United States

Securities and Exchange Commission

Washington, D.C. 20549

 

FORM 6-K

 

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16

of the

Securities Exchange Act of 1934

 

For the month of

 

July 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

June 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.  Brumadinho’s dam failure 14
4.  Information by business segment and by geographic area 18
5.  Costs and expenses by nature 23
6.  Financial results 24
7.  Income taxes 24
8.  Basic and diluted earnings (loss) per share 26
9.  Accounts receivable 26
10.    Inventories 26
11.    Other financial assets and liabilities 27
12.    Investments in associates and joint ventures 27
13.    Intangibles 30
14.    Property, plant and equipment 31
15.    Loans, borrowings, cash and cash equivalents and short-term investments 33
16.    Liabilities related to associates and joint ventures 35
17.    Financial instruments classification 37
18.    Fair value estimate 38
19.    Derivative financial instruments 39
20.    Provisions 41
21.    Litigations 41
22.    Employee post-retirement obligations 46
23.    Stockholders’ equity 46
24.    Related parties 47
25.    Parent Company information (individual interim information) 48
26.    Additional information about derivatives financial instruments 51

 

1

 

 

 

(A free translation of the original in Portuguese)

 

Vale S.A.

 

Report on review of quarterly information

 

To the Board of Directors and Stockholders

Vale S.A.

 

Introduction

 

We have reviewed the interim financial information accompanying consolidated and parent company interim accounting information of Vale S.A. ("Company"), included in the Quarterly Information Form - ITR for the quarter ended June 30, 2020, which comprises the parent company and consolidated statements of financial position as of June 30, 2020 and the respective parent company and consolidated income statements and the statements of comprehensive income for the three and six-month periods then ended, the statement of changes in equity for the six-month period then ended, the parent company statement of cash flows for the six-month period then ended and the consolidated statements of cash flows for the three and six-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 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.

 

2

 

 

 

 

(A free translation of the original in Portuguese)

 

Vale S.A.

 

Conclusion on the interim information

 

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

 

Emphasis of matter

 

Brumadinho’s dam failure

 

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

 

Other matters

 

Value added statements

 

The quarterly information referred to above includes the parent company and consolidated statements of value added for the six-month period ended June 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, July 29, 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
June 30,
    Six-month period ended
June 30,
 
    Notes   2020     2019     2020     2019  
Net operating revenue     4(c)     40,434       36,005       71,685       66,957  
Cost of goods sold and services rendered     5(a)     (22,667 )     (20,282 )     (41,882 )     (38,032 )
Gross profit           17,767       15,723       29,803       28,925  
                                       
Operating expenses                                      
Selling and administrative expenses     5(b)     (664 )     (427 )     (1,180 )     (845 )
Research and evaluation expenses           (484 )     (350 )     (913 )     (619 )
Pre-operating and operational stoppage           (1,277 )     (1,313 )     (2,469 )     (2,128 )
Brumadinho event     3     (693 )     (5,921 )     (1,401 )     (23,236 )
Other operating expenses, net     5(c)     (1,282 )     (153 )     (1,549 )     (471 )
            (4,400 )     (8,164 )     (7,512 )     (27,299 )
Impairment and disposals of non-current assets     3 and 12     (2,260 )     (422 )     (2,396 )     (1,203 )
Operating income           11,107       7,137       19,895       423  
                                       
Financial income     6     714       479       1,206       843  
Financial expenses     6     (3,132 )     (2,930 )     (5,422 )     (5,891 )
Other financial items, net     6     (173 )     (383 )     (8,861 )     (376 )
Equity results and other results in associates and joint ventures     12 and 16     (2,785 )     (2,862 )     (3,552 )     (2,548 )
Income (loss) before income taxes           5,731       1,441       3,266       (7,549 )
                                       
Income taxes     7                                
Current tax           (1,741 )     (1,427 )     (3,334 )     (2,388 )
Deferred tax           887       (432 )     5,582       2,973  
            (854 )     (1,859 )     2,248       585  
                                       
Net income (loss)           4,877       (418 )     5,514       (6,964 )
Loss attributable to noncontrolling interests           (412 )     (34 )     (759 )     (158 )
Net income (loss) attributable to Vale's stockholders           5,289       (384 )     6,273       (6,806 )
                                       
Earnings (loss) per share attributable to Vale's stockholders:                                      
Basic and diluted earnings (loss) per share:     8                                
Common share (R$)           1.03       (0.07 )     1.22       (1.31 )

 

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 June 30,     Six-month period ended June 30,  
    2020     2019     2020     2019  
Net operating revenue     24,855       19,763       43,648       36,548  
Cost of goods sold and services rendered     (9,942 )     (9,097 )     (18,559 )     (18,298 )
Gross profit     14,913       10,666       25,089       18,250  
                                 
Operating revenues (expenses)                                
Selling and administrative expenses     (340 )     (204 )     (600 )     (405 )
Research and evaluation expenses     (202 )     (176 )     (380 )     (335 )
Pre-operating and operational stoppage     (1,001 )     (1,269 )     (2,161 )     (2,045 )
Equity results from subsidiaries     1,682       2,921       (5 )     6,996  
Brumadinho event     (693 )     (5,921 )     (1,401 )     (23,236 )
Other operating expenses, net     (1,257 )     658       (1,843 )     345  
      (1,811 )     (3,991 )     (6,390 )     (18,680 )
Impairment and disposals of non-current assets     (180 )     (431 )     (138 )     (1,062 )
Operating income (loss)     12,922       6,244       18,561       (1,492 )
                                 
Financial income     379       58       552       168  
Financial expenses     (3,086 )     (2,597 )     (5,413 )     (5,745 )
Other financial items, net     (982 )     (303 )     (6,814 )     (148 )
Equity results and other results in associates and joint ventures     (2,785 )     (2,862 )     (3,552 )     (2,548 )
Income (loss) before income taxes     6,448       540       3,334       (9,765 )
                                 
Income taxes                                
Current tax     (1,350 )     (1,056 )     (2,415 )     (1,548 )
Deferred tax     191       132       5,354       4,507  
      (1,159 )     (924 )     2,939       2,959  
Net income (loss) attributable to Vale's stockholders     5,289       (384 )     6,273       (6,806 )
                                 
Earnings (loss) per share attributable to Vale's stockholders:                                
Basic and diluted earnings (loss) per share:                                
Common share (R$)     1.03       (0.07 )     1.22       (1.31 )

 

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 June 30,     Six-month period ended June 30,  
    2020     2019     2020     2019  
Net income (loss)     4,877       (418 )     5,514       (6,964 )
Other comprehensive income (loss):                                
Items that will not be subsequently reclassified to income statement                                
Retirement benefit obligations     (1,093 )     (584 )     (1,046 )     (549 )
Fair value adjustment to investment in equity securities     220       (215 )     (989 )     (362 )
Total items that will not be subsequently reclassified to income statement, net of tax     (873 )     (799 )     (2,035 )     (911 )
                                 
Items that may be subsequently reclassified to income statement                                
Translation adjustments     4,395       (902 )     22,700       277  
Net investments hedge (note 19c)     (632 )     128       (3,026 )     84  
Cash flow hedge     (269 )     -       8       -  
Total of items that may be subsequently reclassified to income statement, net of tax     3,494       (774 )     19,682       361  
Total comprehensive income (loss)     7,498       (1,991 )     23,161       (7,514 )
Comprehensive income (loss) attributable to noncontrolling interests     (607 )     (39 )     (2,250 )     (167 )
Comprehensive income (loss) attributable to Vale's stockholders     8,105       (1,952 )     25,411       (7,347 )

 

    Parent company  
    Three-month period ended June 30,     Six-month period ended June 30,  
    2020     2019     2020     2019  
Net income (loss)     5,289       (384 )     6,273       (6,806 )
Other comprehensive income (loss):                                
Items that will not be subsequently reclassified to income statement                                
Retirement benefit obligations     (10 )     (20 )     (19 )     (34 )
Fair value adjustment to investment in equity securities     180       (174 )     (822 )     (288 )
Equity results     (1,043 )     (605 )     (1,194 )     (589 )
Total items that will not be subsequently reclassified to income statement, net of tax     (873 )     (799 )     (2,035 )     (911 )
                                 
Items that may be subsequently reclassified to income statement                                
Translation adjustments     4,590       (897 )     24,191       286  
Net investments hedge (note 19c)     (632 )     128       (3,026 )     84  
Equity results     (269 )     -       8       -  
Total of items that may be subsequently reclassified to income statement, net of tax     3,689       (769 )     21,173       370  
Total comprehensive income (loss)     8,105       (1,952 )     25,411       (7,347 )

 

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

 

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

 

6

 

 

 

 

 

Statement of Cash Flows

In millions of Brazilian reais

 

    Consolidated  
    Three-month period ended June 30,     Six-month period ended June 30,  
    2020     2019     2020     2019  
Cash flow from operations (a)     11,182       14,275       20,188       25,741  
Interest on loans and borrowings paid (note 15)     (932 )     (942 )     (2,009 )     (1,869 )
Derivatives received (paid), net     (598 )     (15 )     734       (455 )
Interest on participative stockholders' debentures paid     (469 )     (351 )     (469 )     (351 )
Income taxes (including settlement program)     (2,153 )     (1,403 )     (3,680 )     (3,241 )
Net cash provided by operating activities     7,030       11,564       14,764       19,825  
                                 
Cash flow from investing activities:                                
Investment fund applications     (500 )     -       (500 )     -  
Capital expenditures     (5,201 )     (2,866 )     (10,200 )     (5,171 )
Additions to investments     (1 )     (1 )     (365 )     (2 )
Acquisition of subsidiary, net of cash (note 12)     -       -       -       (1,884 )
Proceeds from disposal of assets and investments     14       46       17       393  
Dividends received from associates and joint ventures     409       761       409       761  
Judicial deposits and restricted cash related to Brumadinho event (note 3)     (100 )     471       (100 )     (12,571 )
Short-term investment (LFTs)     2,434       (39 )     3,318       (50 )
Other investments activities, net     (675 )     (712 )     (922 )     (603 )
Net cash used in investing activities     (3,620 )     (2,340 )     (8,343 )     (19,127 )
                                 
Cash flow from financing activities:                                
Loans and borrowings from third-parties (note 15)     -       1,169       24,419       8,102  
Payments of loans and borrowings from third-parties (note 15)     (628 )     (6,411 )     (2,306 )     (7,200 )
Payments of leasing     (264 )     (13 )     (482 )     (301 )
Dividends and interest on capital paid to noncontrolling interest     (29 )     (51 )     (41 )     (288 )
Net cash provided by (used in) financing activities     (921 )     (5,306 )     21,590       313  
                                 
Increase in cash and cash equivalents     2,489       3,918       28,011       1,011  
Cash and cash equivalents in the beginning of the period     61,284       19,513       29,627       22,413  
Effect of exchange rate changes on cash and cash equivalents     2,560       (255 )     8,695       (248 )
Cash and cash equivalents at end of the period     66,333       23,176       66,333       23,176  
                                 
Non-cash transactions:                                
Additions to property, plant and equipment - capitalized loans and borrowing costs     69       155       207       296  
                                 
Cash flow from operating activities:                                
Income (loss) before income taxes     5,731       1,441       3,266       (7,549 )
Adjusted for:                                
Provisions related to Brumadinho event (note 3)     108       5,672       108       22,126  
Equity results and other results in associates and joint ventures     2,785       2,862       3,552       2,548  
Impairment and disposal of non-current assets     2,260       422       2,396       1,203  
Depreciation, amortization and depletion     4,336       3,786       8,012       6,815  
Financial results, net     2,591       2,834       13,077       5,424  
Changes in assets and liabilities:                                
Accounts receivable     (5,071 )     (2,186 )     (2,518 )     (141 )
Inventories     (666 )     901       (1,531 )     (805 )
Suppliers and contractors (i)     522       1,925       (2,324 )     1,563  
Provision - Payroll, related charges and other remunerations     631       647       (254 )     (1,111 )
Payments related to Brumadinho event (note 3) (ii)     (829 )     (1,242 )     (1,799 )     (1,242 )
Other assets and liabilities, net     (1,216 )     (2,787 )     (1,797 )     (3,090 )
Cash flow from operations (a)     11,182       14,275       20,188       25,741  

 

(i) Includes variable lease payments.

