United States

Securities and Exchange Commission

Washington, D.C. 20549

 

FORM 6-K

 

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16

of the

Securities Exchange Act of 1934

 

For the month of

 

October 2021

 

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 o

 

(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 o 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 o 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 o No x

 

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

 

 

 

 

 

 

Interim Financial Statements

September 30, 2021

 

 

IFRS in US$

 

     

 

 

 

Vale S.A. Interim Financial Statements

Contents

 

  Page
Report of Independent Registered Public Accounting Firm 3
Consolidated Income Statement 4
Consolidated Statement of Comprehensive Income 5
Consolidated Statement of Cash Flows 6
Consolidated Statement of Financial Position 7
Consolidated Statement of Changes in Equity 8
Notes to the Interim Financial Statements 9
1.      Corporate information 9
2.      Basis of preparation of the interim financial statements 9
3.      Significant events in the current period 9
4.      Information by business segment and by geographic area 10
5.      Costs and expenses by nature 15
6.      Financial results 16
7.      Income taxes 16
8.      Basic and diluted earnings per share 17
9.      Accounts receivable 18
10.    Inventories 18
11.    Other financial assets and liabilities 18
12.    Acquisitions and divestitures 19
13.    Investments in subsidiaries, associates and joint ventures 22
14.    Intangible 23
15.    Property, plant and equipment 23
16.    Financial and capital risk management 24
17.    Financial assets and liabilities 32
18.    Participative stockholders’ debentures 34
19.    Loans, borrowings, leases, cash and cash equivalents and short-term investments 34
20.    Brumadinho’s dam failure 37
21.    Liabilities related to associates and joint ventures 41
22.    Provisions 43
23.    Litigations 44
24.    Employee benefits 45
25.    Stockholders’ equity 47
26.    Related parties 48

 

  2  

 

 

 

Report of Independent registered Public Accounting Firm

 

To the Stockholders and Board of Directors of

Vale S.A.

 

Results of Review of Interim Financial Statements

 

We have reviewed the accompanying consolidated statement of financial position of Vale S.A. and its subsidiaries (the “Company”) as of September 30, 2021, and the related consolidated income statement, consolidated statement of comprehensive income and the consolidated statement of cash flows for the three and nine-month periods ended September 30, 2021 and September 30, 2020, and the consolidated statement of changes in equity for the nine-month periods ended September 30, 2021 and September 30, 2020, including the related notes (collectively referred to as the “interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).

 

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial position of the Company as of December 31, 2020, and the related consolidated income statement and consolidated statements of comprehensive income, changes in equity and of cash flows for the year then ended (not presented herein), and in our report dated February 25, 2021, which included a paragraph describing a change in the manner of accounting for leases on January 1, 2019, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated statement of financial position as of December 31, 2020, is fairly stated, in all material respects, in relation to the consolidated statement of financial position from which it has been derived.

 

Basis for Review Results

 

These interim financial statements are the responsibility of the Company’s management. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial statements consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

 

/s/ PricewaterhouseCoopers Auditores Independentes Ltda.

Rio de Janeiro, RJ, Brazil

October 28, 2021

 

  3  

 

 

Consolidated Income Statement

In millions of United States dollars, except earnings per share data

 

        Three-month period ended September 30,     Nine-month period ended September 30,  
    Notes   2021     2020     2021     2020  
Net operating revenue   4(c)     12,682       10,762       42,002       25,249  
Cost of goods sold and services rendered   5(a)     (5,836 )     (4,816 )     (16,268 )     (13,306 )
Gross profit         6,846       5,946       25,734       11,943  
                                     
Operating expenses                                    
Selling and administrative expenses   5(b)     (115 )     (127 )     (353 )     (366 )
Research and evaluation expenses         (136 )     (105 )     (377 )     (290 )
Pre-operating and operational stoppage   3 and 20     (165 )     (188 )     (501 )     (694 )
Brumadinho event   20     (161 )     (114 )     (461 )     (403 )
Other operating expenses, net   5(c)     (36 )     (113 )     (122 )     (412 )
          (613 )     (647 )     (1,814 )     (2,165 )
Impairment and disposals of non-current assets   12 and 15     (2,390 )     (298 )     (2,983 )     (730 )
Operating income         3,843       5,001       20,937       9,048  
                                     
Financial income   6     91       69       251       311  
Financial expenses   6     (136 )     (1,215 )     (1,699 )     (2,325 )
Other financial items, net   6     (328 )     (214 )     1,348       (2,116 )
Equity results and other results in associates and joint ventures   13 and 21     128       (40 )     (342 )     (741 )
Income before income taxes         3,598       3,601       20,495       4,177  
                                     
Income taxes   7(b)                                
Current tax         (2,464 )     (743 )     (5,180 )     (1,416 )
Deferred tax         2,824       (51 )     1,657       1,126  
          360       (794 )     (3,523 )     (290 )
                                     
Net income         3,958       2,807       16,972       3,887  
Net income (loss) attributable to non-controlling interests         72       (101 )     (46 )     (255 )
Net income attributable to Vale's stockholders         3,886       2,908       17,018       4,142  
                                     
Earnings per share attributable to Vale's stockholders:                                    
Basic and diluted earnings per share:   8                                
Common share (US$)         0.76       0.57       3.36       0.81  

 

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

 

  4  

 

 

Consolidated Statement of Comprehensive Income

In millions of United States dollars

 

    Three-month period ended September 30,     Nine-month period ended September 30,  
    2021     2020     2021     2020  
Net income     3,958       2,807       16,972       3,887  
Other comprehensive income (loss):                                
Items that will not be reclassified to the income statement                                
Translation adjustments     (3,249 )     (1,047 )     (1,364 )     (12,296 )
Retirement benefit obligations (note 24)     95       76       411       (124 )
Fair value adjustment to investment in equity securities (note 11)     150       251       343       42  
      (3,004 )     (720 )     (610 )     (12,378 )
                                 
Items that may be reclassified to the income statement                                
Translation adjustments     1,380       648       624       5,776  
Net investments hedge (note 16)     (127 )     (81 )     (85 )     (720 )
Net cash flow hedge (note 16)     10       (56 )     (16 )     (41 )
Reclassification of cumulative translation adjustment to net income (note 12)     (10 )     -       (1,552 )     -  
      1,253       511       (1,029 )     5,015  
Total comprehensive income (loss)     2,207       2,598       15,333       (3,476 )
                                 
Comprehensive loss attributable to non-controlling interests     69       (94 )     (47 )     (223 )
Comprehensive income (loss) attributable to Vale's stockholders     2,138       2,692       15,380       (3,253 )

 

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.  

 

  5  

 

 

Consolidated Statement of Cash Flows

In millions of United States dollars

 

    Three-month period ended September 30,     Nine-month period ended September 30,  
    2021     2020     2021     2020  
Cash flow from operations (a)     10,194       5,567       28,144       9,683  
Interest on loans and borrowings paid (note 19)     (173 )     (203 )     (599 )     (615 )
Cash received (paid) on settlement of derivatives, net (note 16)     22       (130 )     (117 )     29  
Interest on participative stockholders' debentures paid (note 18)     -       -       (193 )     (95 )
Income taxes (including the settlement program)     (992 )     (450 )     (3,436 )     (1,197 )
Net cash provided by operating activities     9,051       4,784       23,799       7,805  
                                 
Cash flow from investing activities:                                
Capital expenditures (notes 14 and 15)     (1,248 )     (872 )     (3,396 )     (2,963 )
Additions to investments (note 13)     -       -       (42 )     (75 )
Acquisition of NLC, net of cash (note 12)     -       -       (2,345 )     -  
Disbursement related to the disposal of VNC (note 12)     -       -       (555 )     -  
Dividends received from associates and joint ventures (note 13)     5       2       48       79  
Short-term investment     424       -       251       630  
Investment fund applications     -       (31 )     -       (127 )
Other investments activities, net     18       (106 )     (195 )     (292 )
Net cash used in investing activities     (801 )     (1,007 )     (6,234 )     (2,748 )
                                 
Cash flow from financing activities:                                
Loans and borrowings from third-parties (note 19)     -       1,800       300       6,800  
Payments of loans and borrowings from third-parties (note 19)     (111 )     (5,265 )     (1,523 )     (5,756 )
Lease payments (note 19)     (58 )     (45 )     (162 )     (144 )
Dividends and interest on capital paid to stockholders (note 25)     (7,391 )     (3,327 )     (13,483 )     (3,327 )
Dividends and interest on capital paid to non-controlling interest     (3 )     (3 )     (9 )     (11 )
Share buyback program (note 25)     (2,841 )     -       (4,845 )     -  
Net cash used in financing activities     (10,404 )     (6,840 )     (19,722 )     (2,438 )
                                 
Increase (decrease) in cash and cash equivalents     (2,154 )     (3,063 )     (2,157 )     2,619  
Cash and cash equivalents at the beginning of the period     13,649       12,113       13,487       7,350  
Effects of exchange rate changes on cash and cash equivalents     (638 )     (205 )     (473 )     (1,124 )
Cash and cash equivalents at end of the period     10,857       8,845       10,857       8,845  
                                 
Non-cash transactions:                                
Additions to property, plant and equipment - capitalized loans and borrowing costs     14       13       44       57  
                                 
Cash flow from operating activities:                                
Income before income taxes     3,598       3,601       20,495       4,177  
Adjusted for:                                
Provisions related to Brumadinho event (note 20)     -       -       -       21  
Equity results and other results in associates and joint ventures (note 13)     (128 )     40       342       741  
Impairment and disposal of non-current assets     2,390       298       2,983       730  
Depreciation, depletion and amortization     700       774       2,280       2,396  
Financial results, net (note 6)     373       1,360       100       4,130  
Changes in assets and liabilities:                                
Accounts receivable     3,889       (276 )     4,185       (577 )
Inventories     (574 )     (298 )     (936 )     (650 )
Suppliers and contractors (i)     338       214       373       (352 )
Provision - Payroll, related charges and other remunerations     60       177       (147 )     84  
Payments related to Brumadinho event (note 20) (ii)     (186 )     (218 )     (638 )     (589 )
Other assets and liabilities, net     (266 )     (105 )     (893 )     (428 )
Cash flow from operations (a)     10,194       5,567       28,144       9,683  

 

(i) Includes variable lease payments.

