6-K 1 tm2032550-1_6k.htm FORM 6-K

 

 

 

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 information 2
Consolidated and Parent Company Income Statement 4
Consolidated and Parent Company Statement of Comprehensive Income 6
Consolidated and Parent Company Statement of Cash Flows 7
Consolidated and Parent Company Statement of Financial Position 9
Consolidated Statement of Changes in Equity 10
Consolidated and Parent Company Value Added Statement 11
Notes to the Interim Financial Statements 12
1.  Corporate information 12
2.  Basis of preparation of the interim financial statements 12
3.  Significant events in the current period 13
4.  Brumadinho’s dam failure 15
5.  Information by business segment and by geographic area 19
6.  Costs and expenses by nature 24
7.  Financial results 25
8.  Income taxes 26
9.  Basic and diluted earnings (loss) per share 27
10.    Accounts receivable 27
11.    Inventories 27
12.    Other financial assets and liabilities 28
13.    Investments in associates and joint ventures 28
14.    Intangibles 31
15.    Property, plant and equipment 32
16.    Loans, borrowings, cash and cash equivalents and short-term investments 33
17.    Liabilities related to associates and joint ventures 36
18.    Financial instruments classification 37
19.    Fair value estimate 38
20.    Derivative financial instruments 39
21.    Provisions 41
22.    Litigations 41
23.    Employee post-retirement obligations 44
24.    Stockholders’ equity 45
25.    Related parties 46
26.    Parent Company information (individual interim information) 47
27.    Additional information about derivatives financial instruments 50

 

  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)

 

  58 

 

 

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

 

  59 

 

 

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

 

  60