(ii) Additionally, the Company incurred in expenses in the amount of R$585 and R$1,293 for the three and six-month periods ended June 30, 2020, respectively, and R$621 and R$1,013 for the three and six-month periods ended June 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  
    Six-month period ended June 30,  
    2020     2019  
Cash flow from operations (a)     16,006       20,878  
Interest on loans and borrowings paid     (2,733 )     (2,408 )
Derivatives received (paid), net     (287 )     (335 )
Interest on participative stockholders' debentures paid     (469 )     (351 )
Income taxes (including settlement program)     (3,220 )     (2,133 )
Net cash provided by operating activities     9,297       15,651  
                 
Cash flow from investing activities:                
Capital expenditures     (5,316 )     (2,725 )
Additions to investments     (865 )     (2,334 )
Investment fund applications     (500 )     -  
Proceeds from disposal of assets and investments     119       16  
Dividends received     412       1,081  
Judicial deposits and restricted cash related to Brumadinho event     (100 )     (12,571 )
Short-term investment (LFTs)     3,263       (166 )
Other investments activities, net (i)     (4,301 )     (1,298 )
Net cash used in investing activities     (7,288 )     (17,997 )
                 
Cash flow from financing activities:                
Loans and borrowings from third-parties     -       2,894  
Payments of loans and borrowings from third-parties     (1,780 )     (3,686 )
Payments of leasing     (67 )     (53 )
Net cash used in financing activities     (1,847 )     (845 )
                 
Increase (decrease) in cash and cash equivalents     162       (3,191 )
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     9,947       1,644  
                 
Non-cash transactions:                
Additions to property, plant and equipment - capitalized loans and borrowing costs     207       295  
                 
Cash flow from operating activities:                
Income (loss) before income taxes     3,334       (9,765 )
Adjusted for:                
Provisions related to Brumadinho event     108       22,126  
Equity results from subsidiaries     5       (6,996 )
Equity results and other results in associates and joint ventures     3,552       2,548  
Impairment and disposal of non-current assets     138       1,062  
Depreciation, amortization and depletion     3,988       3,705  
Financial results, net     11,675       5,725  
Changes in assets and liabilities:                
Accounts receivable     (4,319 )     4,882  
Inventories     (676 )     (497 )
Suppliers and contractors     (1,616 )     2,028  
Provision - Payroll, related charges and other remunerations     (101 )     (578 )
Payments related to Brumadinho event (note 3)     (1,799 )     (1,242 )
Other assets and liabilities, net     1,717       (2,120 )
Cash flow from operations (a)     16,006       20,878  

 

(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     June 30,
2020
    December 31,
2019
    June 30,
2020
    December 31,
2019
 
Assets                                        
Current assets                                        
Cash and cash equivalents             66,333       29,627       9,947       9,597  
Short-term investments     15       507       3,329       507       3,309  
Accounts receivable     9       14,219       10,195       25,263       16,599  
Other financial assets     11       3,031       3,062       565       1,140  
Inventories     10       22,221       17,228       6,040       5,310  
Prepaid income taxes             794       1,492       585       648  
Recoverable taxes             2,165       2,227       991       929  
Others             1,925       1,538       1,965       1,569  
              111,195       68,698       45,863       39,101  
                                         
Non-current assets                                        
Judicial deposits     21(c)       11,333       12,629       10,994       12,242  
Other financial assets     11       12,590       11,074       3,176       3,972  
Prepaid income taxes             3,191       2,407       -       -  
Recoverable taxes             2,827       2,446       1,736       1,471  
Deferred income taxes     7(a)       53,689       37,151       42,340       28,770  
Others             3,164       1,998       977       937  
              86,794       67,705       59,223       47,392  
                                         
Investments     12       11,343       11,278       178,547       144,594  
Intangibles     13       36,724       34,257       16,176       16,271  
Property, plant and equipment     14       209,248       187,733       108,244       105,875  
              344,109       300,973       362,190       314,132  
Total assets             455,304       369,671       408,053       353,233  

 

Liabilities                                        
Current liabilities                                        
Suppliers and contractors             16,068       16,556       9,205       10,765  
Loans and borrowings     15       5,407       4,895       4,321       3,986  
Leases     14       1,206       910       413       337  
Other financial liabilities     11       6,955       4,328       12,411       6,672  
Taxes payable             2,165       2,065       1,466       1,062  
Settlement program ("REFIS")     7(c)       1,758       1,737       1,722       1,702  
Liabilities related to associates and joint ventures     16       3,880       2,079       3,880       2,079  
Provisions     20       4,656       4,956       2,850       3,210  
Liabilities related to Brumadinho     3       5,547       6,319       5,547       6,319  
De-characterization of dams     3       1,709       1,247       1,709       1,247  
Interest on capital             6,348       6,333       6,333       6,333  
Others             5,373       4,381       4,665       3,187  
              61,072       55,806       54,522       46,899  
Non-current liabilities                                        
Loans and borrowings     15       87,151       47,730       21,061       18,713  
Leases     14       7,843       6,308       1,877       1,833  
Other financial liabilities     11       24,230       17,622       97,905       76,365  
Settlement program ("REFIS")     7(c)       13,295       14,012       13,031       13,733  
Deferred income taxes     7(a)       8,933       7,585       -       -  
Provisions     20       42,755       34,233       11,391       11,368  
Liabilities related to Brumadinho     3       3,887       5,703       3,887       5,703  
De-characterization of dams     3       7,522       8,787       7,522       8,787  
Liabilities related to associates and joint ventures     16       5,258       4,774       5,258       4,774  
Streaming transactions             11,122       8,313       -       -  
Others             1,861       1,649       4,640       3,578  
              213,857       156,716       166,572       144,854  
Total liabilities             274,929       212,522       221,094       191,753  
                                         
Stockholders' equity     23                                  
Equity attributable to Vale's stockholders             186,959       161,480       186,959       161,480  
Equity attributable to noncontrolling interests             (6,584 )     (4,331 )     -       -  
Total stockholders' equity             180,375       157,149       186,959       161,480  
Total liabilities and stockholders' equity             455,304       369,671       408,053       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)     -       -       -       -       -       -       6,273       6,273       (759 )     5,514  
Other comprehensive income     -       -       -       -       (2,035 )     21,173       -       19,138       (1,491 )     17,647  
Dividends of noncontrolling interest     -       -       -       -       -       -       -       -       (28 )     (28 )
Capitalization of noncontrolling interest advances     -       -       -       -       -       -       -       -       25       25  
Assignment and transfer of shares (note 23)     -       -       -       68       -       -       -       68       -       68  
Balance at June 30, 2020     77,300       3,634       28,577       (6,452 )     (7,708 )     85,335       6,273       186,959       (6,584 )     180,375  
                                                                                 
      Share capital       Capital reserve       Profit reserves       Treasury stocks       Other reserves       Cumulative translation adjustments       Retained earnings       Equity attributable to Vale’s stockholders       Equity attributable to noncontrolling interests       Total stockholders' equity  
Balance at December 31, 2018     77,300       3,634       42,502       (6,604 )     (5,912 )     59,483       -       170,403       3,280       173,683  
Loss     -       -       -       -       -       -       (6,806 )     (6,806 )     (158 )     (6,964 )
Other comprehensive income     -       -       -       -       (922 )     381       -       (541 )     (9 )     (550 )
Dividends of noncontrolling interest     -       -       -       -       -       -       -       -       (326 )     (326 )
Capitalization of noncontrolling interest advances     -       -       -       -       -       -       -       -       56       56  
Assignment and transfer of shares (note 23)     -       -       -       84       -       -       -       84       -       84  
Balance at June 30, 2019     77,300       3,634       42,502       (6,520 )     (6,834 )     59,864       (6,806 )     163,140       2,843       165,983  

 

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

 

10

 

 

 

 

 

Value Added Statement

In millions of Brazilian Reais

 

    Consolidated     Parent company  
    Six-month period ended June 30,  
    2020     2019     2020     2019  
Generation of value added                                
Gross revenue                                
Revenue from products and services     72,329       67,715       44,217       37,208  
Revenue from the construction of own assets     2,594       3,645       1,096       2,041  
Other revenues     574       333       309       218  
Less:                                
Cost of products, goods and services sold     (11,702 )     (10,638 )     (5,727 )     (4,961 )
Material, energy, third-party services and other     (16,728 )     (16,268 )     (5,156 )     (5,608 )
Impairment of non-current assets and others results     (2,396 )     (1,203 )     (138 )     (1,062 )
Brumadinho event     (1,401 )     (23,236 )     (1,401 )     (23,236 )
Other costs and expenses     (7,683 )     (4,639 )     (4,907 )     (2,909 )
Gross value added     35,587       15,709       28,293       1,691  
Depreciation, amortization and depletion     (8,012 )     (6,815 )     (3,988 )     (3,705 )
Net value added     27,575       8,894       24,305       (2,014 )
                                 
Received from third parties                                
Equity results from entities     (3,552 )     (2,548 )     (3,557 )     4,448  
Financial income     7,421       794       6,338       318  
Total value added to be distributed     31,444       7,140       27,086       2,752  
                                 
Direct compensation     3,880       3,953       1,910       1,702  
Benefits     87       49       49       42  
F.G.T.S.     14       10       12       10  
Federal taxes     1,195       2,448       226       (129 )
State taxes     140       267       (9 )     41  
Municipal taxes     7       11       4       3  
Interest (net derivatives and monetary and exchange rate variation)     20,268       6,108       17,813       5,965  
Other remunerations of third party funds     339       1,258       808       1,924  
Reinvested net income (absorbed loss)     6,273       (6,806 )     6,273       (6,806 )
Loss attributable to noncontrolling interest     (759 )     (158 )     -       -  
Distributed value added     31,444       7,140       27,086       2,752  

 

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

 

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

 

 

2.        Basis of preparation of the interim financial statements

 

a)    Statement of compliance

 

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

 

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

 

b)    Basis of presentation

 

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

 

These interim financial statements were authorized for issue on July 29, 2020.

 

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

 

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

                Average rate  
    Closing rate     Three-month period ended     Six-month period ended  
    June 30, 2020     December 31, 2019     June 30, 2020     June 30, 2019     June 30, 2020     June 30, 2019  
US Dollar ("US$")     5.4760       4.0307       5.3854       3.9221       4.9218       3.8459  
Canadian dollar ("CAD")     4.0226       3.1034       3.8882       2.9312       3.5992       2.8833  
Euro ("EUR" or "€")     6.1539       4.5305       5.9279       4.4068       5.4211       4.3440  

 

c) Coronavirus outbreak

 

The coronavirus outbreak has developed rapidly in 2020, with reports of multiple fatalities from the COVID-19, including locations where the Company has its main operations. Measures taken by various governments to contain the virus have affected economic activity of several locations. The Company has taken several measures to monitor and prevent the effects of the COVID-19 virus such as safety and health measures for its employees (like social distancing and working from home) and securing the supply of materials that are essential to the Company’s production process.

 

The Company continues to support the communities near its operating locations, with special focus on Brazil communities that have been more adversely affected by the pandemic. Vale has pledged more than R$469 to support COVID-19 relief efforts in the communities where it operates through its humanitarian aid program, which are being used to provide needed support such as medical supplies and equipment. This amount was recognized as “Other operating expenses” in the income statement for the three and six-months periods ended June 30, 2020.

 

12

 

 

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

 

A significant portion of the Company’s revenue is originated from sales made to customers in Asia and Europe, and Vale as well relies on an extensive logistics and supply chain, including several ports, distribution centers and suppliers that have operations in affected regions. The Company is closely evaluating the impact of the COVID-19 on its business. 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.

 

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

 

Itabira mining complex, Iron Ore - From June 5, 2020 to June 17, 2020, the activities at the Itabira mining complex were suspended by a ruling of the Regional Labor Court of Appeals (“Tribunal Regional do Trabalho – TRT”) of the 3rd Region, based on an alleged increase of COVID-19 infections. On June 17, 2020, the federal labor inspectors revoked their initial suspension order, and the Company resumed this operation. Therefore, impairment losses were not identified in relation to this asset.

 

Teluk Rubiah Maritime Terminal (“TRMT”), Iron Ore - On March 24, 2020, the Company temporarily halted its operations in the TRMT in Malaysia, as the Company was temporarily unable to secure the minimum resources to safely operate the terminal. On May 16, 2020, the Company resumed the loading operations at TRMT and no impairment losses were recorded in relation to this asset.

 

Voisey’s Bay, Nickel - On March 16, 2020, the Company ramped down the Voisey’s Bay mining operation and placed it on care and maintenance, as a precaution to avoid exposure 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 should reach its full capacity by August 2020. Therefore, impairment losses were not identified in relation to this asset.

 

Mozambique, Coal – In 2019, the Company fully impaired the assets related to this CGU because the expected yield of metallurgical coal and thermal coal will not be achieved, mostly due to technical issues on the project and operation of the assets related to this CGU. As a result, the Company has decided to implement a new mining plan and a new plant strategy to achieve the ramp-up of this asset, which includes shortening the life of mine and completing a plant overhaul. However, due to travel and equipment transportation restrictions resulting from the COVID-19 outbreak, the Company is revisiting plans for the Mozambique coal processing plant stoppage. The halting of the processing plants’ operations was previously expected to start in the second quarter of 2020 and a new date is under evaluation. Other than this, the plan for this CGU has not changed and, therefore, no further impact was recognized in the period ended June 30, 2020.

 

Other assets - The Company did not identify any changes in the circumstances that would indicate an impairment trigger of other assets due to the coronavirus outbreak. However, due to the decision to sell the investment held in Vale Nouvelle-Calédonie, the Company recognized an impairment loss as disclosed in note 12. At this time, the outbreak has not caused a significant impact to the Company’s operations, but if it continues for an extended period of time, the Company’s financial conditions or results of operations in 2020 may be adversely impacted.

 

Liquidity – On March 24, 2020, as a precautionary measure to increase its cash position and preserve financial flexibility considering the uncertainties in the global markets resulting from the COVID-19 outbreak, the Company drew down R$25,994 (US$5 billion) under its revolving credit lines agreements, maturing in June 2022 R$10,397 (US$2 billion) and in December 2024 R$15,597 (US$3 billion) Also, in March 2020, the Company discontinued its nickel hedge accounting program, by selling the contract options for a total cash consideration of R$1,123.

 

Deferred taxes – On March 31, 2020, the Indonesian Government issued Government Regulation (“PERPPU-1”) to manage the economic impact of the COVID-19 global pandemic, which impacts the Indonesian tax policies. The enacted income tax rate of 25% has been decreased to 22% for fiscal years 2020 and 2021 and there will be a further decrease to 20%, starting from fiscal year 2022. Therefore, the Company has remeasured its deferred taxes arising from PT Vale Indonesia Tbk (“PTVI”) operations, considering the substantive enactment of the new tax rate. As a result, the Company recognized an income tax gain of R$400 for the six-month period ended June 30, 2020.

 

13

 

 

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

 

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

 

3.       Brumadinho dam failure

 

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

 

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, which includes indemnification and donations to those affected by the dam rupture. In addition, the Company has informed the market and Brazilian authorities 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$18,665 as at June 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, certain centerline structures and dikes for the six-month periods ended June 30, 2020 and 2019 are as follows:

 

    Consolidated  
    2020     2019  
Balance at January 1,     10,034       -  
Provision recognized     -       7,515  
Payments     (536 )     (62 )
Present value valuation     (267 )     280  
Balance at June 30,     9,231       7,733  

 

    June 30,
2020
    December 31,
2019
 
Current liabilities     1,709       1,247  
Non-current liabilities     7,522       8,787  
Liabilities     9,231       10,034  

 

14

 

 

 

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

 

b) Framework Agreements and donations

 

The Company has been working together with the authorities and society to remediate the environmental and social impacts of the event. Therefore, the Company has started negotiations and entered into agreements with the relevant authorities and affected people. Vale has also developed studies and projects to ensure geotechnical safety of the remaining structures at the Córrego do Feijão mine, in Brumadinho, and the removal and proper disposal of the tailings, especially alongside the Paraopeba river.

 

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 outbreak and were considered part of the obligation assumed by the Company for social and economic compensation due to the Brumadinho dam rupture.