(ii) In addition, the Company has incurred in expenses in the amount of US$161 and US$461 for the three and nine-month periods ended September 30, 2021, respectively (US$114 and US$382 for the three and nine-month periods ended September 30, 2020).

 

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

 

  6  

 

 

 

Consolidated Statement of Financial Position

In millions of United States dollars

 

    Notes   September 30, 2021     December 31, 2020  
Assets                    
Current assets                    
Cash and cash equivalents   19     10,857       13,487  
Short-term investments   19     521       771  
Accounts receivable   9     873       4,993  
Other financial assets   11     1,366       329  
Inventories   10     5,085       4,061  
Recoverable taxes         824       509  
Others         405       253  
          19,931       24,403  
                     
Non-current assets held for sale   12     60       -  
          19,991       24,403  
Non-current assets                    
Judicial deposits   23(c)     1,221       1,268  
Other financial assets   11     162       1,784  
Recoverable taxes         1,322       1,091  
Deferred income taxes   7(a)     11,402       10,335  
Others         683       651  
          14,790       15,129  
                     
Investments in associates and joint ventures   13     2,099       2,031  
Intangible   14     8,913       9,296  
Property, plant and equipment   15     41,087       41,148  
          66,889       67,604  
Total assets         86,880       92,007  
                     
Liabilities                    
Current liabilities                    
Suppliers and contractors         4,096       3,367  
Loans, borrowings and leases   19     1,345       1,136  
Other financial liabilities   11     1,557       1,906  
Taxes payable         2,594       952  
Settlement program ("REFIS")   7(c)     330       340  
Liabilities related to associates and joint ventures   21     1,551       876  
Provisions   22     1,176       1,865  
Liabilities related to Brumadinho   20     2,336       1,910  
De-characterization of dams   20     435       381  
Dividends payable         35       1,220  
Others         606       641  
          16,061       14,594  
Liabilities associated with non-current assets held for sale   12     13       -  
          16,074       14,594  
Non-current liabilities                    
Loans, borrowings and leases   19     12,240       13,891  
Participative stockholders' debentures   18     4,128       3,413  
Other financial liabilities   11     2,825       4,564  
Settlement program ("REFIS")   7(c)     2,080       2,404  
Deferred income taxes   7(a)     1,928       1,770  
Provisions   22     7,274       8,434  
Liabilities related to Brumadinho   20     2,020       2,665  
De-characterization of dams   20     1,422       1,908  
Liabilities related to associates and joint ventures   21     714       1,198  
Streaming transactions         1,936       2,005  
Others         150       340  
          36,717       42,592  
Total liabilities         52,791       57,186  
                     
Stockholders' equity   25                
Equity attributable to Vale's stockholders         33,322       35,744  
Equity attributable to non-controlling interests         767       (923 )
Total stockholders' equity         34,089       34,821  
Total liabilities and stockholders' equity         86,880       92,007  

 

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

 

  7  

 

 

Consolidated Statement of Changes in Equity

In millions of United States dollars

 

 

 

  Share capital   Capital reserve   Profit
reserves
  Treasury
shares
  Other
reserves
  Cumulative translation
adjustments
  Retained
earnings
  Equity
attributable to
Vale’s
stockholders
  Equity
attributable to
non-controlling
interests
  Total
stockholders'
equity
 
Balance at December 31, 2020   61,614     1,139     7,042     (2,441 )   (2,056 )   (29,554 )   -     35,744     (923 )   34,821  
Net income (loss)   -     -     -     -     -     -     17,018     17,018     (46 )   16,972  
Other comprehensive income   -     -     (211 )   -     760     (2,187 )   -     (1,638 )   (1 )   (1,639 )
Dividends and interest on capital of Vale's stockholders (note 25)   -     -     (4,319 )   -     -     -     (8,368 )   (12,687 )   -     (12,687 )
Dividends of non-controlling interest   -     -     -     -     -     -     -     -     (24 )   (24 )
Acquisition and disposal of non-controlling interest (note 12)   -     -     -     -     (331 )   -     -     (331 )   1,761     1,430  
Share buyback program (note 25)   -     -     -     (4,845 )   -     -     -     (4,845 )   -     (4,845 )
Share-based payment (note 24)   -     -     -     -     54     -     -     54     -     54  
Treasury shares utilized in the period (note 25)   -     -     -     7     -     -     -     7     -     7  
Treasury shares cancellation (note 25)   -     -     -     2,401     -     -     (2,401 )   -     -     -  
Balance at September 30, 2021   61,614     1,139     2,512     (4,878 )   (1,573 )   (31,741 )   6,249     33,322     767     34,089  

 

  Share capital   Capital reserve   Profit
reserves
  Treasury
shares
  Other
reserves
  Cumulative translation
adjustments
  Retained
earnings
  Equity
attributable to
Vale’s
stockholders
  Equity
attributable to
non-controlling
interests
  Total
stockholders'
equity
 
Balance at December 31, 2019   61,614     1,139     7,090     (2,455 )   (2,110 )   (25,211 )   -     40,067     (1,074 )   38,993  
Net income (loss)   -     -     -     -     -     -     4,142     4,142     (255 )   3,887  
Other comprehensive income   -     -     (1,884 )   -     146     (5,657 )   -     (7,395 )   32     (7,363 )
Dividends and interest on capital of Vale's stockholders   -     -     (2,329 )   -     -     -     -     (2,329 )   -     (2,329 )
Dividends of non-controlling interest   -     -     -     -     -     -     -     -     (7 )   (7 )
Capitalization of non-controlling interest advances   -     -     -     -     -     -     -     -     14     14  
Treasury shares utilized in the period (note 25)   -     -     -     14     -     -     -     14     -     14  
Balance at September 30, 2020   61,614     1,139     2,877     (2,441 )   (1,964 )   (30,868 )   4,142     34,499     (1,290 )   33,209  

 

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

 

  8  

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of United States dollar, unless otherwise stated

 

1. Corporate information

 

Vale S.A. and its subsidiaries (“Vale” or the “Company”) are iron ore and iron ore pellets producers, which are key raw materials for steelmaking, and nickel producers, which is used to produce stainless steel and metal alloys employed in the production process of several products. The Company also produces copper, coking and thermal coal, manganese ore, 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 consolidated interim financial statements of the Company (“interim financial statements”) have been prepared and are being presented in accordance with IAS 34 Interim Financial Reporting of the International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

 

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, 2020. 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, except for the change in the accounting practice for the share-based payment plans as disclosed in note 24.

 

The interim financial statements of the Company are measured using the currency of the primary economic environment in which the entity operates (“functional currency”), which in the case of the Parent Company is the Brazilian real (“R$”). For presentation purposes, these interim financial statements are presented in United States dollar (“US$”) as the Company believes this is how international investors analyze the interim financial statements.

 

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

 

          Average rate  
  Closing rate   Three-month period ended   Nine-month period ended  
  September 30,
2021
  December 31, 2020   September 30,
2021
  September 30, 2020   September 30,
2021
  September 30, 2020  
United States dollar   5.4394     5.1967     5.2286     5.3772     5.3317     5.0793  
Canadian dollar ("CAD")   4.2931     4.0771     4.1517     4.0366     4.2624     3.7505  
Euro ("EUR")   6.2983     6.3779     6.1623     6.2876     6.3769     5.7207  

 

These interim financial statements were authorized for issue by the Executive Committee on October 28, 2021.

 

3. Significant events in the current period

 

The financial position, cash flows and performance of the Company were particularly affected by the following events and transactions during the three-month period ended September 30, 2021:

 

Since the announcement of the Company’s divestiture intention in the coal segment, it started looking for a potential buyer to purchase the coal assets. Due to the negotiations carried out during the current quarter, the Company decided to impair those assets in full, resulting in a loss of US$2,304 recognized in the income statement as "Impairment and disposal of non-current assets” for the three-month period ended September 30, 2021 (note 12).

 

In September 2021, the Company approved and paid dividends of US$7,391 (R$40,200 million) to its shareholders (note 25).

