEW
RIO reported 2008 revenues of $38.8b and net earnings of $13b.
FINANCIAL DATA
A. Key Data From Call 1. 2008 revenues = $38.8b. 2. 2008 net earnings = $13b. 3. Cash holdings as of 12/31/2008 = $12.6b.
PRESENTATION SUMMARY
S1. 2008 Financial Review (F.B.) 1. 2008 Overview: 1. Good performance, despite a major change observed in 4Q08. 2. Eight production records and eight shipment records. 3. Outstanding financial performance. 2. 2008 Results: 1. Revenues of $38.8b; cumulative growth rate of 46%. 2. EBIT of almost $16b; cumulative growth of 50%. 3. Record cash generation. 4. EBITDA of $19b. 5. Net earnings of $13b. 6. Return to shareholders reached record level of [$3.6b, including] share buybacks. 7. Investments reached record $10.2b; almost three-fourth dedicated to growth. 3. Market Position: 1. Second largest mining co. in the world, with a market cap of [about $81b]. 4. Market: 1. Global industrial production declined sharply in 4Q08; still suffering in early months of 2009. 1. Co. has been responsive to this major change in economic environment. 2. Announced several production cuts to avoid inventory buildups. 3. Took the opportunity to replenish inventory (indiscernible) to optimize operations. 2. Focused on cost minimization; enhanced operational flexibility in production and CapEx execution management. 3. Long-term growth strategy remains unchanged, because views about future have not changed. 1. Structural transformation taking place should continue. 2. Will have some adjustments in short-term, but long-term perspectives are positive. 5. Cost Reduction: 1. Shut down several higher cost operating units. 2. Cut administrative costs. 3. Improving efficiency in corporate activities by improving quality of services and downsizing structure. 4. Seeking flexibility in labor contracts. 1. Managed to negotiate several important initiatives to preserve employment level. 5. Working to reduce working capital, since July, in terms of materials and parts. 1. Has reduced about $300m in working capital, besides other initiatives. 2. Re-negotiating existing contracts with service providers to make them reflect current environment. 6. Working on CapEx side. 1. Trying to review costs and timing of delivery of several equipments associated with important CapEx programs ahead. 7. Initiatives to reduce costs did not show results yet, particularly in 4Q08. 1. This was associated with long production cycle of nickel business. 2. Still some intermediate products are costing Co. more today than they will in future. 3. This lag in reaction of cost structure is reflected in the bulk of the $66m price change. 8. Benefiting from [devaluation] of Canadian currency against real; costs down QbyQ. 6. Long-Term Growth: 1. Strategy is unchanged. 2. Good financial position. 3. Continues to develop project pipeline.
S2. Project Pipeline (E.B.) 1. Projects: 1. Seeing a lot of opportunities ahead; one of those is currency devaluation. 2. Market is turning into a buyers' market. 3. Equipment and metallic construction are already facing some good news. 4. Engineering still under pressure. 2. Outlook: 1. In long term or medium term, Co. will be able to deliver same pipeline with much less pressure, with higher quality, and with much lower costs.
S3. Acquisitions (F.B.) 1. Overview: 1. Keeps focus on growth and development of important project pipeline with required caution. 2. Trying to pursue cost reduction; already successful on some fronts. 3. Benefits from devaluation of exchange rates. 4. Aforementioned factors, combined, should represent a much lower disbursement of cash position. 2. Global Leader: 1. Global leader in iron ore. 2. Leadership was consolidated during last down cycle at early 2000-2001, when Co. acquired several assets. 3. Acquisitions: 1. Just bought an asset in Argentina and an asset in Canada related to potash business. 1. Entering more heavily in fertilizers business. 2. Believes there is a great opportunity in long term; current global recession does not change underlying fundamentals of long-term growth of this market. 3. With this acquisition, Co. is in a privileged position to explore one of the potentially highest growth markets in future, South America. 4. Transaction was already concluded and implemented last month. 4. Acquisition of Corumba: 1. World-class asset. 2. Very important asset strategically and in terms of quality.
S4. Corumba Acquisition & Chinese Market (J.M.) 1. Corumba Acquisition: 1. Main strategic issue behind this acquisition is production of lump. 1. Lump ore is important on blast furnace charge. 2. Lump production was going down year-by-year. 3. It was important to add lump to compound the sales baskets for main customers, mainly in Europe. 2. Acquisition will bring strategic strength in market position, mainly in Europe; Co. can ship it to other markets also. 1. Product is highest quality available in the world. 2. Can be used in blast furnace and DRI production. 3. There are a lot of challenges relating to logistics. 1. This kind of lump commands a premium that is able to cover additional cost of logistics. 4. Acquisition will strengthen strategic position, in long term, in iron ore market. 2. Chinese Market: 1. Last qtr. was very weak. 2. China was the first market to feel problems of this downturn in world economy. 3. Lost a lot of sales during 4Q08. 1. Now things are coming back to normal level, and even better. 2. Expects to deliver the highest number ever with China; above 30m tons in a qtr. 4. Took advantage of low freight costs in this period. 1. Was able to hire a lot of vessels on convenient price. 5. Developed a lot of new customers. 1. Signed a lot of new commercial agreements with new customers. 2. These agreements now will become new contracts. 6. Co. thinks this crisis will put it in a strong position in China. 7. In the past, Co. never had opportunity to test what should be market share in China. 1. Co. never had enough iron ore to feed their needs. 8. With slowdown in Europe and even in Brazil, Co. has much more iron ore available; so Co. can test how much it can grab of the China market. 9. Co. is coping with the situation in natural markets with Europe and Brazil, which are very weak. 1. China is helping Co. to cover a lot of this weakness in natural markets. 2. Sales in China have come back to better levels than before.
S5. Financial Position (F.B.) 1. Global Financial Crisis: 1. Many mining projects have been cancelled and postponed by other companies. 2. Supply of capital is much more restricted. 1. Co. is in a different position vs. last year. 2. Most companies face less open environment to get credit. 3. Banks are in a less favorable position; risk aversion has increased. 4. Cost of capital is expected to be much higher. 5. There will be less possibilities of funding future expansions in this and other industries. 3. Global exploration investment is likely to suffer a major decrease. 1. In Asian crisis, after peak of $5.2b, it decreased to almost one-third of this level by 2002. 2. Became more positive again. 3. Reduction in investment could effect new investment in mining business itself and expansion of capacity. 4. Credit Suisse estimates a $200b shortfall in mining investments over next five years. 2. Financial Position: 1. In a good position to explore growth options, but with the caution required. 2. As of Dec. 31, had $12.6b in cash holdings. 1. Almost $10b in long-term credit facilities. 2. Has very low-cost, long-lived assets. 3. Project Delivery: 1. Good track record in project delivery. 2. 29 major projects concluded over last six years. 3. 23 major projects in pipeline. 4. [ 134] mineral exploration projects across the globe, to support long-term growth.
S6. Market Outlook...
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