 

The changes in the provision for the six-month periods ended June 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  
Payments (i)     (2,763 )     (810 )
Present value valuation     67       91  
Balance at June 30,     9,434       13,520  
                 
      June 30,
2020
      December 31,
2019
 
Current liabilities     5,547       6,319  
Non-current liabilities     3,887       5,703  
Liabilities     9,434       12,022  

 

(i) Includes cash outflows of R$1,263 and the realization of judicial deposits of R$1,500.

 

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

 

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

 

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

 

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

 

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

 

c) Incurred expenses

 

The Company has incurred expenses, which do not qualify for provision and have been recognized in the income statement, in the amount of R$585 and R$1,293 for the three and six-month periods ended June 30, 2020, respectively and R$621 and R$1,013 for the three and six-month periods ended June 30, 2019, respectively. These expenses include communication services, accommodation and humanitarian assistance, equipment, legal services, water, food aid, taxes, among others.

 

15

 

 

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

 

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 recorded a loss in relation to the operational stoppage and idle capacity of the ferrous mineral segment in the amounts of R$557 and R$1,279 for the three and six-month periods ended June 30, 2020, respectively, and R$939 and R$1,544 for the three and six-month periods ended June 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 six-month periods ended June 30, 2019 in relation to the assets writen-off of the Córrego do Feijão mine and those related to the other upstream dams in Brazil. In 2020, the Company did not write-off any asset related to the Brumadinho event.

 

f) Contingencies and other legal matters

 

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

 

On April 14, 2020, the judge of the 1st Civil Court of Ouro Preto ordered to restrict the Company's resources in the amount of R$50, to guarantee the reimbursement of any losses resulting from the compulsory removal of residents, in the event of a possible breach of the Doutor Dam.

 

Following these contingencies, approximately R$5,160 of the Company's assets are restricted as at June 30, 2020, of which approximately R$507 of the Company’s bank accounts are restricted and R$4,653 were converted into judicial deposits.

 

For the Brumadinho event, the Company has additional guarantees in the amounts of R$5,677 and R$5,714 for the three and six-month periods ended June 30, 2020, respectively. The expenses related to these additional guarantees in the amounts of R$10 and R$20 were recorded as financial expense in the Company's income statement for the three and six-month periods ended June 30, 2020, respectively.

 

On May 26, 2020, the Public Prosecutor's Office of Minas Gerais (“MPMG”) obtained a preliminary injunction determining the provision of a bank guarantee and/or insurance guarantee in the amount of R$7,932 to guarantee the application of an eventual fine and potential loss of assets, rights and values. After Vale’s appeal, the Minas Gerais Court of Justice (“TJMG”), on July 17, 2020 (subsequent event), upheld the decision that suspended the period prescribed for the Company to provide the required guarantee, based on the understanding there is no evidence of non-compliance risk in the future of a subsequent decision on this lawsuit.

 

(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 (subsequent event), 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 will be deposited in court to, after ratification of justice, be used in these environmental projects.

 

Furthermore, in 2019, the Secretary for Environment – SEMA Brumadinho imposed administrative fines, in the total amount of R$109.

 

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

 

16

 

 

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

 

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

 

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

 

The Lead Plaintiff alleges that we made false and misleading statements or omitted to make disclosures concerning the risks of the operations of Dam I in the Córrego do Feijão mine and the adequacy of the related programs and procedures.  The Lead Plaintiff has not specified an amount of alleged damages in these actions.  On December 13, 2019, the Company made a motion to dismiss the amended complaint. In January 2020, the lead plaintiff filed an opposition to this motion to dismiss.  On February 21, 2020, Vale filed a reply to the opposition. On May 20, 2020, Vale’s motion to dismiss was denied by the Court, although, in the same decision, the Court also dismissed several of the alleged misstatements initially claimed in the amended complaint. On June 3, 2020, Vale filed a motion for reconsideration of the Judge’s decision on Vale’s motion to dismiss. On June 17, 2020, the Lead Plaintiff filed an opposition to Vale’s motion for reconsideration. The judge has not issued a decision on Vale’s motion for reconsideration to date.

 

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

 

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 event.

 

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

 

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

 

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

 

17

 

 

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

 

4.        Information by business segment and by geographic area

 

The Company 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 (EBITDA).

 

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

 

The Company 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 June 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     26,069       (9,343 )     (320 )     (130 )     (656 )     -       15,620  
Iron ore pellets     4,858       (2,030 )     10       (5 )     (90 )     283       3,026  
Ferroalloys and manganese     366       (226 )     -       (5 )     (51 )     -       84  
Other ferrous products and services     403       (298 )     3       (2 )     -       -       106  
      31,696       (11,897 )     (307 )     (142 )     (797 )     283       18,836  
                                                         
Base metals                                                        
Nickel and other products     5,108       (3,491 )     (87 )     (61 )     (155 )     -       1,314  
Copper     2,809       (999 )     (14 )     (79 )     -       -       1,717  
      7,917       (4,490 )     (101 )     (140 )     (155 )     -       3,031  
                                                         
Coal     510       (1,959 )     16       (32 )     -       -       (1,465 )
                                                         
Brumadinho event     -       -       (693 )     -       -       -       (693 )
COVID-19     -       -       (469 )     -       -       -       (469 )
Others     311       (373 )     (1,014 )     (169 )     (9 )     126       (1,128 )
Total     40,434       (18,719 )     (2,568 )     (483 )     (961 )     409       18,112  

 

18

 

 

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

 

    Consolidated  
    Three-month period ended June 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     22,936       (8,209 )     (572 )     (95 )     (923 )     -       13,137  
Iron ore pellets     5,093       (2,254 )     (14 )     (22 )     (51 )     567       3,319  
Ferroalloys and manganese     270       (218 )     (6 )     (1 )     -       -       45  
Other ferrous products and services     382       (323 )     7       (3 )     -       -       63  
      28,681       (11,004 )     (585 )     (121 )     (974 )     567       16,564  
                                                         
Base metals                                                        
Nickel and other products     4,207       (3,108 )     (87 )     (30 )     (16 )     -       966  
Copper     1,804       (921 )     (11 )     (27 )     -       -       845  
      6,011       (4,029 )     (98 )     (57 )     (16 )     -       1,811  
                                                         
Coal     1,009       (1,517 )     7       (24 )     -       111       (414 )
                                                         
Brumadinho event     -       -       (5,921 )     -       -       -       (5,921 )
                                                         
Others     304       (316 )     153       (148 )     (10 )     194       177  
Total     36,005       (16,866 )     (6,444 )     (350 )     (1,000 )     872       12,217  

 

    Consolidated  
    Six-month period ended June 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     45,444       (16,891 )     (407 )     (238 )     (1,405 )     -       26,503  
Iron ore pellets     8,682       (3,878 )     58       (9 )     (202 )     283       4,934  
Ferroalloys and manganese     577       (449 )     -       (5 )     (56 )     -       67  
Other ferrous products and services     786       (615 )     8       (5 )     -       -       174  
      55,489       (21,833 )     (341 )     (257 )     (1,663 )     283       31,678  
                                                         
Base metals                                                        
Nickel and other products     9,761       (6,472 )     (173 )     (122 )     (155 )     -       2,839  
Copper     4,518       (1,923 )     (10 )     (156 )     -       -       2,429  
      14,279       (8,395 )     (183 )     (278 )     (155 )     -       5,268  
                                                         
Coal     1,183       (3,643 )     22       (72 )     -       324       (2,186 )
                                                         
Brumadinho event     -       -       (1,401 )     -       -       -       (1,401 )
COVID-19     -       -       (469 )     -       -       -       (469 )
Others     734       (778 )     (1,605 )     (305 )     (26 )     126       (1,854 )
Total     71,685       (34,649 )     (3,977 )     (912 )     (1,844 )     733       31,036  

 

19

 

 

Selected Notes to the Interim Financial Statements

Expressed in millions of Brazilian reais, unless otherwise stated

 

 

    Consolidated  
    Six-month period ended June 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     39,824       (14,413 )     (621 )     (166 )     (1,524 )     -       23,100  
Iron ore pellets     11,413       (5,099 )     (28 )     (39 )     (88 )     567       6,726  
Ferroalloys and manganese     594       (436 )     (9 )     (2 )     -       -       147  
Other ferrous products and services     783       (610 )     4       (3 )     -       -       174  
      52,614       (20,558 )     (654 )     (210 )     (1,612 )     567       30,147  
                                                         
Base metals                                                        
Nickel and other products     7,908       (5,707 )     (133 )     (56 )     (46 )     -       1,966  
Copper     3,580       (1,774 )     (12 )     (47 )     -       -       1,747  
      11,488       (7,481 )     (145 )     (103 )     (46 )     -       3,713  
                                                         
Coal     2,267       (3,118 )     3       (46 )     -       217       (677 )
                                                         
Brumadinho event     -       -       (23,236 )     -       -       -       (23,236 )
                                                         
Others     588       (634 )     (406 )     (260 )     (10 )     194       (528 )
Total     66,957       (31,791 )     (24,438 )     (619 )     (1,668 )     978       9,419  

 

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

 

    Consolidated  
    Three-month period ended June 30,     Six-month period ended June 30,  
    2020     2019     2020     2019  
Net income (loss) attributable to Vale's stockholders     5,289       (384 )     6,273       (6,806 )
Loss attributable to noncontrolling interests     (412 )     (34 )     (759 )     (158 )
Net income (loss)     4,877       (418 )     5,514       (6,964 )
Depreciation, depletion and amortization     4,336       3,786       8,012       6,815  
Income taxes     854       1,859       (2,248 )     (585 )
Financial results     2,591       2,834       13,077       5,424  
LAJIDA (EBITDA)     12,658       8,061       24,355       4,690  
                                 
Items to reconciled adjusted LAJIDA (EBITDA)                                
Equity results and other results in associates and joint ventures     2,785       2,862       3,552       2,548  
Dividends received and interest from associates and joint ventures (i)     409       872       733       978  
Impairment and disposal of non-current assets     2,260       422       2,396       1,203  
Adjusted LAJIDA (EBITDA)     18,112       12,217       31,036       9,419  

 

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

 

20

 

 

Selected Notes to the Interim Financial Statements

Expressed in millions of Brazilian reais, unless otherwise stated

 

 

b)       Assets by segment

 

    Consolidated  
    June 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     10,178       6,756       139,315       7,880       6,970       135,143  
Base metals     7,717       90       99,652       5,457       56       80,181  
Coal     210       -       -       243       -       -  
Others     54       4,497       7,005       7       4,252       6,666  
Total     18,159       11,343       245,972       13,587       11,278       221,990  

 

    Consolidated  
    Three-month period ended June 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     2,595       315       2,568       1,226       341       2,085  
Base metals     1,770       338       1,705       1,013       164       1,396  
Coal     168       -       -       105       -       235  
Others     4       11       63       12       5       70  
Total     4,537       664       4,336       2,356       510       3,786  

 

    Consolidated  
    Six-month period ended June 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     4,976       721       4,460       2,278       665       3,701  
Base metals     3,385       573       3,338       1,701       205       2,554  
Coal     513       -       83       295       -       420  
Others     10       22       131       14       13       140  
Total     8,884       1,316       8,012       4,288       883       6,815  

 

i) Goodwill is allocated mainly to ferrous minerals and base metals segments in the amount of R$7,133 and R$9,926 in June 30, 2020 and R$7,133 and R$7,495 in December 31, 2019, respectively.

(ii) Cash outflows.

 

c)       Net operating revenue by geographic area

 

    Consolidated  
    Three-month period ended June 30, 2020  
    Ferrous minerals     Base metals     Coal     Others     Total  
Americas, except United States and Brazil     71       269       -       -       340  
United States of America     156       802       -       -       958  
Germany     359       1,508       -       -       1,867  
Europe, except Germany     1,205       2,287       178       -       3,670  
Middle East, Africa and Oceania     1,518       26       117       -       1,661  
Japan     1,556       576       1       -       2,133  
China     22,342       889       -       -       23,231  
Asia, except Japan and China     2,221       1,323       191       -       3,735  
Brazil     2,268       237       23       311       2,839  
Net operating revenue     31,696       7,917       510       311       40,434  

 

21

 

 

Selected Notes to the Interim Financial Statements

Expressed in millions of Brazilian reais, unless otherwise stated

 

 

    Consolidated  
    Three-month period ended June 30, 2019  
    Ferrous minerals     Base metals     Coal     Others     Total  
Americas, except United States and Brazil     569       647       -       -       1,216  
United States of America     483       956       -       -       1,439  
Germany     1,208       575       -       -       1,783  
Europe, except Germany     1,836       1,644       168       -       3,648  
Middle East, Africa and Oceania     1,927       19       36       -       1,982  
Japan     1,845       341       116       -       2,302  
China     15,744       712       -       -       16,456  
Asia, except Japan and China     2,012       913       566       -       3,491  
Brazil     3,057       204       123       304       3,688  
Net operating revenue     28,681       6,011       1,009       304       36,005  

 

    Consolidated  
    Six-month period ended June 30, 2020  
    Ferrous minerals     Base metals     Coal     Others     Total  
Americas, except United States and Brazil     529       1,147       -       -       1,676  
United States of America     357       1,894       -       -       2,251  
Germany     1,185       2,373       -       -       3,558  
Europe, except Germany     2,481       3,976       397       -       6,854  
Middle East, Africa and Oceania     2,593       62       243       -       2,898  
Japan     3,248       1,000       56       -       4,304  
China     36,131       1,394       75       -       37,600  
Asia, except Japan and China     4,071       2,030       389       -       6,490  
Brazil     4,894       403       23       734       6,054  
Net operating revenue     55,489       14,279       1,183       734       71,685  

 

    Consolidated  
    Six-month period ended June 30, 2019  
    Ferrous minerals     Base metals     Coal     Others     Total  
Americas, except United States and Brazil     1,177       1,481       -       -       2,658  
United States of America     853       1,743       -       -       2,596  
Germany     2,195       1,014       -       -       3,209  
Europe, except Germany     3,390       3,141       568       -       7,099  
Middle East, Africa and Oceania     4,300       41       138       -       4,479  
Japan     3,647       674       362       -       4,683  
China     27,987       1,251       -       -       29,238  
Asia, except Japan and China     3,648       1,758       1,017       -       6,423  
Brazil     5,417       385       182       588       6,572  
Net operating revenue     52,614       11,488       2,267       588       66,957  

 

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 third quarter of 2020.