 

  9  

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of United States dollar, unless otherwise stated

 

In August 2021, production and maintenance employees of Sudbury, Canada, represented by United Steelworkers (“USW”) approved the new five-year collective bargaining agreement, that was previously rejected in June 2021 and led to the stoppage of the operation at that location. The agreement became effective immediately after its approval and the strike came to an end. Due to the stoppage, the Company recorded expenses of US$51 recognized as "Pre-operating and operational stoppage" for the three-month period ended September 30, 2021 (US$110 for the nine-month period ended September 30, 2021).

 

In October 2021 (subsequent event), the Company approved the prepayment of the concession grant related to the Estrada de Ferro Carajás (“EFC”) and Estrada de Ferro Vitória Minas (“EFVM”) in the amount of US$344 (R$1,871 million) (note 11).

 

In October 2021 (subsequent event), the Superior Court of Justice issued a decision to exclude the Risoleta Neves hydroelectric plant out of the Energy Reallocation Mechanism. Therefore, the Company would be requested by the National Electric Energy Agency (“ANEEL”) and the Chamber of Electric Energy Commercialization (“CCEE”) to pay approximately US$72 (R$392 million), for which the Company has a provision as at September 30, 2021 (note 22).

 

In October 2021 (subsequent event), the Company approved a new share buyback program for its common shares, limited to a maximum of 200,000,000 common shares and their respective ADRs due to the upcoming conclusion of the current program in place as the cap number approved is close to being reached (note 25).

 

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 ("chief operating decision maker" under IFRS 8 - Operating Segments) are the Executive Boards and the Board of Directors. Accordingly, the performance of the operating segments is assessed based on a measure of adjusted EBITDA.

 

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. Additionally, the costs related to the Brumadinho event are not directly linked to the Company's operating activities and, therefore, are allocated to "Other" as well.

 

The Company has allocated the financial information of Vale Nouvelle-Calédonie SAS (“VNC”) operation to “Others” as this operation is no longer analyzed by the chief operating decision maker as part of to the performance of the Base Metals business segment due to the sale of this operation. The comparative periods were restated to reflect this change in the allocation criteria.

 

a) Adjusted EBITDA

 

The definition of Adjusted 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.

 

  10  

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of United States dollar, unless otherwise stated

 

    Three-month period ended September 30, 2021  
    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
EBITDA
 
Ferrous minerals                                                        
Iron ore     8,530       (3,064 )     (32 )     (53 )     (61 )     -       5,320  
Iron ore pellets     2,009       (612 )     (2 )     (1 )     (10 )     -       1,384  
Ferroalloys and manganese     45       (33 )     1       (1 )     (4 )     -       8  
Other ferrous products and services     94       (76 )     -       -       -       -       18  
      10,678       (3,785 )     (33 )     (55 )     (75 )     -       6,730  
                                                         
Base metals                                                        
Nickel and other products     896       (782 )     57       (20 )     (52 )     -       99  
Copper     678       (242 )     (6 )     (23 )     (1 )     -       406  
      1,574       (1,024 )     51       (43 )     (53 )     -       505  
                                                         
Coal     352       (314 )     (5 )     (1 )     -       -       32  
                                                         
Others     78       (60 )     (143 )     (37 )     (1 )     5       (158 )
      12,682       (5,183 )     (130 )     (136 )     (129 )     5       7,109  
                                                         
Brumadinho event     -       -       (161 )     -       -       -       (161 )
COVID-19     -       -       (10 )     -       -       -       (10 )
Total     12,682       (5,183 )     (301 )     (136 )     (129 )     5       6,938  
                                                         
    Three-month period ended September 30, 2020  
    Net operating
revenue
    Cost of goods
sold and services
rendered
    Sales,
administrative
and other
operating
expenses
    Research and
evaluation
    Pre operating
and operational
stoppage
    Dividends
received and
interest from
associates and
joint ventures
    Adjusted
EBITDA
 
Ferrous minerals                                                        
Iron ore     7,357       (2,064 )     (51 )     (31 )     (121 )     -       5,090  
Iron ore pellets     1,195       (431 )     2       (1 )     (17 )     -       748  
Ferroalloys and manganese     51       (44 )     (4 )     -       (8 )     -       (5 )
Other ferrous products and services     81       (60 )     -       -       -       2       23  
      8,684       (2,599 )     (53 )     (32 )     (146 )     2       5,856  
                                                         
Base metals                                                        
Nickel and other products     1,219       (776 )     (23 )     (8 )     -       -       412  
Copper     587       (190 )     (2 )     (15 )     -       -       380  
      1,806       (966 )     (25 )     (23 )     -       -       792  
                                                         
Coal     103       (321 )     (5 )     (10 )     -       20       (213 )
                                                         
Others (i)     169       (204 )     (133 )     (40 )     (3 )     -       (211 )
      10,762       (4,090 )     (216 )     (105 )     (149 )     22       6,224  
                                                         
Brumadinho event     -       -       (114 )     -       -       -       (114 )
COVID-19     -       -       (15 )     -       -       -       (15 )
Total     10,762       (4,090 )     (345 )     (105 )     (149 )     22       6,095  

 

(i) Includes the reclassification of the negative EBITDA of VNC in the amount of US$22.

 

  11  

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of United States dollar, unless otherwise stated

 

    Nine-month period ended September 30, 2021  
    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
EBITDA
 
Ferrous minerals                                                        
Iron ore     29,884       (7,967 )     (115 )     (129 )     (227 )     -       21,446  
Iron ore pellets     5,164       (1,515 )     29       (2 )     (36 )     22       3,662  
Ferroalloys and manganese     143       (95 )     (1 )     (1 )     (12 )     -       34  
Other ferrous products and services     289       (213 )     3       (1 )     -       -       78  
      35,480       (9,790 )     (84 )     (133 )     (275 )     22       25,220  
                                                         
Base metals                                                        
Nickel and other products     3,822       (2,512 )     22       (49 )     (112 )     -       1,171  
Copper     1,920       (637 )     (7 )     (62 )     (3 )     -       1,211  
      5,742       (3,149 )     15       (111 )     (115 )     -       2,382  
                                                         
Coal     605       (966 )     (3 )     (5 )     -       78       (291 )
                                                         
Others (i)     175       (222 )     (345 )     (128 )     (2 )     26       (496 )
      42,002       (14,127 )     (417 )     (377 )     (392 )     126       26,815  
                                                         
Brumadinho event     -       -       (461 )     -       -       -       (461 )
COVID-19     -       -       (28 )     -       -       -       (28 )
Total     42,002       (14,127 )     (906 )     (377 )     (392 )     126       26,326  
                                                         
(i) Includes the negative EBITDA of VNC in the amount of US$65.  
                                                         
    Nine-month period ended September 30, 2020  
    Net operating
revenue
    Cost of goods
sold and services
rendered
    Sales,
administrative
and other
operating
expenses
    Research and
evaluation
    Pre operating
and operational
stoppage
    Dividends
received and
interest from
associates and
joint ventures
    Adjusted
EBITDA
 
Ferrous minerals                                                        
Iron ore     16,520       (5,486 )     (135 )     (79 )     (412 )     -       10,408  
Iron ore pellets     2,947       (1,220 )     14       (3 )     (59 )     53       1,732  
Ferroalloys and manganese     165       (135 )     (4 )     (1 )     (19 )     -       6  
Other ferrous products and services     243       (187 )     2       (1 )     -       2       59  
      19,875       (7,028 )     (123 )     (84 )     (490 )     55       12,205  
                                                         
Base metals                                                        
Nickel and other products     3,066       (1,850 )     (58 )     (30 )     (29 )     -       1,099  
Copper     1,493       (582 )     (4 )     (47 )     -       -       860  
      4,559       (2,432 )     (62 )     (77 )     (29 )     -       1,959  
                                                         
Coal     345       (1,056 )     -       (24 )     -       95       (640 )
                                                         
Others (i)     470       (601 )     (453 )     (105 )     (8 )     24       (673 )
      25,249       (11,117 )     (638 )     (290 )     (527 )     174       12,851  
                                                         
Brumadinho event     -       -       (403 )     -       -       -       (403 )
COVID-19     -       -       (100 )     -       -       -       (100 )
Total     25,249       (11,117 )     (1,141 )     (290 )     (527 )     174       12,348  

 

(i) Includes the reclassification of the negative EBITDA of VNC in the amount of US$116.

 

  12  

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of United States dollar, unless otherwise stated

 

Adjusted EBITDA is reconciled to net income as follows:

 

    Three-month period ended September 30,     Nine-month period ended September 30,  
    2021     2020     2021     2020  
Net income attributable to Vale's stockholders     3,886       2,908       17,018       4,142  
Net income (loss) attributable to non-controlling interests     72       (101 )     (46 )     (255 )
Net income     3,958       2,807       16,972       3,887  
Depreciation, depletion and amortization     700       774       2,280       2,396  
Income taxes     (360 )     794       3,523       290  
Financial results     373       1,360       100       4,130  
EBITDA     4,671       5,735       22,875       10,703  
                                 
Items to reconciled adjusted EBITDA                                
Equity results and other results in associates and joint ventures     (128 )     40       342       741  
Dividends received and interest from associates and joint ventures (i)     5       22       126       174  
Impairment and disposal of non-current assets     2,390       298       2,983       730  
Adjusted EBITDA     6,938       6,095       26,326       12,348  

 

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

 

b) Assets by segment

 

    September 30, 2021     December 31, 2020  
    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     2,811       1,206       28,684       2,017       1,154       29,436  
Base metals     1,288       17       19,696       1,231       18       19,549  
Coal (note 12)     85       -       -       25       -       -  
Others     -       876       1,620       -       859       1,459  
Total     4,184       2,099       50,000       3,273       2,031       50,444  
                                                 
    Three-month period ended September 30,  
    2021     2020  
    Capital expenditures (ii)           Capital expenditures (ii)        
    Sustaining
capital
    Project
execution
    Depreciation,
depletion and
amortization
    Sustaining
capital
    Project
execution
    Depreciation,
depletion and
amortization
 
Ferrous minerals     588       136       412       402       37       403  
Base metals     325       113       227       308       70       349  
Coal (note 12)     49       -       51       27       -       -  
Others (iii)     1       36       10       27       1       22  
Total     963       285       700       764       108       774  
                                                 
    Nine-month period ended September 30,  
    2021     2020  
    Capital expenditures (ii)           Capital expenditures (ii)        
    Sustaining
capital
    Project
execution
    Depreciation,
depletion and
amortization
    Sustaining
capital
    Project
execution
    Depreciation,
depletion and
amortization
 
Ferrous minerals     1,649       331       1,264       1,420       187       1,303  
Base metals     973       250       911       903       185       1,000  
Coal (note 12)     114       -       68       138       -       19  
Others (iii)     13       66       37       125       5       74  
Total     2,749       647       2,280       2,586       377       2,396  

 

(i) Goodwill is allocated to ferrous minerals and base metals segments in the amount of US$1,311 and US$1,936 in September 30, 2021 and US$1,373 and US$1,926 in December 31, 2020, respectively.

(ii) Cash outflows.

(iii) Includes the reclassification of VNC under the captions “Sustaining capital” and “depreciation, depletion and amortization”, in the amount of US$27 and US$9, respectively, for the three-month period ended on September 30, 2020 and in the amount of US$122 and US$35, respectively, for the nine-month period ended on September 30, 2020.

 

  13  

 

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of United States dollar, unless otherwise stated
 

 

c)   Net operating revenue by geographic area

 

    Three-month period ended September 30, 2021  
    Ferrous
minerals
    Base metals     Coal     Others     Total  
Americas, except USA and Brazil     228       80       -       -       308  
United States of America     71       274       -       -       345  
Germany     176       174       -       -       350  
Europe, except Germany     546       430       22       -       998  
Middle East, Africa and Oceania     553       5       37       -       595  
Japan     1,293       143       15       -       1,451  
China     5,361       241       71       -       5,673  
Asia, except Japan and China     953       220       209       -       1,382  
Brazil     1,497       7       (2 )     78       1,580  
Net operating revenue     10,678       1,574       352       78       12,682  

 

    Three-month period ended September 30, 2020  
    Ferrous
minerals
    Base metals     Coal     Others (i)     Total  
Americas, except USA and Brazil     113       37       -       98       248  
United States of America     102       176       -       -       278  
Germany     43       300       -       -       343  
Europe, except Germany     272       676       11       -       959  
Middle East, Africa and Oceania     401       3       13       -       417  
Japan     465       93       -       -       558  
China     6,136       280       -       -       6,416  
Asia, except Japan and China     544       210       72       -       826  
Brazil     608       31       7       71       717  
Net operating revenue     8,684       1,806       103       169       10,762  

 

(i) Includes the reclassification of VNC in the amount of US$98.

 

    Nine-month period ended September 30, 2021  
    Ferrous
minerals
    Base metals     Coal     Others (i)     Total  
Americas, except USA and Brazil     695       304       -       4       1,003  
United States of America     330       847       -       -       1,177  
Germany     499       1,103       -       -       1,602  
Europe, except Germany     2,125       1,717       45       -       3,887  
Middle East, Africa and Oceania     1,496       12       76       -       1,584  
Japan     2,763       358       35       -       3,156  
China     20,819       665       131       -       21,615  
Asia, except Japan and China     2,722       693       318       -       3,733  
Brazil     4,031       43       -       171       4,245  
Net operating revenue     35,480       5,742       605       175       42,002  

 

(i) Includes the revenue of VNC in the amount of US$4.

 

    Nine-month period ended September 30, 2020  
    Ferrous
minerals
    Base metals     Coal     Others (i)     Total  
Americas, except USA and Brazil     227       136       -       243       606  
United States of America     175       569       -       -       744  
Germany     292       778       -       -       1,070  
Europe, except Germany     781       1,481       92       -       2,354  
Middle East, Africa and Oceania     923       16       62       -       1,001  
Japan     1,130       295       13       -       1,438  
China     13,354       562       16       -       13,932  
Asia, except Japan and China     1,372       611       151       -       2,134  
Brazil     1,621       111       11       227       1,970  
Net operating revenue     19,875       4,559       345       470       25,249  

 

(i) Includes the reclassification of VNC in the amount of US$243.

 

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 (note 16). The selling price of these products can be measured reliably at each period, since the price is quoted in an active market.

 

  14  

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of United States dollar, unless otherwise stated
 

 

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

 

    September 30, 2021  
    Thousand metric tons     Provisional price
(US$/tonne)
    Change     Effect on Revenue  
Iron ore     21,772       100.2       +/-10 %     218  
Iron ore pellets     407       167.2       +/-10 %     7  
Copper     104       10,981.8       +/-10 %     114  

 

5.        Costs and expenses by nature

 

a)  Cost of goods sold and services rendered

 

    Three-month period ended September 30,     Nine-month period ended September 30,  
    2021     2020     2021     2020  
Personnel     393       413       1,227       1,188  
Materials and services     805       809       2,326       2,362  
Fuel oil and gas     287       217       762       702  
Maintenance     810       689       2,259       1,975  
Royalties     399       212       1,003       544  
Energy     173       176       491       512  
Ores acquired from third parties (i)     634       279       1,668       540  
Depreciation, depletion and amortization     653       726       2,141       2,189  
Freight (ii)     1,176       932       2,949       2,319  
Others     506       363       1,442       975  
Total     5,836       4,816       16,268       13,306  
                                 
Cost of goods sold     5,676       4,677       15,832       12,880  
Cost of services rendered     160       139       436       426  
Total     5,836       4,816       16,268       13,306  

 

(i) The increase in “Ores acquired from third parties” is mainly due to the significant increase in the reference price of iron ore compared to 2020.

(ii) The increase in "Freight" is mainly due to the significant increase in volumes of CFR sales and higher international freight prices.

 

Tax on mineral production (Taxa de Fiscalização de Recursos Minerais - “TFRM”) Several Brazilian states, including Minas Gerais, Pará and Mato Grosso do Sul, charge a TFRM, which is currently assessed at rates ranging from R$0.50 to R$3.72 per metric ton of minerals produced in or transferred from the state. The expenses related to the TFRM are presented in these interim financial statements under “Royalties”. In March 2021, a state decree increased the TFRM rate in the state of Para to R$11.19 per metric ton, effective in April 2021. According to the prior rule, which would expire in 2031, the TFRM rate was R$3.72 per ton until the production of 10 million metric tons and R$0.74 for volumes over than 10 million metric tons. The Company did not apply this increase in the current period based on the Brazilian constitutional principle of mandatory notice period, which sets out the tax increase would become in force only in the subsequent year of its enactment and does not expect any impact for the year ending December 31, 2021. The Company is also evaluating other legal aspects to avoid this increase in the future.

 

b)  Selling and administrative expenses

 

    Three-month period ended September 30,     Nine-month period ended September 30,  
    2021     2020     2021     2020  
Selling     25       21       68       58  
Personnel     29       50       128       137  
Services     29       28       68       79  
Depreciation and amortization     11       9       30       40  
Others     21       19       59       52  
Total     115       127       353       366  

 

c)  Other operating expenses (income), net

 

    Three-month period ended September 30,     Nine-month period ended September 30,  
    2021     2020     2021     2020  
Provision for litigations     23       11       67       74  
Profit sharing program     31       34       106       79  
COVID-19 expenses     10       15       28       100  
Others (i)     (28 )     53       (79 )     159  
Total     36       113       122       412  

 

(i) Includes the gain related to the exclusion of ICMS from the PIS and COFINS computation tax base, as detailed in note 23(e). 