 

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

 

    June 30, 2020  
    Thousand
metric tons
    Provisional
price
(US$/tonne)
    Change    

Effect on

Revenue

(R$ million)

 
Iron ore     19,267       94.3       +/-10%       978  
Iron ore pellets     1,783       123.5       +/-10%       119  
Copper     81       7,865.0       +/-10%       342  

 

22

 

 

Selected Notes to the Interim Financial Statements

Expressed in millions of Brazilian reais, unless otherwise stated

 

 

5.       Costs and expenses by nature

 

a)    Cost of goods sold and services rendered

 

    Consolidated  
    Three-month period ended June 30,     Six-month period ended June 30,  
    2020     2019     2020     2019  
Personnel     1,950       2,077       3,804       3,816  
Materials and services     4,040       3,812       7,671       7,413  
Fuel oil and gas     1,107       1,319       2,364       2,633  
Maintenance     3,315       2,797       6,318       5,169  
Energy     793       789       1,636       1,586  
Acquisition of products     1,069       538       1,335       940  
Depreciation and depletion     3,948       3,416       7,233       6,241  
Freight     3,706       3,309       6,824       6,183  
Others     2,739       2,225       4,697       4,051  
Total     22,667       20,282       41,882       38,032  
                                 
Cost of goods sold     21,993       19,610       40,492       36,752  
Cost of services rendered     674       672       1,390       1,280  
Total     22,667       20,282       41,882       38,032  

 

b)       Selling and administrative expenses

 

    Consolidated  
    Three-month period ended June 30,     Six-month period ended June 30,  
    2020     2019     2020     2019  
Selling     112       96       183       175  
Personnel     213       163       424       337  
Services     175       51       254       104  
Depreciation and amortization     71       58       153       114  
Others     93       59       166       115  
Total     664       427       1,180       845  

 

c)       Other operating expenses (income), net

 

    Consolidated  
    Three-month period ended June 30,     Six-month period ended June 30,  
    2020     2019     2020     2019  
Provision for litigations (i)     237       626       326       925  
Profit sharing program     68       65       218       197  
COVID-19 expenses     469       -       469       -  
Others (ii)     508       (538 )     536       (651 )
Total     1,282       153       1,549       471  

 

(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.

 

23

 

 

 

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

 

6.        Financial result

 

    Consolidated  
    Three-month period ended June 30,     Six-month period ended June 30,  
    2020     2019     2020     2019  
Financial income                                
Short-term investments     148       181       379       354  
Others (i)     566       298       827       489  
      714       479       1,206       843  
Financial expenses                                
Loans and borrowings gross interest     (1,037 )     (1,078 )     (1,991 )     (2,025 )
Capitalized loans and borrowing costs     69       155       207       296  
Participative stockholders' debentures     (1,236 )     (973 )     (1,339 )     (2,310 )
Interest on REFIS     (69 )     (165 )     (178 )     (325 )
Interest on lease liabilities     (93 )     (97 )     (171 )     (169 )
Financial guarantees (note 12)     (163 )     32       (866 )     70  
Others     (603 )     (804 )     (1,084 )     (1,428 )
      (3,132 )     (2,930 )     (5,422 )     (5,891 )
Other financial items, net                                
Net foreign exchange gains (losses) - Loans and borrowings     (1,046 )     218       (5,831 )     169  
Derivative financial instruments (note 19)     (421 )     255       (6,815 )     595  
Other foreign exchange gains (losses), net     1,580       (135 )     4,089       (109 )
Indexation losses, net     (286 )     (721 )     (304 )     (1,031 )
      (173 )     (383 )     (8,861 )     (376 )
Total     (2,591 )     (2,834 )     (13,077 )     (5,424 )

 

(i) In 2020, includes amounts related to Eletrobrás' contingent assets in the amount of R$301, see note 21e.

 

7.        Income taxes

 

a) Deferred income tax assets and liabilities

 

Changes in deferred tax are as follows:

 

    Consolidated  
    Assets     Liabilities     Deferred taxes, net  
Balance at December 31, 2019     37,151       7,585       29,566  
Effect in income statement     5,288       (294 )     5,582  
Translation adjustment     2,770       2,010       760  
Other comprehensive income     8,480       (368 )     8,848  
Balance at June 30, 2020     53,689       8,933       44,756  

 

    Consolidated  
    Assets     Liabilities     Deferred taxes, net  
Balance at December 31, 2018     26,767       5,936       20,831  
Effect in income statement     2,807       (166 )     2,973  
Translation adjustment     (46 )     97       (143 )
Other comprehensive income     (27 )     (238 )     211  
Balance at June 30, 2019     29,501       5,629       23,872  

 

24

 

 

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

 

b) Income tax reconciliation – Income statement

 

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

 

    Consolidated  
    Three-month period ended June 30,     Six-month period ended June 30,  
    2020     2019     2020     2019  
Income (loss) before income taxes     5,731       1,441       3,266       (7,549 )
Income taxes at statutory rate - 34%     (1,948 )     (490 )     (1,110 )     2,567  
Adjustments that affect the basis of taxes:                                
Tax incentives     970       118       2,349       239  
Equity results     77       121       (100 )     256  
Addition (reversal) of tax loss carryforward     150       (1,048 )     1,959       (1,911 )
Others     (103 )     (560 )     (850 )     (566 )
Income taxes     (854 )     (1,859 )     2,248       585  

 

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

 

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

 

The balance mainly relates to the settelment 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 June 30, 2020, the balance of R$15,053 (R$1,758 classified as current liabilities and R$13,295 classified as non-current liabilities) is due in 100 remaining monthly installments, bearing the SELIC interest rate (Special System for Settlement and Custody), which is the Brazilian federal funds rate. As at June 30, 2020, the SELIC rate was 2,25% per annum.

 

d) Uncertain tax positions

 

In 2004, a 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. Following this decision, the Company has filed a motion for clarification, which was not accepted in the trial in June 2020. New appeals will be filed.

 

Due to the developments on the proceedings, the Company has decided to not deduct the “CSLL” from the taxable income from the 2019 year-end onwards. Based on its internal and external experts, the Company has determined that it is probable that the Company’s tax treatment on the uncertainties associated to the deduction of the “CSLL”, in the amount of R$783, will be accepted by the Brazilian tax authority and, therefore,  this amount has not been reserved in these interim financial statements.

 

25

 

 

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

 

8.        Basic and diluted earnings (loss) per share

 

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

 

    Three-month period ended June 30,     Six-month period ended June 30,  
    2020     2019     2020     2019  
Net income (loss) attributable to Vale's stockholders:                                
Net income (loss)     5,289       (384 )     6,273       (6,806 )
                                 
Thousands of shares                                
Weighted average number of shares outstanding - common shares     5,129,911       5,181,771       5,129,254       5,181,092  
                                 
Basic and diluted earnings (loss) per share:                                
Common share (R$)     1.03       (0.07 )     1.22       (1.31 )

 

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

 

9.        Accounts receivable

 

    Consolidated  
    June 30,
2020
    December 31,
2019
 
Accounts receivable     14,477       10,448  
Expected credit loss     (258 )     (253 )
      14,219       10,195  
                 
Revenue related to the steel sector - %     84.80 %     87.33 %

 

    Consolidated  
    Three-month period ended June 30,     Six-month period ended June 30,  
    2020     2019     2020     2019  
Impairment of accounts receivable recorded in the income statement     (14 )     (12 )     41       (12 )

 

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

 

10.      Inventories

 

    Consolidated  
    June 30,
2020
    December 31,
2019
 
Finished products     14,690       10,505  
Work in progress     3,469       3,082  
Consumable inventory     4,062       3,641  
Total     22,221       17,228  

 

    Consolidated  
    Three-month period ended June 30,     Six-month period ended June 30,  
    2020     2019     2020     2019  
Reversal (provision) for net realizable value     127       (139 )     (213 )     (206 )

 

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

 

26

 

 

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

 

11.      Other financial assets and liabilities

 

    Consolidated  
    Current     Non-Current  
    June 30,
2020
    December 31, 2019     June 30,
2020
    December 31,
2019
 
Other financial assets                                
Assets held for sale (note 12)     832       613       -       -  
Restricted cash     -       -       830       609  
Loans     16       -       355       350  
Derivative financial instruments (note 19)     533       1,160       344       742  
Investments in equity securities     -       -       2,341       2,925  
Related parties - Loans (note 24)     1,650       1,289       8,720       6,448  
      3,031       3,062       12,590       11,074  
Other financial liabilities                                
Derivative financial instruments (note 19)     2,881       377       4,823       1,237  
Related parties - Loans (note 24)     4,074       3,951       5,151       3,853  
Financial guarantees (note 12)     -       -       2,971       2,116  
Participative stockholders' debentures     -       -       11,285       10,416  
      6,955       4,328       24,230       17,622  

 

Participative stockholders’ debentures

 

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

 

12.      Investments in associates and joint ventures

 

a) Changes during the period

 

Changes in investments in associates and joint ventures as follows:

 

    Consolidated  
    Total  
    2020     2019  
Balance at January 1,     11,278       12,495  
Additions (i)     365       2  
Translation adjustment     426       (2 )
Equity results in income statement     (293 )     752  
Equity results in statement of comprehensive income     (8 )     (14 )
Fair value adjustment (ii)     -       (630 )
Dividends declared     (488 )     (701 )
Others     63       36  
Balance at June 30,     11,343       11,938  

 

(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 4(b).

 

27

 

 

 

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

 

b) Assets held for sale

 

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

 

The closing of the transaction is expected to occur by the first quarter of 2021 and is subject to the consultation of the VNC’s works council, as required by the New Caledonian law and customary closing conditions, including regulatory approvals. The parties also plan to jointly engage with the French State to confirm its continued financing support to VNC.

 

The VNC’s assets and liabilities were classified as “held for sale” at the fair value less costs of disposal, resulting in the recognition of an impairment charge of R$1,783 recorded as “Impairment and disposals of non-current assets”, in the income statement for the three and six-month periods ended June 30, 2020.

 

The potential sale agreement will include a financial package to support the transition and continuity of VNC operations from VCL to NCZ, including the funding for the conversion of tailings deposition from wet to dry-stacking (“Project Lucy”). When the negotiation is completed and final transaction documentation is signed, the Company will recognize a liability of approximately R$2,738 (US$500 million) in relation to those potential cash contributions, which will be made by Vale into an independently managed capital trust.

 

Henan Longyu – On December 27, 2019 the Company entered into an agreement to sell its 25% interest in Henan Longyu Energy Resources Co., Ltd, a company that operates two coal mines in the province of Henan, China, for the total consideration of R$832 (US$152 million). The closing is expected by the end of 2020 upon completion of conditions precedent. The investment is classified as held for sale in “other financial assets”.

 

c) Acquisitions and divestitures

 

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

 

In June 2020, the Company signed together with Sumitomo Metal Mining Co., Ltd. ("SMM"), a definitive agreement for the sale of 20% of their stake in PTVI to PT Indonesia Asahan Aluminium ("PT Inalum”), an Indonesia state-owned enterprise. The conclusion of the transaction is expected to occur in 2020, after the satisfaction of customary regulatory approvals.

 

After the closing of the transaction, Vale and SMM will have a stake of 44.3% and 15%, respectively, totaling a 59.3% interest in PTVI and, therefore, the Company will continue consolidating PTVI in its financial statements due to the shareholders’ agreement that will be signed by Vale and SMM at the closing of the transaction. With this divestment, the Company will receive cash consideration of approximately R$1,588 (US$290 million) at the closing date of the sale and the result arising from the transaction with non-controlling interests will be recorded within Stockholders’ Equity.

 

New Steel – On January 24, 2019 the Company acquired 100% of the share capital of New Steel Global N.V. (“New Steel”) and gained its control for the total cash consideration of R$1,884. New Steel is a company that develops processing and beneficiating technologies for iron ore through a completely dry process. The consideration paid is mainly attributable to the research and development project for processing and beneficiating iron ore, which are presented as “Intangibles” (note 13).

 

d) Guarantees provided

 

As of June 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$8,356 (December 31, 2019 R$6,671). The fair value of these financial guarantees is shown in note 11.

 

28

 

 

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 June 30,
    Six-month period
ended June 30,
    Three-month period
ended June 30,
    Six-month period
ended June 30,
 
Associates and joint ventures   %
ownership
    % voting
capital
    June 30,
2020
    December 31,
2019
    2020     2019     2020     2019     2020     2019     2020     2019  
Ferrous minerals                                                                                                
Baovale Mineração S.A.     50.00       50.00       113       102       6       15       11       21       -       -       -       -  
Companhia Coreano-Brasileira de Pelotização     50.00       50.00       247       354       10       37       25       104       89       126       89       126  
Companhia Hispano-Brasileira de Pelotização (i)     50.89       50.89       200       284       4       32       16       79       72       148       72       148  
Companhia Ítalo-Brasileira de Pelotização (i)     50.90       51.00       253       262       27       26       51       57       119       109       119       109  
Companhia Nipo-Brasileira de Pelotização (i)     51.00       51.11       645       605       30       80       40       194       -       182       -       182  
MRS Logística S.A.     48.16       46.75       2,009       1,999       77       57       68       101       -       -       -       -  
VLI S.A.     37.60       37.60       3,168       3,273       39       27       (92 )     30       -       -       -       -  
Zhuhai YPM Pellet Co.     25.00       25.00       121       91       -       -       -       -       -       -       -       -  
                      6,756       6,970       193       274       119       586       280       565       280       565  
Coal                                                                                                
Henan Longyu Energy Resources Co., Ltd.     25.00       25.00       -       -       -       15       -       (6 )     -       -       -       -  
                      -       -       -       15       -       (6 )     -       -       -       -  
Base metals                                                                                                
Korea Nickel Corp.     25.00       25.00       90       56       -       -       2       (2 )     -       -       -       -  
                      90       56       -       -       2       (2 )     -       -       -       -  
Others                                                                                                
Aliança Geração de Energia S.A. (i)     55.00       55.00       1,852       1,894       38       37       84       91       126       111       126       111  
Aliança Norte Energia Participações S.A. (i)     51.00       51.00       631       646       (11 )     (2 )     (15 )     5       -       -       -       -  
California Steel Industries, Inc.     50.00       50.00       1,313       975       26       40       (2 )     102       -       83       -       83  
Companhia Siderúrgica do Pecém (ii)     50.00       50.00       -       -       -       -       (364 )     -       -       -       -       -  
Mineração Rio do Norte S.A.     40.00       40.00       338       393       (9 )     17       (55 )     13       -       -       -       -  
Others                     363       344       (9 )     (26 )     (62 )     (37 )     3       2       3       2  
                      4,497       4,252       35       66       (414 )     174       129       196       129       196  
Total                     11,343       11,278       228       355       (293 )     752       409       761       409       761  

 

(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.

 

29

 

 

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

 

13.       Intangibles

 

Changes in intangibles are as follows:

 

    Consolidated  
    Goodwill     Concessions     Contract right     Software     Research and development project and patents     Total  
Balance at December 31, 2019     14,628       16,005       563       304       2,757       34,257  
Additions     -       358       -       37       -       395  
Disposals     -       (18 )     -       ,       -       (18 )
Amortization     -       (451 )     (3 )     (57 )     -       (511 )
Translation adjustment     2,431       -       139       29       2       2,601  
Balance at June 30, 2020     17,059       15,894       699       313       2,759       36,724  
Cost     17,059       20,767       1,221       3,734       2,759       45,540  
Accumulated amortization     -       (4,873 )     (522 )     (3,421 )     -       (8,816 )
Balance at June 30, 2020     17,059       15,894       699       313       2,759       36,724  
                                                 

 

    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     -       818       -       101       1,888       2,807  
Disposals     -       (44 )     -       (1 )     -       (45 )
Amortization     -       (519 )     (3 )     (151 )     -       (673 )
Translation adjustment     181       9       13       6       (30 )     179  
Balance at June 30, 2019     14,336       16,001       540       383       1,858       33,118  
Cost     14,336       20,132       821       3,768       1,858       40,915  
Accumulated amortization     -       (4,131 )     (281 )     (3,385 )     -       (7,797 )
Balance at June 30, 2019     14,336       16,001       540       383       1,858       33,118  

 

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

 

Concessions

 

The Federal Court of Audit approved on July 29, 2020 (subsequent event), the early extension of the Vitória Minas Railroad (EFVM) and Carajás Railroad (EFC) concessions. The Company will assess the terms and consequences of this decision to submit the proposal, with the required counterparts, to its Board of Directors

 

30

 

 

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

 

14.       Property, plant and equipment

 

Changes in property, plant and equipment are as follows:

 

    Consolidated  
    Land     Building     Facilities     Equipment     Mineral properties     Right of use assets     Others     Constructions in progress     Total  
Balance at December 31, 2019     2,881       40,256       38,713       22,921       33,302       6,819       25,201       17,640       187,733  
Additions (i)     -       -       -       -       -       166       -       8,974       9,140  
Disposals     (4 )     (9 )     (17 )     (17 )     (38 )     -       (19 )     (160 )     (264 )
Assets retirement obligation     -       -       -       -       1,770       -       -       -       1,770  
Depreciation, amortization and depletion     -       (1,091 )     (1,349 )     (1,930 )     (1,267 )     (402 )     (1,237 )     -       (7,276 )
Impairment (note 12b)     -       (947 )     (1,289 )     (93 )     (692 )     (3 )     (342 )     (529 )     (3,895 )
Translation adjustment     374       3,619       2,385       4,218       6,771       1,805       1,629       1,239       22,040  
Transfers     87       488       754       972       1,779       -       1,006       (5,086 )     -  
Balance at June 30, 2020     3,338       42,316       39,197       26,071       41,625       8,385       26,238       22,078       209,248  
Cost     3,338       75,148       59,276       55,725       87,228       10,062       50,260       22,078       363,115  
Accumulated depreciation     -       (32,832 )     (20,079 )     (29,654 )     (45,603 )     (1,677 )     (24,022 )     -       (153,867 )
Balance at June 30, 2020     3,338       42,316       39,197       26,071       41,625       8,385       26,238       22,078       209,248  
                                                                         

 

    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)     -       -       -       -       -       236       -       6,626       6,862  
Disposals     (78 )     (423 )     (117 )     (98 )     (613 )     (16 )     (644 )     (100 )     (2,089 )
Assets retirement obligation     -       -       -       -       907       -       -       -       907  
Depreciation, amortization and depletion     -       (1,000 )     (1,228 )     (1,645 )     (1,235 )     (346 )     (1,264 )     -       (6,718 )
Translation adjustment     (1 )     56       86       (62 )     478       (44 )     31       87       631  
Transfers     1       342       486       2,092       1,284       -       1,575       (5,780 )     -  
Balance at June 30, 2019     2,381       41,409       42,763       25,113       33,752       6,808       27,873       13,953       194,052  
Cost     2,381       71,380       68,038       48,783       67,152       7,383       47,036       13,953       326,106  
Accumulated depreciation     -       (29,971 )     (25,275 )     (23,670 )     (33,400 )     (575 )     (19,163 )     -       (132,054 )
Balance at June 30, 2019     2,381       41,409       42,763       25,113       33,752       6,808       27,873       13,953       194,052  

 

(i) Includes capitalized borrowing costs.

 

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

 

31

 

 

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

 

Leases

 

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

    Assets  
    December 31,
2019
    Additions and
contract
modifications (i)
    Depreciation     Translation
adjustment
    June 30,
2020
 
Ports     2,958       3       (95 )     896       3,762  
Vessels     2,341       -       (123 )     827       3,045  
Pellets plants     676       126       (104 )     19       717  
Properties     521       18       (53 )     (41 )     445  
Energy plants     250       -       (6 )     101       345  
Locomotives     -       11       -       -       11  
Mining equipment     73       5       (21 )     3       60  
Total     6,819       163       (402 )     1,805       8,385  

 

    Liabilities  
    December 31,
2019
    Additions and
contract
modifications (i)
    Payments     Interest     Translation
adjustment
    June 30,
2020
 
Ports     3,023       3       (201 )     70       978       3,873  
Vessels     2,343       -       (185 )     63       824       3,045  
Pellets plants     705       126       (10 )     24       (24 )     821  
Properties     614       18       (37 )     10       80       685  
Energy plants     282       -       (7 )     -       48       323  
Locomotives     154       11       (20 )     -       58       203  
Mining equipment     97       5       (22 )     4       15       99  
Total     7,218       163       (482 )     171       1,979       9,049  

 

(i) Additions mainly relates to renewal of the contract with the pelletizing companies Hispanobras and Itabrasco, which expires in March 2021 and June 2021, respectively.

 

The annual minimum payments are presented as follows:

 

    2020     2021     2022     2023     2024 onwards     Total  
Ports     82       181       181       181       3,379       4,004  
Vessels     181       356       345       340       2,546       3,768  
Pellets plants     159       115       115       33       394       816  
Properties     110       148       93       77       219       647  
Energy plants     16       33       33       33       181       296  
Locomotives     22       49       49       49       126       295  
Mining equipment     16       27       27       16       11       97  
Total     586       909       843       729       6,856       9,923  

 

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

 

The total amount of the variable lease payments not included in the measurement of lease liabilities, which have been recognized straight to the income statement, for the three and six-month periods ended June 30, 2020 was R$51 and R$199, respectively, and for the three and six-month periods ended June 30, 2019 was R$469 and R$1,179, respectively. The interest accretion recognized in the income statement is disclosed in note 6.

 

32

 

 

 

Selected Notes to the Interim Financial Statements

Expressed in millions of Brazilian reais, unless otherwise stated

 

 

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

 

a)        Net debt

 

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

 

    Consolidated  
    June 30,
2020
    December 31,
2019
 
Debt contracts in the international markets     83,492       42,298  
Debt contracts in Brazil     9,066       10,327  
Total of loans and borrowings     92,558       52,625  
                 
(-) Cash and cash equivalents     66,333       29,627  
(-) Short-term investments     507       3,329  
Net debt     25,718       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$10,673 denominated in R$, indexed to the Brazilian Interbank Interest rate (“DI Rate”or”CDI”), R$54,296 denominated in US$ and R$1,364 denominated in other currencies.

 

c)        Short-term investments

 

At June 30, 2020, the balance of R$507 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 and borrowings

 

i)         Total debt

 

    Consolidated  
    Current liabilities     Non-current liabilities  
    June 30,
2020
    December 31,
2019
    June 30,
2020
    December 31,
2019
 
Debt contracts in the international markets                                
Floating rates in:                                
US$     946       456       42,094       11,294  
EUR     -       -       1,232       907  
Fixed rates in:                                
US$     77       593       33,234       24,506  
EUR     -       -       4,617       3,398  
Other currencies     60       56       498       427  
Accrued charges     734       645       -       16  
      1,817       1,750       81,675       40,548  
Debt contracts in Brazil                                
Floating rates in:                                
R$, indexed to TJLP, TR, IPCA, IGP-M and CDI     3,087       2,620       5,169       6,759  
Basket of currencies and US$ indexed to LIBOR     246       177       181       226  
Fixed rates in:                                
R$     120       174       126       181  
Accrued charges     137       174       -       16  
      3,590       3,145       5,476       7,182  
Total     5,407       4,895       87,151       47,730  

 

33

 

 

Selected Notes to the Interim Financial Statements

Expressed in millions of Brazilian reais, unless otherwise stated

 

 

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

 

    Consolidated  
    Principal    

Estimated future

interest
payments (i)

 
2020     1,951       1,727  
2021     3,591       3,464  
2022     15,929       3,222  
2023     6,334       3,031  
Between 2024 and 2028     40,134       11,015  
2029 onwards     23,748       14,815  
Total     91,687       37,274  

 

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

 

At June 30, 2020, the average annual interest rates by currency are as follows:

 

    Consolidated  
    Average interest
rate (i)
    Total debt  
Loans and borrowings                
US$     3.85 %     77,406  
R$ (ii)     8.93 %     8,639  
EUR (iii)     3.79 %     5,952  
Other currencies     3.45 %     561  
              92,558  

 

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

(ii) R$ denominated debt that bears interest at IPCA, CDI, TR or TJLP, plus spread. For a total of R$8,176 the Company entered into derivative transactions to mitigate the exposure to the cash flow variations of the floating rate debt denominated in R$, 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$.

 

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

 

    Consolidated  
    Loans and
borrowings
 
December 31, 2019     52,625  
Additions     24,419  
Repayments     (2,306 )
Interest paid     (2,009 )
Cash flow from financing activities     20,104  
         
Effect of exchange rate     18,026  
Interest accretion     1,803  
Non-cash changes     19,829  
         
June 30, 2020     92,558  

 

iii) Credit and financing lines

 

In March 2020, the Company drew down R$27,380 (US$5 billion) under its revolving credit lines agreements, maturing in June 2022 R$10,952 (US$2 billion) and in December 2024 R$16,428 (US$3 billion), as a precautionary measure in order to increase its cash position and preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 outbreak

 

iv) Funding

 

In July 2020 (subsequent event), 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.

 

34

 

 

Selected Notes to the Interim Financial Statements

Expressed in millions of Brazilian reais, unless otherwise stated

 

 

v) Guarantees

 

As at June 30, 2020 and December 31, 2019, loans and borrowings are secured by property, plant and equipment in the amount of R$876 and R$887, respectively.

 

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

 

vi) 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 June 30, 2020.

 

16.       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 restart its operations by the end of 2020, subject to its shareholders’ approval.

 

The changes in the provision for the periods ended June 30, 2020 and 2019 are as follows:

 

    Consolidated  
    2020     2019  
Balance at January 1,     6,853       4,346  
Provision increase     2,939       2,470  
Payments     (852 )     (575 )
Present value valuation     198       311  
Balance at June 30,     9,138       6,552  
                 
      June 30,
2020
      December 31, 2019  
Current liabilities     3,880       2,079  
Non-current liabilities     5,258       4,774  
Liabilities     9,138       6,853  

 

35

 

 

Selected Notes to the Interim Financial Statements

Expressed in millions of Brazilian reais, unless otherwise stated

 

 

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 for the next 10 years. The contingencies related to the Fundão dam rupture are disclosed in note 21.

 

Samarco’s working capital

 

In addition to the provision, Vale may provide a short-term credit facility up to R$1,164 (US$213 million), to support Samarco’s cash requirements, of which R$362 (US$76 million) has already been made available during the six-month period ended June 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 the second quarter of 2020, the Company received payments in the amount of R$32 (US$6 million) and recognized a gain in the income statement as “Equity results and other results in associates and joint ventures”.

 

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.