  

  15  

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of United States dollar, unless otherwise stated
 

 

6.        Financial result

 

    Three-month period ended September 30,     Nine-month period ended September 30,  
    2021     2020     2021     2020  
Financial income                                
Short-term investments     70       25       138       105  
Others (i)     21       44       113       206  
      91       69       251       311  
Financial expenses                                
Loans and borrowings gross interest (note 19)     (157 )     (208 )     (540 )     (615 )
Capitalized loans and borrowing costs     14       13       44       57  
Participative stockholders' debentures (note 18)     152       (553 )     (1,109 )     (833 )
Interest on REFIS     (17 )     (10 )     (34 )     (47 )
Interest on lease liabilities (note 19)     (16 )     (16 )     (51 )     (51 )
Financial guarantees (ii)     (34 )     (353 )     330       (525 )
Expenses with cash tender offer redemption (note 19)     -       -       (63 )     -  
Others     (78 )     (88 )     (276 )     (311 )
      (136 )     (1,215 )     (1,699 )     (2,325 )
Other financial items, net                                
Net foreign exchange gains (losses)     362       (18 )     292       (375 )
Derivative financial instruments (note 16)     (458 )     (187 )     (41 )     (1,657 )
Reclassification of cumulative translation adjustment (note 12)     10       -       1,142       -  
Indexation gains (losses), net     (242 )     (9 )     (45 )     (84 )
      (328 )     (214 )     1,348       (2,116 )
Total     (373 )     (1,360 )     (100 )     (4,130 )

 

(i) During nine-month period ended on September 30, 2020, includes amounts related to Eletrobras contingent assets in the amount of US$59, due to differences of monetary adjustments and interests due over to the third convertible bonds.
(ii) Refers to the fair value adjustments on financial guarantees given to associates due to their rating improvement, leading to a decrease in the probability of default on the guaranteed loans. Further details are disclosed in note 13 and 17.

 


7.        Income taxes

 

a)  Deferred income tax assets and liabilities

 

    Assets     Liabilities     Deferred taxes, net  
Balance at December 31, 2020     10,335       1,770       8,565  
Effect in income statement     1,633       (24 )     1,657  
Transfers between asset and liabilities     7       7       -  
Translation adjustment     (452 )     (4 )     (448 )
Other comprehensive income     (121 )     179       (300 )
Balance at September 30, 2021     11,402       1,928       9,474  

 

      Assets       Liabilities       Deferred taxes, net  
Balance at December 31, 2019     9,217       1,882       7,335  
Effect in income statement     1,049       (77 )     1,126  
Translation adjustment     (2,552 )     (105 )     (2,447 )
Other comprehensive income     1,896       (65 )     1,961  
Balance at September 30, 2020     9,610       1,635       7,975  

 

b)  Income tax reconciliation – Income statement

 

Income tax expense is recognized based on the estimate of the weighted average effective tax rate expected for the full year, 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.

 

  16  

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of United States dollar, unless otherwise stated
 

 

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

 

    Three-month period ended September 30,     Nine-month period ended September 30,  
    2021     2020     2021     2020  
Income before income taxes     3,598       3,601       20,495       4,177  
Income taxes at statutory rate - 34%     (1,223 )     (1,224 )     (6,968 )     (1,420 )
Adjustments that affect the basis of taxes:                                
Tax incentives     971       491       2,589       980  
Equity results     68       (2 )     94       (25 )
Addition (reversal) of tax loss carryforward     109       103       -       497  
Others     435       (162 )     762       (322 )
Income taxes     360       (794 )     (3,523 )     (290 )

 

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

 

    September 30, 2021     December 31, 2020  
Current liabilities     330       340  
Non-current liabilities     2,080       2,404  
REFIS liabilities     2,410       2,744  
                 
SELIC rate     6.25% per year       2.00% per year  

 

The balance mainly relates to the settlement program of the claims related to the collection of income tax and social contribution on equity gains of foreign subsidiaries and affiliates from 2003 to 2012. As at September 30, 2021, the balance is due in 85 remaining monthly installments, bearing the SELIC interest rate (Special System for Settlement and Custody), which is the Brazilian federal funds rate.

 

d) Uncertain tax positions

 

In September 2021, in the judgement of the leading case (RE 1.063.187), the Brazilian Federal Supreme Court (“STF”) ruled that is unconstitutional to include the gain related to the monetary adjustments, calculated based on the SELIC (Special System for Settlement and Custody), over certain tax credits on the computation of the Corporate Income Tax ("IRPJ") and Social Contribution on Net Income ("CSLL"). Despite the favorable conclusion to taxpayers, the decision is not yet final, as the publication of the decision is pending and may be appealed.

 

Vale filed a lawsuit to discuss the matter and is awaiting for the publication of the STF decision to assess the potential effects on the eventual gain involved, which is estimated at US$35 (R$190 million). Considering that the decision is not even published, the Company's external legal advisors consider a gain is not yet probable. Therefore, the Company did not record any gain in these interim financial statements.

 

8.        Basic and diluted earnings per share

 

The basic and diluted earnings per share are presented below:

 

    Three-month period ended September 30,     Nine-month period ended September 30,  
    2021     2020     2021     2020  
Net income attributable to Vale's stockholders:                                
Net income     3,886       2,908       17,018       4,142  
                                 
Thousands of shares                                
Weighted average number of common shares outstanding     5,080,890       5,129,911       5,065,750       5,129,475  
                                 
Basic and diluted earnings per share:                                
Common share (US$)     0.76       0.57       3.36       0.81  

 

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

 

  17  

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of United States dollar, unless otherwise stated
 

  

9.        Accounts receivable

 

    September 30, 2021     December 31, 2020  
Accounts receivable     920       5,043  
Expected credit loss     (47 )     (50 )
      873       4,993  
                 
Revenue related to the steel sector     89.66 %     87.25 %

 

    Three-month period ended September 30,     Nine-month period ended September 30,  
    2021     2020     2021     2020  
Impairment of accounts receivable recorded in the income statement     1       1       4       10  

 

The decrease in the accounts receivable is mainly due to the reduction in average prices and volumes of provisional sales of iron ore.

 

As at September 30, 2021, there is no customer that individually represents more than 10% of the Company’s accounts receivable or revenues. In 2020, the Company had a customer of the Ferrous Minerals Segment whose revenue individually represented 10.1% of the Company’s total revenue.

 

10.      Inventories

 

    September 30, 2021     December 31, 2020  
Finished products     3,391       2,626  
Work in progress     793       647  
Consumable inventory     901       788  
Total     5,085       4,061  

 

    Three-month period ended September 30,     Nine-month period ended September 30,  
    2021     2020     2021     2020  
Reversal for net realizable value     28       42       29       3  

 

Finished and work in progress products inventories by segments are presented in note 4(b) and the cost of goods sold is presented in note 5(a).

 

11.     Other financial assets and liabilities

 

    Current     Non-Current  
    September 30, 2021     December 31, 2020     September 30, 2021     December 31, 2020  
Other financial assets                                
Restricted cash     -       -       121       38  
Derivative financial instruments (note 16)     145       134       35       66  
Investments in equity securities     1,221       -       6       757  
Related parties (i)     -       195       -       923  
      1,366       329       162       1,784  
Other financial liabilities                                
Derivative financial instruments (note 16)     334       328       630       689  
Related parties (i)     132       725       -       895  
Financial guarantees provided (note 13 and 17)     -       -       538       877  
Liabilities related to the concession grant (note 14)     392       209       1,657       2,103  
Advances received     699       644       -       -  
      1,557       1,906       2,825       4,564  

 

(i) The decrease refers to the settlement of the loans due to the transaction for the acquisition of NLC, as detailed in note 12.

 

Investment in equity securities – Mainly refers to 34.2 million common shares of The Mosaic Company (“Mosaic”), which is accounted for as a financial instrument measured at fair value through other comprehensive income. The fair value of this instrument is measured using the Mosaic’s share price at the end of each financial reporting period. In addition, the Company holds an investment of US$6 made in February 2021 to acquire a non-controlling interest of 3.24% in Boston Electrometallurgical Company, aiming to promote the development of a technology focused on the reduction of carbon dioxide on the steel production.

 

  18  

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of United States dollar, unless otherwise stated
 

  

Liabilities related to the concession grant - On October 28, 2021 (subsequent event), the Board of Directors approved the prepayment in the amount of US$344 (R$1,871 million) of the concessions grant. With the prepayment, the liability will be remeasured and the outstanding balance is estimated to be US$179 (R$973 million).

 

12.      Acquisitions and divestitures

 

a)   Business Combinations

 

The Company has coking and thermal coal mining and processing operations in Mozambique. Vale Moçambique S.A. (“Vale Moçambique”) is a company controlled by Vale, with a non-controlling interest held by Mitsui & Co. Ltd. (“Mitsui”) until the acquisition completed on June 22, 2021, as detailed below in (a.i). Coal products are transported from the Moatize mine to the maritime terminal by the Nacala Logistics Corridor (“NLC”), which were a joint venture between Vale and Mitsui. The NLC’s main assets are the railways and port concessions located in Mozambique and Malawi.

 

(a.i) Acquisition of non-controlling interest in Vale Moçambique

 

On June 22, 2021 the Company acquired the 15% interest held by Mitsui in Vale Moçambique for an immaterial consideration, which resulted in a loss of US$331 (R$1,666 million) due to the negative reserves of Vale Moçambique at the conclusion of the transaction. This transaction with non-controlling interests was recognized in the Stockholders’ Equity for the period ended June 30, 2021 as “Acquisition and disposal of non-controlling interest”. After the acquisition of the interests previously held by Mitsui, the Company holds 95% of the share capital of Vale Moçambique and the remaining interest is held by the government of Mozambique.

 

(a.ii) Business combinations – NLC

 

Also on June 22, 2021, the acquisition was concluded with the settlement of NLC’s loans with third parties (“Project Finance”) in the amount of US$2,517, satisfying all conditions to acquire the additional 50% held by Mitsui. Therefore, the Company started consolidating the NLC’s assets and liabilities on its balance sheet.