 

36

 

 

Selected Notes to the Interim Financial Statements

Expressed in millions of Brazilian reais, unless otherwise stated

 

 

17.       Financial instruments classification

 

    Consolidated  
    June 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     66,333       -       -       66,333       29,627       -       -       29,627  
Short-term investments     -       -       507       507       -       -       3,329       3,329  
Derivative financial instruments     -       -       533       533       -       -       1,160       1,160  
Accounts receivable     14,071       -       148       14,219       9,885       -       310       10,195  
Related parties     1,650       -       -       1,650       1,289       -       -       1,289  
      82,054       -       1,188       83,242       40,801       -       4,799       45,600  
Non-current                                                                
Judicial deposits     11,333       -       -       11,333       12,629       -       -       12,629  
Restricted cash     830       -       -       830       609       -       -       609  
Derivative financial instruments     -       -       344       344       -       -       742       742  
Investments in equity securities     -       2,341       -       2,341       -       2,925       -       2,925  
Loans     355       -       -       355       350       -       -       350  
Related parties     8,720       -       -       8,720       6,448       -       -       6,448  
      21,238       2,341       344       23,923       20,036       2,925       742       23,703  
Total of financial assets     103,292       2,341       1,532       107,165       60,837       2,925       5,541       69,303  
                                                                 
Financial liabilities                                                                
Current                                                                
Suppliers and contractors     16,068       -       -       16,068       16,556       -       -       16,556  
Leases     1,206       -       -       1,206       910       -       -       910  
Derivative financial instruments     -       -       2,881       2,881       -       -       377       377  
Loans and borrowings     5,407       -       -       5,407       4,895       -       -       4,895  
Interest on capital     6,348       -       -       6,348       6,333       -       -       6,333  
Related parties     4,074       -       -       4,074       3,951       -       -       3,951  
      33,103       -       2,881       35,984       32,645       -       377       33,022  
Non-current                                                                
Leases     7,843       -       -       7,843       6,308       -       -       6,308  
Derivative financial instruments     -       -       4,823       4,823       -       -       1,237       1,237  
Loans and borrowings     87,151       -       -       87,151       47,730       -       -       47,730  
Related parties     5,151       -       -       5,151       3,853       -       -       3,853  
Participative stockholders' debentures     -       -       11,285       11,285       -       -       10,416       10,416  
Financial guarantees     -       -       2,971       2,971       -       -       2,116       2,116  
      100,145       -       19,079       119,224       57,891       -       13,769       71,660  
Total of financial liabilities     133,248       -       21,960       155,208       90,536       -       14,146       104,682  

 

37

 

 

 

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

 

18.       Fair value estimate

 

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

 

    Consolidated  
    June 30, 2020     December 31, 2019  
    Level 1     Level 2     Level 3     Total     Level 1     Level 2     Level 3     Total  
Financial assets                                                                
Short-term investments     507       -       -       507       3,329       -       -       3,329  
Derivative financial instruments     -       748       129       877       -       1,806       96       1,902  
Accounts receivable     -       148       -       148       -       310       -       310  
Investments in equity securities     2,341       -       -       2,341       2,925       -       -       2,925  
Total     2,848       896       129       3,873       6,254       2,116       96       8,466  
                                                                 
Financial liabilities                                                                
Derivative financial instruments     -       7,492       212       7,704       -       1,130       484       1,614  
Participative stockholders' debentures     -       11,285       -       11,285       -       10,416       -       10,416  
Financial guarantees     -       2,971       -       2,971       -       2,116       -       2,116  
Total     -       21,748       212       21,960       -       13,662       484       14,146  

 

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

 

The following table presents the changes in Level 3 assets and liabilities for the six-month period ended June 30, 2020:

 

    Consolidated  
    Derivative financial instruments  
    Financial
assets
    Financial
liabilities
 
Balance at December 31, 2019     96       484  
 Gain and losses recognized in income statement     33       (272 )
Balance at June 30, 2020     129       212  
                 

 

Methods and techniques of evaluation

 

i) Derivative financial instruments

 

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

 

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

 

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

 

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

 

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

 

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

 

38

 

 

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

 

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

 

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

 

    Consolidated  
Financial liabilities   Balance     Fair value     Level 1     Level 2  
June 30, 2020                                
Debt principal     91,687       99,154       48,326       50,828  
                                 
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.

 

19. Derivative financial instruments

 

a)       Derivatives effects on statement of financial position

 

    Consolidated  
    Assets  
    June 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     235       203       337       474  
Pre-dollar swap     -       -       84       31  
      235       203       474       505  
Commodities price risk                                
Nickel (i)     16       1       606       36  
Bunker oil, Gasoil and Brent     244       16       76       -  
      260       17       682       36  
                                 
Others     38       124       4       201  
      38       124       4       201  
Total     533       344       1,160       742  

 

(i) The nickel hedge accounting program was fully settled on April 1,2020. The remaining balance relates to the palladium (a nickel by-product) hedge accounting program.

 

    Consolidated  
    Liabilities  
    June 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     1,084       3,339       196       322  
IPCA swap     498       567       52       150  
Eurobonds swap     34       273       24       117  
Pre-dollar swap     412       412       32       148  
      2,028       4,591       304       737  
Commodities price risk                                
Nickel     6       -       13       16  
Bunker oil, Gasoil and Brent     841       -       29       -  
      847       -       42       16  
Others     6       232       31       484  
      6       232       31       484  
Total     2,881       4,823       377       1,237  

 

39

 

 

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

 

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 June 30,     Six-month period ended June 30,  
    2020     2019     2020     2019  
Foreign exchange and interest rate risk                                
CDI & TJLP vs. US$ fixed and floating rate swap     (969 )     65       (4,095 )     37  
IPCA swap     (123 )     63       (1,212 )     109  
Eurobonds swap     38       (11 )     (107 )     (83 )
Pre-dollar swap     (146 )     (20 )     (807 )     (12 )
      (1,200 )     97       (6,221 )     51  
Commodities price risk                                
Nickel     3       (14 )     3       60  
Bunker oil, Gasoil and Brent     540       (1 )     (1,098 )     107  
      543       (15 )     (1,095 )     167  
Options - MBR     -       138       -       145  
Others     236       35       501       232  
      236       173       501       377  
Total     (421 )     255       (6,815 )     595  

 

    Consolidated  
    Financial settlement inflows (outflows)  
    Three-month period ended June 30,     Six-month period ended June 30,  
    2020     2019     2020     2019  
Foreign exchange and interest rate risk                                
CDI & TJLP vs. US$ fixed and floating rate swap     (168 )     (76 )     (248 )     (400 )
IPCA swap     -       -       1       (101 )
Eurobonds swap     -       -       (24 )     (19 )
Pre-dollar swap     42       63       (58 )     55  
      (126 )     (13 )     (329 )     (465 )
Commodities price risk                                
Nickel     219       3       1,462       16  
Bunker oil, Gasoil and Brent     (702 )     -       (706 )     -  
      (483 )     3       756       16  
                                 
Others     11       (5 )     307       (6 )
Total     (598 )     (15 )     734       (455 )

 

    Consolidated  
    Gain recognized in other comprehensive income  
    Three-month period ended June 30,     Six-month period ended June 30,  
    2020     2019     2020     2019  
Derivatives designated as cash flow hedge accounting                        
Nickel     (269 )              -         8             -  
Total     (269 )     -       8       -  

 

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

 

    Last maturity dates
Currencies and interest rates   September 2029
Palladium   March 2021
Nickel   December 2021
Brent   June 2021
Gasoil   December 2020
Debentures convertible into shares   December 2027
Others   July 2022

 

c) Hedge in foreign operations

 

In January 2017, the Company implemented hedge accounting for the foreign currency risk arising from Vale S.A.’s net investments in Vale International S.A. and Vale Holding BV. Under the hedge accounting program, the Company’s debt denominated in U.S. dollars and Euros serves as a hedge instrument for these investments. With the program, the impact of exchange rate variations on debt denominated in U.S. dollars and Euros has been partially recorded in other comprehensive income, in the “Cumulative translation adjustments”. As at June 30, 2020, the carrying value of the debts designated as instrument hedge of these investments are R$12,369 (US$2,259 million) and R$4,615 (EUR750 million).

 

40

 

 

 

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

 

    Consolidated  
    Gain (loss) recognized in the other comprehensive income  
    Three-month period ended June 30,     Six-month period ended June 30,  
    2020     2019     2020     2019  
Hedge in foreign operation, net of tax     (632 )     128       (3,026 )     84  

 

20.        Provisions

 

    Consolidated  
      Current liabilities       Non-current liabilities  
      June 30,
2020
      December 31,
2019
      June 30,
2020
      December 31,
2019
 
Payroll, related charges and other remunerations     2,716       3,183       -       -  
Onerous contracts     310       229       4,685       3,489  
Environmental obligations     539       587       1,286       980  
Asset retirement obligations     690       638       18,480       15,323  
Provisions for litigation (note 21)     -       -       6,265       5,895  
Employee postretirement obligations (note 22)     401       319       12,039       8,546  
Provisions     4,656       4,956       42,755       34,233  

 

21.       Litigations

 

a)        Provision for litigations

 

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

 

Changes in provision for litigations are as follows:

 

    Consolidated  
    Tax litigation     Civil litigation     Labor litigation     Environmental litigation     Total of litigation provision  
Balance at December 31, 2019     2,804       1,213       1,835       43       5,895  
Additions and reversals, net     95       153       68       10       326  
Payments     (58 )     (51 )     (167 )     -       (276 )
Indexation and interest     65       77       60       3       205  
Translation adjustment     107       8       -       -       115  
Balance at June 30, 2020     3,013       1,400       1,796       56       6,265  
                                         
      Consolidated
      Tax litigation (i)       Civil litigation       Labor litigation       Environmental
litigation
      Total of litigation
provision
 
Balance at December 31, 2018     2,816       644       1,785       13       5,258  
Additions and reversals, net (ii)     5       659       241       20       925  
Payments     (57 )     (142 )     (276 )     -       (475 )
Indexation and interest     (6 )     76       56       6       132  
Translation adjustment     8       (5 )     -       -       3  
Balance at June 30, 2019     2,766       1,232       1,806       39       5,843  

 

(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

 

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

 

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

 

    Consolidated  
    June 30, 2020     December 31, 2019  
Tax litigations     37,730       33,839  
Civil litigations     6,654       6,116  
Labor litigations     2,800       3,116  
Environmental litigations     4,533       4,410  
Brumadinho event     712       635  
Total     52,429       48,116  

 

i - Tax litigations - The most relevant tax and social security contingent liabilities are associated with proceedings related to the collection of: (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 increase in the contingent liability for the six-month period ended June 30, 2020 is mainly due to new proceedings related to CFEM, ICMS and PIS, associated with the changes on the stage of the proceedings and monetary updates of the judicial claims under discussion.

 

ii - Civil litigations - Most of these lawsuits have been filed by suppliers under the argument of contractual imbalance and non-compliance, thus seeking compensation for alleged losses, payments and contractual fines. In addition, there are also land-based lawsuits regarding Vale's operational properties.

 

iii - Labor litigations - Represents 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 - The most significant claims concern alleged environmental damages and issues related to environmental licensing.

 

c)       Judicial deposits

 

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

 

    Consolidated  
    June 30, 2020     December 31, 2019  
Tax litigations     5,112       5,152  
Civil litigations     416       346  
Labor litigations     910       992  
Environmental litigations     242       163  
Brumadinho event (note 3)     4,653       5,976  
Total     11,333       12,629  

 

In addition to the above-mentioned tax, civil, labor and environmental judicial deposits, the Company contracted R$10 billion in guarantees for its lawsuits, as an alternative to judicial deposits. For the Brumadinho event, the Company contracted guarantees in the amount of R$5.7 billion which were presented in court according to agreements with Treasury Court of Minas Gerais and Public Prosecutor's Office.

 

42

 

 

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

 

d) Contingencies related to Samarco accident

 

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

 

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

 

In June 2018, the parties entered into an agreement (“Term of Adjustment of Conduct”), which extinguished (i) the public civil claim of R$20.2 billion filed by the Federal Government and others; and (ii) part of the claims included in the public civil claim of R$155 billion filed by MPF. The agreement also 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. These negotiations are ongoing and the conclusion is expected to occur by the end of this year.

 

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

 

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

 

In January 2020, the Court also determined the commencement of 10 specific proceedings to address the controverted and pending items related to settlement agreements, signed by the parties (TTAC and TacGov), according to some aspects from the referred agreements (the “Priority Topics”). The Court has been establishing specific obligations in each of the Priority Topics for public authorities, Renova Foundation, Vale, Samarco and BHP Brasil with the purpose of overcoming any pending and controversial for each of the Priority Topics.

 

(ii) United States class action lawsuits

 

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

 

In June 2019, the Court issued a decision and order dismissing with prejudice the putative federal securities class action. In December 2019 the plaintiffs filed a Notice of Appeal to the Court of Appeals. On March 10, 2020, the plaintiff filed its opening appeal brief. In June 8, 2020, Vale has filed the opposition to Safra’s Appeal and they have filed their reply. The New York State Court of Appeals should rule the case during 2020. Based on the assessment of the Company´s legal consultants, Vale has good arguments to oppose the appeal.

 

43

 

 

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

 

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

 

Vale and some of its Executive Officers were named as defendants in a class action filed with the Federal Court in New York, which was raised by holders of Vale’s ADRs under U.S. federal securities laws. The suit was brought as a putative class action on behalf of holders of Vale’s ADRs, alleging violations of the U.S. Federal Securities laws on the basis of alleged false and misleading statements or omissions concerning the risks of Samarco’s Fundão dam operation and the adequacy of the related programs and procedures.

 

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

 

Upon the Court's determination, the parties submitted, on February 7, 2020, a settlement proposal whereby the defendants agreed to pay the amount of R$137 (US$25 million) for closing the case and, in a public hearing held on June 10, 2020, the final agreement was approved by the Court. The agreement amount was recognized in the Company’s income statement within “Result from interests and other results in associates and joint ventures”.

 

(iv) Criminal lawsuit

 

In 2016, the MPF brought a criminal lawsuit against Samarco and its shareholders, VogBr Recursos Hídricos e Geotecnia Ltda. and 22 individuals for the consequences related to Fundão dam failure. On April 23, 2019, the Federal Court from the 1st Region (“TRF 1”) granted a writ of Habeas Corpus to dismiss the criminal charges of homicide and physical injuries committed by oblique intent held against one of the defendants on the criminal action. At the same time, the Court extended the writ’s issuance to all other defendants on the case as the criminal information does not describe the crimes of homicide and physical injury, but the crime of flooding qualified by the result of death and physical injury as a consequence of the Fundão dam’s failure. Therefore, the Court dismissed the homicide and physical injuries charges held against all defendants.

 

Currently, the progress of the criminal action is on hold due to the judgment of Habeas Corpus, with no decision.

 

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

 

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

 

In July 2020, the Federal Court of the 1st Region denied an appeal presented by Vale and rejected the claim to recognize the state of limitation to keep the company within the criminal process.

 

(v) Tax proceedings

 

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

 

44

 

 

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

 

e) Contingent Assets

 

(i) Compulsory loan

 

In 2015, the Company requested for the enforcement of the judicial decision in the amount of R$524 related to a favorable unappealable decision which partially recognized its right to refund the differences of monetary adjustments and interests due over to the third convertible bonds issued by Eletrobrás shares in the period within 1987 to 1993. In November 2019, the Company requested for the payment of the amount recognized by Eletrobrás as due and such requirement was granted by the court. In June 2020, Eletrobrás made a deposit of R$301, accordingly, the Company recognized an asset of such amount in these interim financial statements. The remaining amount is still under assessment and so, the Company did not recognize the asset in these interim financial statements.

 

(ii) ICMS included in PIS and COFINS tax base

 

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

 

 

(iii) Arbitral award related to Simandou

 

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

 

Vale commenced arbitration proceedings against BSG Resources Limited (“BSGR”) in April 2014, and in April 2019, the arbitral tribunal in London ruled in Vale’s favor and ordered BSGR to pay to Vale the amount of R$6,571 (US$1.2 billion) plus costs and interest (with interest and costs, the award exceeds R$10,952 (US$2.0 billion)).  The arbitral tribunal ruled that BSGR had defrauded Vale by inducing Vale to enter into the joint venture. On September 20, 2019, the English High Court ruled that Vale can proceed with enforcement of its R$10,952 (US$2.0 billion) arbitration award.