 

In addition, the Company has updated the discounted cash flow model to assess the fair value of the acquired business, resulting in a loss of US$771 (US$798 as at December 31, 2020) on the fair value of the loans receivable from NLC, mainly due to the decrease in the long-term price assumption for both coking and thermal coal as well as the reduction in the expected production to reflect the operational challenges to reach the ramp-up of the coal business, after the revamp of the processing plants. The cash flows were discounted at a rate of 11.6%, and the loss was recognized as “Impairment and disposals of non-current assets” for the period ended June 30, 2021.

 

The fair values of identifiable assets acquired and liabilities assumed as a result of the NLC’s acquisition were as follows:

 

    June 22, 2021  
Acquired assets        
Cash and cash equivalents     172  
Inventory, recoverable tax and other assets     423  
Intangible     2,219  
Property, plant and equipment     1,363  
Assumed liabilities     (158 )
Net identifiable assets acquired     4,019  
Fair value adjustments (i)     (1,590 )
Total identifiable net assets at fair value (ii)     2,429  
         
Pre-existing relationship (Loans receivable from NLC)     859  
Loss on pre-existing relationship     (771 )
      2,517  
         
Cash consideration     2,517  
(-) Balances acquired        
Cash and cash equivalents     172  
Net cash outflow     2,345  

 

(i) Of this amount, US$441 was allocated to property, plant and equipment and US$791 was allocated to intangible and the remaining amount was allocated to other assets.

 

  19  

 

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of United States dollar, unless otherwise stated

 

(ii) The fair value was assessed using the fair value less costs of disposal model, through discounted cash flow techniques, which is classified as “level 3” in the fair value hierarchy. The cash flows were discounted by using a post-tax discount rate expressed in real terms, which represents an estimate of the rate that a market participant would apply having regard to the time value of money and the asset’s specific risk.

 

(a.iii) Fair value adjustments

 

On the announcement of the Investment Agreement with Mitsui, the Company has also informed the market its divestiture intention in the coal segment. Since then, interactions during the current quarter with potential interested parties in acquiring the Company’s coal assets have led management to decide to fully impair those assets, resulting in the recognition of an impairment loss of US$2,304 in the income statement as "Impairment and disposal of non-current assets” for the period ended September 30, 2021. Therefore, in the event of a potential sale, the Company will recognize a gain of approximately US$1,910 related to the accumulated translation adjustments on the disposal.

 

Additionally, due to the current stage of the sale process, the coal segment does not yet meet the “highly probable” definition under IFRS - 5 Non-Current Assets Held for Sale and Discontinued Operations to quality as held for sale as at September 30, 2021. Therefore, the Company will continue assessing the criteria at each period for financial reporting purposes.

 

Furthermore, the Company concluded that its Australian subsidiaries (part of the coal segment), which are no longer operational, were considered "abandoned" under IAS 21 - The Effects of Changes in Foreign Exchange Rates and, therefore, the Company recognized a gain related to the accumulated translation adjustments in the amount of US$424, which was reclassified to net income as “Impairment and disposals of non-current assets” for the period ended June 30, 2021.

 

b) Other acquisitions and divestitures

 

Vale Nouvelle-Calédonie S.A.S. (“VNC”) – In December 2020, the Company signed a binding put option agreement to sell its interest in VNC for an immaterial consideration to Prony Resources, a consortium constituted and led by the current management and employees of VNC supported by the Caledonian and French authorities, with Trafigura Pte. Ltd. as a non-controlling shareholder. Under the terms of agreement, the Company has assumed an obligation to pay to the buyers an amount of US$500 upon closing of the transaction and this amount has been provided for as at December 31, 2020.

 

In March 2021, the Company signed the share purchase and sale agreement with Prony Resources, concluding the transaction to sell its interest in VNC. With the final agreement, Vale's obligation to pay to buyers increased by US$55, which combined with other working capital adjustments, resulted in an additional loss of US$98, recorded as “Impairment and disposals of non-current assets”. On March 31, 2021, the Company disbursed US$555 to VNC on the closing of the transaction.

 

The agreement also established that Vale has an offtake agreement to purchase a certain amount of VNC’s annual nickel production with a cap price over a period of 13 years. Such cap included in contract is an embedded derivative, however, it is deemed closely related to the host contract (nickel supply agreement) because the cap was out of the money on inception of the contract. Therefore, this derivative will not be separated from the host contract, which will be accounted for as an executory contract.

 

Upon closing of the transaction, the Company also recognized a gain of US$1,132 arising from the accumulated exchange differences reclassified from the stockholders’ equity to the income statement under “Other financial items, net”.

 

Manganese ferroalloys operations classified as non-current assets and liabilities held for sale – In September 2021, the Company signed an agreement to sell its assets and liabilities located in the state of Minas Gerais, which are part of Vale Manganês S.A. and relates to the manganese ferroalloys business, for US$40 (R$218 million). Due to that agreement, those assets and liabilities were classified as "held for sale" and measured at fair value less costs of disposal, resulting in the recognition of an impairment loss of US$18 recognized in the income statement as "Impairment and disposal of non-current assets” for the three-month period ended September 30, 2021. The completion of the transaction is subject to review of the Brazilian Administrative Council for Economic Defense ("CADE") and is expected to occur within the next 12 months. Those assets and liabilities were classified as non-current held for sale as follows:

 

  20  

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of United States dollar, unless otherwise stated

 

    September 30, 2021  
Assets        
Accounts receivable     21  
Inventories     11  
Recoverable taxes     17  
Property, plant and equipment     11  
Non-current assets held for sale     60  
         
Liabilities        
Suppliers and contractors     8  
Provisions     5  
Non-current liabilities held for sale     13  

 

  21  

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of United States dollar, unless otherwise stated

 

13.            Investments in associates and joint ventures

 

a) Investment information

 

            Investments in associates and
joint ventures
  Equity results in the income statement   Dividends received  
                    Three-month period
ended September 30,
  Nine-month period
ended September 30,
  Three-month period
ended September 30,
  Nine-month period
ended September 30,
 
Associates and joint ventures   % ownership   % voting
capital
  September 30,
2021
  December 31,
2020
  2021   2020   2021   2020   2021   2020   2021   2020  
Ferrous minerals                                                                          
Baovale Mineração S.A.     50.00     50.00     22     20     1     1     4     3     -     -     -     -  
Companhia Coreano-Brasileira de Pelotização     50.00     50.00     71     48     15     2     30     7     -     -     2     17  
Companhia Hispano-Brasileira de Pelotização (i)     50.89     50.89     39     43     1     5     1     8     -     -     7     13  
Companhia Ítalo-Brasileira de Pelotização (i)     50.90     51.00     69     44     16     -     29     10     -     -     6     23  
Companhia Nipo-Brasileira de Pelotização (i)     51.00     51.11     139     121     15     -     28     8     -     -     7     -  
MRS Logística S.A.     48.16     46.75     438     398     33     12     69     24     -     -     -     -  
VLI S.A.     29.60     29.60     428     480     (23 )   (1 )   (31 )   (23 )   -     2     -     2  
                  1,206     1,154     58     19     130     37     -     2     22     55  
Base metals                                                                          
Korea Nickel Corp.     25.00     25.00     17     18     -     (1 )   -     -     -     -     -     -  
                  17     18     -     (1 )   -     -     -     -     -     -  
Others                                                                          
Aliança Geração de Energia S.A. (i)     55.00     55.00     382     367     41     5     58     22     5     -     26     24  
Aliança Norte Energia Participações S.A. (i)     51.00     51.00     109     117     -     (2 )   (3 )   (5 )   -     -     -     -  
California Steel Industries, Inc.     50.00     50.00     316     234     104     (8 )   165     (10 )   -     -     -     -  
Companhia Siderúrgica do Pecém (“CSP”) (ii)     50.00     50.00     -     -     -     -     (42 )   (75 )   -     -     -     -  
Mineração Rio do Norte S.A.     40.00     40.00     -     71     (3 )   5     (5 )   (7 )   -     -     -     -  
Others                 69     70     (2 )   (24 )   (26 )   (35 )   -     -     -     -  
                  876     859     140     (24 )   147     (110 )   5     -     26     24  
Total                 2,099     2,031     198     (6 )   277     (73 )   5     2     48     79  

 

(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)  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.

(iii) “Equity results and other results in associates and joint ventures” presented in the Income Statement considers, in addition to the equity results in associates and joint ventures shown in the table above, the results of Renova Foundation and Samarco (note 21) and other results with group entities.

 

  22  

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of United States dollar, unless otherwise stated

 

b) Movements during the period

 

    2021     2020  
Balance at January 1     2,031       2,798  
Capital contribution to CSP     42       75  
Translation adjustment     (82 )     (695 )
Equity results in income statement     275       (73 )
Equity results in statement of comprehensive income     3       (2 )
Impairment of Mineração Rio do Norte S.A.     (65 )     -  
Dividends declared     (132 )     (104 )
Others     27       37  
Balance at September 30     2,099       2,036  

 

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

 

c) Financial guarantees provided

 

As at September 30, 2021 and December 31, 2020, the notional value of corporate financial guarantees provided by the Company (within the limit of its direct or indirect interest) for certain associates and joint ventures were US$1,510 and US$1,557, respectively. The fair value of these financial guarantees is shown in note 17.