 

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

 

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

 

On December 3, 2019, Vale and two of its affiliates filed new litigation proceedings in the English High Court, claiming damages of approximately R$10,131 (US$1.85 billion), against certain individuals and related parties to BSGR.

 

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

 

(iv) Canadian Tax Litigation Matter

 

Vale Canada Limited (“VCL”) and the Canadian Department of Justice - Canada Revenue Agency signed an agreement regarding a tax litigation matter related to the appropriate tax treatment of certain receipts received and expenditures incurred by VCL in respect of merger and acquisition transactions in 2006. In 2019, the Company recognized an asset in the amount of R$889 (CAD221 million) for the agreed tax refund including interest and recognized in 2020 an additional amount of R$84 (CAD21 million) related to interest.  The total amount has been paid in full to the company.

 

45

 

 

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

 

22.       Employee post-retirement obligations

 

Reconciliation of net liabilities recognized in the statement of financial position

 

    Consolidated  
    June 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     (15,493 )     (23,765 )     (8,050 )     (16,148 )     (17,818 )     (6,066 )
Fair value of assets     19,655       19,373       -       21,380       15,019       -  
Effect of the asset ceiling     (4,162 )     -       -       (5,232 )     -       -  
Liabilities     -       (4,392 )     (8,050 )     -       (2,799 )     (6,066 )
                                                 
Current liabilities     -       (133 )     (241 )     -       (50 )     (269 )
Non-current liabilities     -       (4,259 )     (7,809 )     -       (2,749 )     (5,797 )
Liabilities     -       (4,392 )     (8,050 )     -       (2,799 )     (6,066 )

 

23. Stockholders’ equity

 

a) Share capital

 

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

 

    June 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.     323,496,276       -       323,496,276  
Bradespar S.A.     293,907,266       -       293,907,266  
Mitsui & Co., Ltd     286,347,055       -       286,347,055  
Foreign investors - ADRs     1,114,017,346       -       1,114,017,346  
Foreign institutional investors in local market     1,236,753,147       -       1,236,753,147  
FMP - FGTS     44,454,824       -       44,454,824  
PIBB - Fund     3,290,327       -       3,290,327  
Institutional investors     922,693,533       -       922,693,533  
Retail investors in Brazil     310,385,604       -       310,385,604  
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, to pay the Matching program of its eligible executives, in the amount of R$68 and R$84 recognized as “assignment and transfer of shares” for the six-month periods ended June 30, 2020 and 2019, respectively.

 

c) Remuneration to the Company´s stockholders

 

On July 29, 2020 (subsequent event), 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% on Adjusted EBITDA less sustaining capital expenditures. 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.

 

46

 

 

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

 

24.        Related parties

 

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

 

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

 

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

 

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

 

a)       Transactions with related parties

 

    Consolidated  
    Three-month period ended June 30,  
    2020     2019  
    Joint Ventures     Associates     Major stockholders     Total     Joint Ventures     Associates     Major stockholders     Total  
Net operating revenue     370       303       296       969       377       267       180       824  
Cost and operating expenses     (1,411 )     (25 )     -       (1,436 )     (1,555 )     (26 )     -       (1,581 )
Financial result     43       (8 )     (61 )     (26 )     (45 )     (1 )     (4 )     (50 )

 

    Consolidated  
    Six-month period ended June 30,  
    2020     2019  
    Joint Ventures     Associates     Major stockholders     Total     Joint Ventures     Associates     Major stockholders     Total  
Net operating revenue     678       577       438       1,693       620       522       345       1,487  
Cost and operating expenses     (2,612 )     (53 )     -       (2,665 )     (3,437 )     (56 )     -       (3,493 )
Financial result     76       16       (167 )     (75 )     (33 )     (2 )     (120 )     (155 )

 

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  
    June 30, 2020     December 31, 2019  
    Joint Ventures     Associates     Major stockholders (iii)     Total     Joint Ventures     Associates     Major stockholders (iii)     Total  
Assets                                                                
Cash and cash equivalents     -       -       7,453       7,453       -       -       5,578       5,578  
Accounts receivable     383       158       16       557       367       88       19       474  
Dividends receivable     413       33       -       446       335       25       -       360  
Loans (i)     10,370       -       -       10,370       7,737       -       -       7,737  
Derivatives financial instruments     -       -       -       -       -       -       169       169  
Other assets     341       -       -       341       262       -       -       262  
                                                                 
Liabilities                                                                
Supplier and contractors     515       53       667       1,235       1,218       113       149       1,480  
Loans (ii)     -       7,610       5,410       13,020       -       5,511       6,804       12,315  
Derivatives financial instruments     -       -       559       559       -       -       259       259  
Other liabilities     1,615       269       -       1,884       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”.

 

47

 

 

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

 

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

 

a)       Other financial assets and liabilities

 

    Parent company  
    Current     Non-Current  
    June 30,
2020
    December 31,
2019
    June 30,
2020
    December 31,
2019
 
Other financial assets                                
Restricted cash     -       -       578       530  
Loans     -       -       18       18  
Derivative financial instruments     236       450       332       593  
Investments in equity securities     -       -       2,045       2,555  
Related parties - Loans     329       690       203       276  
      565       1,140       3,176       3,972  
Other financial liabilities                                
Derivative financial instruments     1,693       280       3,944       972  
Related parties - Loans     10,718       6,392       79,705       62,861  
Financial guarantees     -       -       2,971       2,116  
Participative stockholders' debentures     -       -       11,285       10,416  
      12,411       6,672       97,905       76,365  

 

b)        Investments

 

    Parent company  
    2020     2019  
Balance at January 1st,     144,594       139,510  
Additions and Capitalizations     1,341       2,334  
Disposals     (117 )     (84 )
Translation adjustment     36,445       (69 )
Equity results in income statement     (298 )     7,118  
Equity results in statement of comprehensive income     (1,157 )     (589 )
Dividends declared     (839 )     (1,082 )
Merger (i)     (2,105 )     -  
Others     683       (21 )
Balance at June 30,     178,547       147,117  

 

(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     370       -       31       401  
Disposals     (18 )     -       -       (18 )
Amortization     (451 )     (3 )     (29 )     (483 )
Merger of Ferrous     -       -       5       5  
Balance at June 30, 2020     15,894       96       186       16,176  
Cost     20,767       223       2,559       23,549  
Accumulated amortization     (4,873 )     (127 )     (2,373 )     (7,373 )
Balance at June 30, 2020     15,894       96       186       16,176  

 

    Parent company  
    Concessions     Right of use     Software     Total  
Balance at December 31, 2018     15,240       105       277       15,622  
Additions     817       -       58       875  
Disposals     (44 )     -       -       (44 )
Amortization     (454 )     (3 )     (124 )     (581 )
Balance at June 30, 2019     15,559       102       211       15,872  
Cost     19,658       223       2,599       22,480  
Accumulated amortization     (4,099 )     (121 )     (2,388 )     (6,608 )
Balance at June 30, 2019     15,559       102       211       15,872  

 

48

 

 

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)     -       -       -       -       -       133       -       4,348       4,481  
Disposals     (4 )     (2 )     (10 )     (5 )     (17 )     -       (8 )     (71 )     (117 )
Assets retirement obligation     -       -       -       -       (250 )     -       -       -       (250 )
Depreciation, amortization and depletion     -       (571 )     (1,047 )     (698 )     (246 )     (173 )     (950 )     -       (3,685 )
Merger of Ferrous     577       103       325       73       990       2       6       (136 )     1,940  
Transfers     90       297       698       512       1,159       -       974       (3,730 )     -  
Balance at June 30, 2020     2,460       26,382       30,185       10,095       8,789       2,076       19,628       8,629       108,244  
Cost     2,460       34,959       40,453       19,183       11,614       2,557       33,980       8,629       153,835  
Accumulated depreciation     -       (8,577 )     (10,268 )     (9,088 )     (2,825 )     (481 )     (14,352 )     -       (45,591 )
Balance at June 30, 2020     2,460       26,382       30,185       10,095       8,789       2,076       19,628       8,629       108,244  

 

    Parent company  
    Land     Building     Facilities     Equipment     Mineral properties     Leasing agreements     Others     Constructions in progress     Total  
Balance at December 31, 2018     1,735       26,559       30,593       10,004       7,689       -       19,240       7,996       103,816  
Effects of IFRS 16/CPC 06 (R2) adoption     -       -       -       -       -       2,058       -       -       2,058  
Additions (i)     -       -       -       -       -       229       -       2,424       2,653  
Disposals     (2 )     (415 )     (106 )     (70 )     (219 )     -       (648 )     (97 )     (1,557 )
Assets retirement obligation     -       -       -       -       466       -       -       -       466  
Depreciation, amortization and depletion     -       (502 )     (706 )     (671 )     (296 )     (151 )     (965 )     -       (3,291 )
Transfers     2       525       463       855       (274 )     -       1,615       (3,186 )     -  
Balance at June 30, 2019     1,735       26,167       30,244       10,118       7,366       2,136       19,242       7,137       104,145  
Cost     1,735       33,433       38,715       17,939       9,705       2,287       31,813       7,137       142,764  
Accumulated depreciation     -       (7,266 )     (8,471 )     (7,821 )     (2,339 )     (151 )     (12,571 )     -       (38,619 )
Balance at June 30, 2019     1,735       26,167       30,244       10,118       7,366       2,136       19,242       7,137       104,145  

 

(i) Includes capitalized borrowing costs.

 

e)        Loans and borrowings

 

    Parent company  
    Current liabilities     Non-current liabilities  
    June 30,
2020
    December 31,
2019
    June 30,
2020
    December 31,
2019
 
Debt contracts in the international markets                                
Floating rates in:                                
US$     946       445       8,145       6,419  
Fixed rates in:                                
US$     -       536       2,850       2,098  
EUR     -       -       4,615       3,398  
Accrued charges     181       238       -       -  
      1,127       1,219       15,610       11,915  
Debt contracts in Brazil                                
Floating rates in:                                
R$, indexed to TJLP, TR, IPCA, IGP-M and CDI     2,718       2,279       5,157       6,418  
Basket of currencies and US$ indexed to LIBOR     244       180       183       225  
Fixed rates in:                                
R$     100       151       111       155  
Accrued charges     132       157       -       -  
      3,194       2,767       5,451       6,798  
Total     4,321       3,986       21,061       18,713  

 

49

 

 

 

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     1,938  
2021     2,988  
2022     3,456  
2023     6,206  
Between 2024 and 2028     7,546  
2029 onwards     2,935  
      25,069  

 

f)        Provisions

 

    Parent company  
    Current liabilities     Non-current liabilities  
    June 30,
2020
    December 31,
2019
    June 30,
2020
    December 31,
2019
 
Payroll, related charges and other remunerations     1,802       2,124       -       -  
Environmental obligations     450       490       668       585  
Asset retirement obligations     473       488       3,349       3,567  
Provisions for litigation     -       -       5,245       5,102  
Employee postretirement obligations     125       108       2,129       2,114  
Provisions     2,850       3,210       11,391       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     87       42       75       7       211  
Payments     (56 )     (30 )     (158 )     -       (244 )
Indexation and interest     41       61       62       3       167  
Merger of Ferrous     1       3       3       2       9  
Balance at June 30, 2020     2,398       1,080       1,716       51       5,245  

 

    Parent company  
    Tax litigation (i)     Civil litigation     Labor litigation     Environmental
litigation
    Total of litigation
provision
 
Balance at December 31, 2018   2,347     467     1,660     9     4,483  
Additions and reversals, net (ii)     14       489       211       20       734  
Payments     (8 )     (97 )     (180 )     -       (285 )
Indexation and interest     (10 )     46       55       6       97  
Balance at June 30, 2019     2,343       905       1,746       35       5,029  

 

(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  
    June 30, 2020     December 31, 2019  
Tax litigation     34,745       30,905  
Civil litigation     5,087       4,589  
Labor litigation     2,712       3,025  
Environmental litigation     3,704       4,239  
Brumadinho event     712       635  
Total     46,960       43,393  

 

50

 

 

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  
    Six-month period ended June 30,  
    2020     2019  
Income (loss) before income taxes     3,334       (9,765 )
Income taxes at statutory rates - 34%     (1,134 )     3,320  
Adjustments that affect the basis of taxes:                
Tax incentives     2,011       34  
Equity results     (101 )     2,420  
Others (i)     2,163       (2,815 )
Income taxes     2,939       2,959  

 

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

 

26.     Additional information about derivatives financial instruments

 

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

 

The following tables detail the derivatives positions for Vale and its controlled companies as of June 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.