 

14.            Intangible

 

Movements during the period

 

    Goodwill     Concessions     Contract right     Software     Research and
development
project and
patents
    Total  
Balance at December 31, 2020     3,298       5,391       -       76       531       9,296  
Additions     -       121       -       22       -       143  
Disposals     -       (4 )     -       -       -       (4 )
Amortization     -       (187 )     -       (23 )     -       (210 )
Acquisition of NLC (note 12)     -       1,428       -       -       -       1,428  
Impairment (i)     -       (1,422 )     -       -       -       (1,422 )
Translation adjustment     (50 )     (242 )     -       (2 )     (24 )     (318 )
Balance at September 30, 2021     3,248       5,085       -       73       507       8,913  
Cost     3,248       7,486       -       741       507       11,982  
Accumulated amortization     -       (2,401 )     -       (668 )     -       (3,069 )
Balance at September 30, 2021     3,248       5,085       -       73       507       8,913  

 

    Goodwill     Concessions     Contract right     Software     Research and
development
project and
patents
    Total  
Balance at December 31, 2019     3,629       3,970       140       76       684       8,499  
Additions     -       119       -       13       -       132  
Disposals     -       (5 )     -       -       -       (5 )
Amortization     -       (135 )     (1 )     (17 )     -       (153 )
Translation adjustment     (515 )     (1,126 )     (10 )     (13 )     (195 )     (1,859 )
Balance at September 30, 2020     3,114       2,823       129       59       489       6,614  
Cost     3,114       3,718       226       703       489       8,250  
Accumulated amortization     -       (895 )     (97 )     (644 )     -       (1,636 )
Balance at September 30, 2020     3,114       2,823       129       59       489       6,614  
                                                 

 

(i) In the current year, the Company recognized an impairment loss related to coal assets incorporated in the acquisition of NLC in the amount of US$1,422 (note 12).

 

15.            Property, plant and equipment

 

a) Movements during the period

 

  23  

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of United States dollar, unless otherwise stated

 

    Building
and land
  Facilities   Equipment   Mineral
properties
  Railway
equipment
  Right of use
assets
  Others   Constructions
in progress
  Total  
Balance at December 31, 2020     8,591     7,591     4,933     8,054     2,523     1,563     2,495     5,398     41,148  
Additions (i)     -     -     -     -     -     56     -     3,502     3,558  
Disposals     (3 )   (26 )   (60 )   -     (5 )   -     -     (44 )   (138 )
Asset retirement obligation (ii)     -     -     -     (442 )   -     -     -     -     (442 )
Depreciation, depletion and amortization     (332 )   (361 )   (495 )   (319 )   (129 )   (130 )   (193 )   -     (1,959 )
Acquisition of NLC (note 12)     235     140     102     -     318     33     2     92     922  
Impairment (iii)     (231 )   (114 )   (85 )   -     (313 )   (33 )   (2 )   (233 )   (1,011 )
Translation adjustment     (263 )   (276 )   (71 )   (64 )   (110 )   (17 )   (63 )   (116 )   (980 )
Transfers     226     370     521     200     84     -     208     (1,609 )   -  
Transfer to net assets held for sale (note 12)     (3 )   (2 )   (3 )   (2 )   -     -     (1 )   -     (11 )
Balance at September 30, 2021     8,220     7,322     4,842     7,427     2,368     1,472     2,446     6,990     41,087  
Cost     15,228     12,074     10,905     16,674     3,747     1,951     5,463     6,990     73,032  
Accumulated depreciation     (7,008 )   (4,752 )   (6,063 )   (9,247 )   (1,379 )   (479 )   (3,017 )   -     (31,945 )
Balance at September 30, 2021     8,220     7,322     4,842     7,427     2,368     1,472     2,446     6,990     41,087  

 

    Building
and land
  Facilities   Equipment   Mineral
properties
  Railway
equipment
  Right of use
assets
  Others   Constructions
in progress
  Total  
Balance at December 31, 2019     10,702     9,604     5,686     8,261     3,241     1,692     3,012     4,378     46,576  
Additions (i)     -     -     -     -     -     41     -     2,767     2,808  
Disposals     (7 )   (37 )   (2 )   (8 )   (5 )   -     (4 )   (33 )   (96 )
Asset retirement obligation     -     -     -     370     -     -     -     -     370  
Depreciation, depletion and amortization     (333 )   (374 )   (559 )   (365 )   (141 )   (136 )   (215 )   -     (2,123 )
Impairment     (180 )   (260 )   (14 )   (140 )   -     -     (79 )   (145 )   (818 )
Translation adjustment     (2,201 )   (2,297 )   (846 )   (923 )   (903 )   (106 )   (591 )   (862 )   (8,729 )
Transfers     161     391     435     357     107     -     201     (1,652 )   -  
Balance at September 30, 2020     8,142     7,027     4,700     7,552     2,299     1,491     2,324     4,453     37,988  
Cost     14,256     10,759     10,168     16,129     3,489     1,842     5,510     4,453     66,606  
Accumulated depreciation     (6,114 )   (3,732 )   (5,468 )   (8,577 )   (1,190 )   (351 )   (3,186 )   -     (28,618 )
Balance at September 30, 2020     8,142     7,027     4,700     7,552     2,299     1,491     2,324     4,453     37,988  

 

(i) Includes capitalized borrowing costs.

(ii) Refers to changes in discount rates.

(iii) Due to the Company's assessment of the fair value of the coal assets, the assets acquired during the year are provided for impairment in full, resulting in a loss of US$23 and US$111 for the three and nine-month periods ended September 30, 2021 (US$32 and US$103 for the three and nine-month periods ended September 30, 2020). In the current year, the Company also recognized an impairment loss related to NLC assets in the amount of US$882 (note 12).

 

b) Right-of-use assets (Leases)

 

    December 31,
2020
    Additions and contract
modifications
    Impairment (ii)     Depreciation     Translation
adjustment
    September 30,
2021
 
Ports     718       -       -       (34 )     (5 )     679  
Vessels     534       -       -       (31 )     -       503  
Pellets plants     131       37       -       (27 )     (6 )     135  
Properties     112       3       -       (23 )     (6 )     86  
Energy plants     56       -       -       (5 )     -       51  
Mining equipment and locomotives (i)     12       49       (33 )     (10 )     -       18  
Total     1,563       89       (33 )     (130 )     (17 )     1,472  

 

(i) "Additions and contract modifications" includes the effects arising from the acquisition of NLC in the amount of US$33.

(ii) Impairment loss related to the NLC assets (note 12).

 

Lease liabilities are presented in note 19.

 

16.            Financial and capital risk management

 

a) Effects of derivatives on the balance sheet

 

  24  

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of United States dollar, unless otherwise stated

 

    Assets  
    September 30, 2021     December 31, 2020  
    Current     Non-current     Current     Non-current  
Foreign exchange and interest rate risk                                
IPCA swap     40       -       7       38  
Eurobonds swap     -       -       -       3  
Pre-dollar swap and forward (NDF)     23       11       -       9  
Libor swap     -       5       -       -  
      63       16       7       50  
Commodities price risk                                
Base metals products     32       7       30       -  
Gasoil, Brent and freight     50       -       97       -  
      82       7       127       -  
                                 
Others     -       12       -       16  
      -       12       -       16  
Total     145       35       134       66  

 

    Liabilities  
    September 30, 2021     December 31, 2020  
    Current     Non-current     Current     Non-current  
Foreign exchange and interest rate risk                                
CDI & TJLP vs. US$ fixed and floating rate swap     171       477       111       525  
IPCA swap     2       116       72       100  
Eurobonds swap     -       -       4       -  
Pre-dollar swap and forward (NDF)     60       37       63       58  
Libor swap     2       -       1       6  
      235       630       251       689  
Commodities price risk                                
Base metals products     29       -       46       -  
Gasoil, Brent and freight     -       -       13       -  
Thermal and coking coal     65       -       -       -  
      94       -       59       -  
                                 
Others     5       -       18       -  
Total     334       630       328       689  

 

a.i) Net exposure

 

    September 30, 2021     December 31, 2020  
Foreign exchange and interest rate risk                
CDI & TJLP vs. US$ fixed and floating rate swap     (648 )     (636 )
IPCA swap     (78 )     (127 )
Eurobonds swap     -       (1 )
Pre-dollar swap and forward (NDF)     (63 )     (112 )
Libor swap (i)     3       (7 )
      (786 )     (883 )
Commodities price risk                
Base metals products     10       (16 )
Gasoil, Brent and freight     50       84  
Thermal and coking coal     (65 )     -  
      (5 )     68  
                 
Others     7       (2 )
      7       (2 )
Total     (784 )     (817 )

 

(i) In July 2017, the U.K. Financial Conduct Authority (FCA), which regulates the London Interbank Offered Rate (‘‘LIBOR’’), announced the effective discontinuation of LIBOR. After June 30, 2023, the FCA will no longer require panel banks to submit quotes for any U.S. dollar LIBOR settings. The Company is currently evaluating the potential impact of the eventual replacement of the LIBOR interest rate.