 

51

 

 

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

 

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   June 30,
2020
    December 31,
2019
    Index     Average
rate
    June 30,
2020
    December 31,
2019
    June 30,
2020
    June 30,
2020
    2020     2021     2022+  
CDI vs. US$ fixed rate swap                                     (3,369 )     (155 )     (105 )     249       (617 )     (392 )     (2,360 )
Receivable   R$ 10,850     R$ 2,115       CDI       100.07 %                                                        
Payable   US$ 2,579     US$ 558       Fix       2.07 %                                                        
                                                      .                                  
TJLP vs. US$ fixed rate swap                                     (1,054 )     (304 )     (98 )     56       (144 )     (291 )     (619 )
Receivable   R$ 1,881     R$ 2,111       TJLP +       1.15 %                                                        
Payable   US$ 531     US$ 601       Fix       3.00 %                                                        
                                                                                         
R$ fixed rate vs. US$ fixed rate swap                                     (769 )     (72 )     (57 )     62       (40 )     (398 )     (331 )
Receivable   R$ 2,579     R$ 2,173       Fix       5.66 %                                                        
Payable   US$ 642     US$ 604       Fix       0.20 %                                                        
                                                                                         
IPCA vs. US$ fixed rate swap                                     (1,064 )     185       (48 )     68       (23 )     (496 )     (545 )
Receivable   R$ 2,450     R$ 2,826       IPCA +       5.06 %                                                        
Payable   US$ 649     US$ 759       Fix       4.01 %                                                        
                                                                                         
IPCA vs. CDI swap                                     438       422       -       11       236       31       171  
Receivable   R$ 1,650     R$ 1,634       IPCA +       6.62 %                                                        
Payable   R$ 1,350     R$ 1,350       CDI       98.57 %                                                        

 

    Notional                 Fair value     Value at Risk     Fair value by
year
 
Flow   June 30,
2020
    December 31,
2019
    Bought / Sold     Average
rate
(BRL/USD)
    June 30,
2020
    December 31,
2019
    June 30,
2020
    2020+  
Forward   R$ 924     R$ 121       B       5.96       (55 )     6       22       (55 )

 

52

 

 

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

 

(ii) Protection program for EUR denominated debt instruments

 

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

 

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

 

    Notional                 Fair value     Financial
Settlement
Inflows
(Outflows)
    Value at
Risk
    Fair value by year  
Flow   June 30,
2020
    December 31,
2019
    Index     Average
rate
    June 30,
2020
    December 31,
2019
    June 30,
2020
    June 30,
2020
    2020     2021     2022+  
EUR fixed rate vs. US$ fixed rate swap                                     (307 )     (142 )     (24 )     24       -       (30 )     (277 )
Receivable   500     500       Fix       3.75 %                                                        
Payable   US$ 613     US$ 613       Fix       4.29 %                                                        

 

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

 

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

 

    Notional                 Fair value     Value at
Risk
    Fair value by year  
Flow   June 30,
2020
    December 31,
2019
    Index     Average
rate
    June 30,
2020
    December 31,
2019
    June 30,
2020
    2020     2021     2022+  
Libor vs. US$ fixed rate swap                                     (25 )     -       13       3       (10 )     (18 )
Receivable    US$ 800       -       Libor 3M       -                                                  
Payable    US$ 800       -       Fix       0.45 %                                                

 

b) Commodities derivative positions

 

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

 

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

 

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

 

Brent Crude Oil Options

 

    Notional (bbl)               Fair value     Financial
settlement
Inflows
(Outflows)
    Value at
Risk
    Fair value by
year
 
Flow   June 30,
2020
    December 31,
2019
    Bought / Sold   Average strike
(US$/bbl)
    June 30,
2020
    December 31,
2019
    June 30,
2020
    June 30,
2020
    2020     2021  
Call options     11,089,494       7,048,500     B     63       201       45       -       17       34       167  
Put options     11,089,494       7,048,500     S     38       (342 )     (15 )     (299 )     43       (295 )     (47 )
Total                                 (141 )     30       (299 )     60       (261 )     120  

 

53

 

 

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

 

Gasoil Options

 

    Notional (bbl)               Fair value     Financial
settlement
Inflows
(Outflows)
    Value at Risk     Fair value by
year
 
Flow   June 30,
2020
    December 31,
2019
    Bought / Sold   Average strike
(US$/bbl)
    June 30,
2020
    December 31,
2019
    June 30,
2020
    June 30,
2020
    2020  
Call options     6,481,500       7,710,750     B     88       14       24       -       3       14  
Put options     6,481,500       7,710,750     S     56       (388 )     (10 )     (471 )     44       (388 )
Total                                 (374 )     14       (471 )     47       (374 )

 

(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   June 30,
2020
    December 31,
2019
    Bought / Sold   Average
strike
(US$/ton)
    June 30,
2020
    December 31,
2019
    June 30,
2020
    June 30,
2020
    2020     2021  
Fixed price sales protection                                                                            
Nickel forwards     3,139       -     B     11,843       17       -       4       6       14       3  
Total                                 17       -       4       6       14       3  

 

Nickel Revenue Hedging Program

 

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

 

In April 2020 the hedge program was fully settled. The cumulative gain recognized in the cash flow hedge reserve until the settlement of the option contracts will be reclassified to the income statement as the Company recognizes the revenue from nickel sales (hedged item).

 

    Notional (ton)                 Fair value     Financial
settlement
Inflows
(Outflows)
    Value at
Risk
    Fair value by
year
 
Flow   June 30,
2020
    December 31,
2019
    Bought / Sold     Average
strike
(US$/ton)
    June 30,
2020
    December 31,
2019
    June 30,
2020
    June 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       -       -       -  

 

54

 

 

Selected Notes to the Interim Financial Statements

 

Expressed in millions of Brazilian reais, unless otherwise stated

 

Palladium Revenue Hedging Program

 

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

 

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

 

    Notional (t oz)               Fair value     Financial settlement Inflows (Outflows)     Value at
Risk
    Fair value by
year
 
Flow   June 30,
2020
    December 31,
2019
    Bought / Sold   Average strike
(US$/t oz)
    June 30,
2020
    December 31,
2019
    June 30,
2020
    June 30,
2020
    2020     2021  
Palladium Revenue Hedging Program                                                                            
Palladium Forwards     7,200       -     S     2,228       12       -       14       3       12       -  
                                                                             
Call Options     14,400       -     S     2,387       (6 )     -       -       2       (2 )     (4 )
Put Options     14,400       -     B     2,050       22       -       -       4       10       12  
Total                                 28       -       14       9       20       8  

 

c) Freight derivative positions

 

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

 

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

 

    Notional (days)               Fair value     Financial Settlement Inflows (Outflows)     Value at
Risk
    Fair value by
year
 
Flow   June 30,
2020
    December 31,
2019
    Bought / Sold   Average strike (US$/day)     June 30,
2020
    December 31,
2019
    June 30,
2020
    June 30,
2020
    2020+  
Freight forwards     2,575       1,050     B     12,914       35       1       (29 )     10       35  

 

55

 

 

Selected Notes to the Interim Financial Statements

 

Expressed in millions of Brazilian reais, unless otherwise stated

 

d) Wheaton Precious Metals Corp. warrants

 

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

 

    Notional (quantity of warranties)               Fair value     Financial settlement Inflows (Outflows)     Value at
Risk
    Fair value by
year
 
Flow   June 30,
2020
    December 31,
2019
    Bought / Sold   Average strike
(US$/share)
    June 30,
2020
    December 31,
2019
    June 30,
2020
    June 30,
2020
    2023  
Call options     -       10,000,000     B     -       -       105       110       -       -  

 

e) 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.

 

    Notional (quantity)               Fair value     Financial settlement Inflows (Outflows)     Value at
Risk
    Fair value by
year
 
Flow   June 30,
2020
    December 31,
2019
    Bought / Sold   Average strike
(R$/share)
    June 30,
2020
    December 31,
2019
    June 30,
2020
    June 30,
2020
    2027  
Conversion options     140,239       140,239     S     6,688       (212 )     (206 )     -       14       (212 )

 

f) 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   June 30,
2020
    December 31,
2019
    Bought / Sold   Average strike
(R$/share)
    June 30,
2020
    December 31,
2019
    June 30,
2020
    June 30,
2020
    2022  
Call option     137,751,623       137,751,623     B     2.69       129       96       -       11       129  

 

56

 

 

Selected Notes to the Interim Financial Statements

 

Expressed in millions of Brazilian reais, unless otherwise stated

 

g) 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 until August 2020. 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   June 30,
2020
    December 31,
2019
    Bought / Sold   Average strike
(R$/share)
    June 30,
2020
    December 31,
2019
    June 30,
2020
    June 30,
2020
    2020  
Put option     1,105,070,863       1,105,070,863     S     4.04       -       (279 )     -       131       -  

 

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   June 30,
2020
    December 31,
2019
    Bought / Sold   Average strike
(US$/ton)
    June 30,
2020
    December 31,
2019
    June 30,
2020
    June 30,
2020
    2020  
Nickel forwards     3,078       1,497     S     12,446       (4 )     9       -       6       (4 )
Copper forwards     1,348       1,009     S     5,479       (2 )     (1 )     -       1       (2 )
Total                                 (6 )     8       -       7       (6 )

 

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

 

57

 

 

 

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 June 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     (3,369 )     (6,983 )     (10,597 )
    US$ interest rate inside Brazil decrease     (3,369 )     (3,545 )     (3,730 )
    Brazilian interest rate increase     (3,369 )     (3,515 )     (3,670 )
Protected item: R$ denominated liabilities   R$ depreciation      n.a.       -       -  
                             
TJLP vs. US$ fixed rate swap   R$ depreciation     (1,054 )     (1,824 )     (2,594 )
    US$ interest rate inside Brazil decrease     (1,054 )     (1,077 )     (1,101 )
    Brazilian interest rate increase     (1,054 )     (1,114 )     (1,168 )
    TJLP interest rate decrease     (1,054 )     (1,115 )     (1,177 )
Protected item: R$ denominated debt   R$ depreciation      n.a.       -       -  
                             
R$ fixed rate vs. US$ fixed rate swap   R$ depreciation     (769 )     (1,630 )     (2,491 )
    US$ interest rate inside Brazil decrease     (769 )     (789 )     (809 )
    Brazilian interest rate increase     (769 )     (828 )     (884 )
Protected item: R$ denominated debt   R$ depreciation      n.a.       -       -  
                             
IPCA vs. US$ fixed rate swap   R$ depreciation     (1,064 )     (2,026 )     (2,988 )
    US$ interest rate inside Brazil decrease     (1,064 )     (1,103 )     (1,144 )
    Brazilian interest rate increase     (1,064 )     (1,157 )     (1,249 )
    IPCA index decrease     (1,064 )     (1,126 )     (1,189 )
Protected item: R$ denominated debt   R$ depreciation      n.a.       -       -  
                             
IPCA vs. CDI swap   Brazilian interest rate increase     438       420       403  
    IPCA index decrease     438       429       420  
Protected item: R$ denominated debt linked to IPCA   IPCA index decrease      n.a.       (429 )     (420 )
                             
EUR fixed rate vs. US$ fixed rate swap   EUR depreciation     (307 )     (1,168 )     (2,029 )
    Euribor increase     (307 )     (311 )     (315 )
    US$ Libor decrease     (307 )     (313 )     (318 )
Protected item: EUR denominated debt   EUR depreciation     n.a.       1,168       2,029  
                             
US$ floating rate vs. US$ fixed rate swap   US$ Libor decrease     (25 )     (37 )     (48 )
Protected item: Libor US$ indexed debt   US$ Libor decrease     n.a.       37       48  
                             
NDF BRL/USD   R$ depreciation     (55 )     (303 )     (552 )
    US$ interest rate inside Brazil decrease     (55 )     (67 )     (80 )
    Brazilian interest rate increase     (55 )     (105 )     (156 )
Protected item: R$ denominated liabilities   R$ depreciation     n.a.       -       -  
                             

 

58

 

 

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     (515 )     (1,254 )     (2,017 )
Protected item: Part of costs linked to fuel oil prices   Price input decrease     n.a.       1,254       2,107  
                             
Maritime Freight protection                            
Forwards   Freight price decrease     35       (19 )     (74 )
Protected item: Part of costs linked to maritime freight prices   Freight price decrease     n.a.       19       74  
                             
Nickel sales fixed price protection                            
Forwards   Nickel price decrease     17       (38 )     (93 )
Protected item: Part of nickel revenues with fixed prices   Nickel price decrease     n.a.       38       93  
                             
Palladium Revenue Hedging Program                            
Options   Palladium price increase     29       (20 )     (70 )
Protected item: Part of palladium future revenues   Palladium price increase     n.a.       20       70  
                             
Conversion options   Stock value increase     (212 )     (353 )     (548 )
                             
Option - SPCs   SPCs stock value decrease     129       58       13  

 

Instrument   Main risks   Probable     Scenario I     Scenario II  
Embedded derivatives - Raw material purchase (nickel)   Nickel price increase     (4 )     (58 )     (111 )
Embedded derivatives - Raw material purchase (copper)   Copper price increase     (2 )     (13 )     (23 )
Embedded derivatives - Gas purchase   Pellet price increase     (1 )     (3 )     (9 )
Embedded derivatives - Guaranteed minimum return   Stock value decrease     -       (1,047 )     (2,187 )

 

59

 

 

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

 

i) Financial counterparties’ ratings

 

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

 

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

 

Long term ratings by counterparty     Moody’s       S&P  
ABN Amro     A1       A  
Agricultural Bank of China     A1       A  
ANZ Australia and New Zealand Banking     Aa3       AA-  
Banco ABC     Ba3       BB-  
Banco Bradesco     Ba3       BB-  
Banco do Brasil     Ba3       BB-  
Banco do Nordeste do Brasil SA     Ba3       BB-  
Banco Itaú Unibanco     Ba3       BB-  
Bank Mandiri     Baa2       BBB-  
Banco Santander     A2       A  
Banco Votorantim     Ba3       BB-  
Bancolombia     Baa2       BB+  
Bank of America     A2       A-  
Bank of China     A1       A  
Bank of Montreal     Aa2       A+  
Bank of Nova Scotia     A2       A+  
Bank of Shanghai     Baa2       -  
Bank Rakyat Indonesia (BRI)     Baa2       BBB-  
Banpara     -       BB-  
Barclays     Baa2       BBB  
BBVA Banco Bilbao Vizcaya Argentaria     A3       A-  
BNP Paribas     Aa3       A+  
BTG Pactual     Ba3       BB-  
Caixa Econômica Federal     Ba3       BB-  
Calyon     Aa3       A+  
China Construction Bank     A1       A  
CIBC Canadian Imperial Bank     Aa2       A+  
CIMB Bank     Baa1       A-  
Citigroup     A3       BBB+  
Credit Suisse     Baa2       BBB+  
Deutsche Bank     A3       BBB+  
Goldman Sachs     A3       BBB+  
HSBC     A2       A-  
Industrial and Commercial Bank of China     A1       A  
ING     Baa1       BBB  
Intesa Sanpaolo Spa     Baa1       BBB  
JP Morgan Chase & Co     A2       A-  
Macquarie Group Ltd     A3       BBB+  
Mega International Commercial Bank     A1       A  
Millenium BIM     A1       A-  
Bank of Tokyo Mitsubishi UFJ     A1       A-  
Mitsui & Co     A1       A-  
Mizuho Financial     A1       A-  
Morgan Stanley     A3+       BBB+  
Muscat Bank     B1       BB-  
National Australia Bank     Aa3       AA-  
National Bank of Canada     Aa3       A  
National Bank of Oman     B1       -  
Natixis     A1       A+  
Rabobank     Aa3       A+  
Royal Bank of Canada     Aa2       AA-  
Banco Safra     Ba3       BB-  
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  
United Overseas Bank     Aa1       AA-  

 

60

 

 

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: July 29, 2020 By: /s/ Ivan Fadel
    Head of Investor Relations

 

61

 

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