 

  25  

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of United States dollar, unless otherwise stated

 

a.ii)            Effects of derivatives on the income statement and cash flows

 

    Gain (loss) recognized in the income statement  
    Three-month period ended
September  30,
    Nine-month period ended
September  30,
 
    2021     2020     2021     2020  
Foreign exchange and interest rate risk                                
CDI & TJLP vs. US$ fixed and floating rate swap     (194 )     (54 )     (142 )     (919 )
IPCA swap     (42 )     (56 )     27       (312 )
Eurobonds swap     -       26       (28 )     (1 )
Pre-dollar swap and forward (NDF)     (238 )     (56 )     (32 )     (229 )
Libor swap     2       (5 )     9       (11 )
      (472 )     (145 )     (166 )     (1,472 )
Commodities price risk                                
Base metals products     -       -       (2 )     -  
Gasoil, Brent and freight     12       36       120       (213 )
      12       36       118       (213 )
Others     2       (78 )     7       28  
      2       (78 )     7       28  
Total     (458 )     (187 )     (41 )     (1,657 )
                                 

 

    Financial settlement inflows (outflows)  
    Three-month period ended
September  30,
    Nine-month period ended
September  30,
 
    2021     2020     2021     2020  
Foreign exchange and interest rate risk                                
CDI & TJLP vs. US$ fixed and floating rate swap     (10 )     (63 )     (109 )     (114 )
IPCA swap     -       -       (18 )     -  
Eurobonds swap     -       -       (29 )     (6 )
Pre-dollar swap and forward (NDF)     3       (33 )     (74 )     (46 )
Libor swap     -       -       (1 )     -  
      (7 )     (96 )     (231 )     (166 )
Commodities price risk                                
Base metals products     (16 )     -       (24 )     -  
Gasoil, Brent and freight     62       (35 )     154       (166 )
Thermal and coking coal     (17 )     -       (17 )     -  
      29       (35 )     113       (166 )
Others     -       1       1       361  
      -       1       1       361  
Total     22       (130 )     (117 )     29  

 

a.iii) Hedge accounting

 

    Gain (loss) recognized in the other comprehensive income  
    Three-month period ended
September 30,
    Nine-month period ended
September 30,
 
    2021     2020     2021     2020  
Net investments hedge     (127 )     (81 )     (85 )     (720 )
Thermal and coking coal cash flow hedge     (12 )     -       (17 )     -  
Cash flow hedge (Nickel and Palladium)     22       (56 )     1       (41 )

 

Net investment hedge:

 

In March 2021, the Company redeemed all its euro bonds (note 19). As a result, the amount of debt designated as a hedge instrument for this investment is US$2,258 as at September 30,2021.

 

Cash flow hedge (Coking Coal):

 

To reduce the volatility of its cash flow as a result of fluctuations in coking coal prices, in July 2021, the Company implemented a Coking Coal Revenue Hedge Program. Under this program, hedge transactions were executed through forward contracts to protect a portion of the projected sales of this product at fluctuating prices that is highly probable to occur. Hedge accounting treatment is being given to the program. The contracts are traded over-the-counter and the cash settlement in/out results are offset by the protected items' loss/gain results due to coking coal price variations.

 

  26  

 

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of United States dollar, unless otherwise stated

 

    Notional (ton)           Fair value   Financial
settlement
Inflows
(Outflows)
  Value at Risk   Fair value
by year
 
Flow     September 
30, 2021
    December 
31, 2020
    Bought /
Sold
    Average
strike (US$/t
oz)
    September 
30, 2021
    December
 31, 2020
    September
 30, 2021
    September 
30, 2021
    2021  
Coking Coal Revenue Hedging Program     69,000     -     S     303     (2 )   -     (1 )   1     (2 )

 

Cash flow hedge (Thermal Coal):

 

    Notional (ton)           Fair value  

Financial

settlement

Inflows

(Outflows)

  Value at Risk   Fair value
by year
 
Flow   September
30, 2021
  December
31, 2020
  Bought /
Sold
  Average
strike (US$/t
oz)
  September 
30, 2021
  December
 31, 2020
  September
 30, 2021
  September
 30, 2021
  2021  
Thermal Coal Revenue Hedging Program                                                        
New Castle Forward     300,000     -     S     108     (32 )   -     (20 )   6     (32 )
API4 Forward     195,000     -     B     105     (19 )   -     (7 )   3     (19 )
Total                             (51 )   -     (27 )   9     (51 )

 

Cash Flow Hedge (Nickel):

 

    Notional (ton)           Fair value   Financial
settlement
Inflows
(Outflows)
  Value at Risk   Fair value
by year
 
Flow   September
30, 2021
  December
31, 2020
  Bought /
Sold
  Average
strike
(US$/ton)
  September
30, 2021
  December
31, 2020
  September
30, 2021
  September
30, 2021
  2021  
Nickel Revenue Hedging Program (i)                                                        
Call options     15,330     58,620     S     17,505     (14 )   (46 )   (31 )   5     (14 )
Put options     15,330     58,620     B     15,000     -     28     -     -     -  
Total                             (14 )   (18 )   (31 )   5     (14 )

 

(i) With the hedge structure, the company ensures prices between US$15,000/t and US$17,505/t for the program’s sales volume.

 

Cash flow hedge (Palladium):

 

    Notional (t oz)           Fair value   Financial
settlement
Inflows
(Outflows)
  Value at Risk   Fair value
by year
 
Flow   September
30, 2021
  December
31, 2020
  Bought /
Sold
  Average strike (US$/t
oz)
  September
30, 2021
  December
31, 2020
  September
30, 2021
  September
30, 2021
  2021  
Palladium Revenue Hedging Program                                                        
Call Options     55,795     7,200     S     3,414     (1 )   (1 )   -     -     (1 )
Put Options     55,795     7,200     B     2,412     34     -     1     4     34  
Total                             33     (1 )   1     4     33  

 

  27  

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of United States dollar, unless otherwise stated

 

b) Protection programs for the R$ and EUR denominated debt instruments and other liabilities

 

    Notional           Fair value   Financial
Settlement
Inflows
(Outflows)
  Value at Risk   Fair value by year  
Flow   September
30, 2021
  December
31, 2020
  Index   Average
rate
  September
30, 2021
  December
31, 2020
  September
30, 2021
  September
30, 2021
  2021   2022   2023+  
CDI vs. US$ fixed rate swap                           (499 )   (473 )   (44 )   42     (22 )   (106 )   (372 )
Receivable   R$ 8,545     R$ 9,445     CDI     100.44 %                                          
Payable   US$ 2,003     US$ 2,213     Fix     2.57 %                                          
                                                                   
TJLP vs. US$ fixed rate swap                           (148 )   (163 )   (38 )   8     (15 )   (46 )   (87 )
Receivable   R$ 1,331     R$ 1,651     TJLP +     1.11 %                                          
Payable   US$ 360     US$ 460     Fix     3.14 %                                          
                                                                   
R$ fixed rate vs. US$ fixed rate swap                           (65 )   (111 )   (82 )   24     (3 )   (53 )   (10 )
Receivable   R$ 6,132     R$ 2,512     Fix     3.72 %                                          
Payable   US$ 1,162     US$ 621     Fix     -1.59 %                                          
                                                                   
IPCA vs. US$ fixed rate swap                           (119 )   (173 )   (61 )   9     (1 )   (4 )   (114 )
Receivable   R$ 1,563     R$ 2,363     IPCA +     4.54 %                                          
Payable   US$ 387     US$ 622     Fix     3.88 %                                          
                                                                   
IPCA vs. CDI swap                           40     45     7     -     -     40     -  
Receivable   R$ 744     R$ 694     IPCA +     6.63 %                                          
Payable   R$ 1,350     R$ 550     CDI     9.88 %                                          
                                                                   
EUR fixed rate vs. US$ fixed rate swap                           -     (1 )   (29 )   -     -     -     -  
Receivable   -     EUR 500     Fix     0.00 %                                          
Payable   -     US$ 613     Fix     0.00 %                                          
                                                                   
Forward   R$ 6,449     R$ 916     B     4.34     2     (1 )   17     21     1     17     (15 )

 

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

 

    Notional             Fair value   Financial
Settlement
Inflows
(Outflows)
  Value at
Risk
  Fair value by year  
Flow   September
30, 2021
  December
31, 2020
  Index   Average
rate
    September
30, 2021
  December
31, 2020
  September
30, 2021
  September
30, 2021
  2021   2022   2023+  
Libor vs. US$ fixed rate swap                       3   (7 ) (1 ) 2   -   (1 ) 4  
Receivable   US$ 950   US$ 950     Libor   0.13 %                              
Payable   US$ 950   US$ 950     Fix   0.48 %                              

 

d) Protection program for product prices and input costs

 

    Notional           Fair value   Financial
settlement
Inflows
(Outflows)
  Value at
Risk
  Fair
value by
year
 
Flow   September
30, 2021
  December
31, 2020
  Bought /
Sold
  Average
strike
(US$/bbl)
  September
30, 2021
  December
31, 2020
  September
30, 2021
  September
30, 2021
  2021+  
Brent crude oil (bbl)                                      
Call options   1,209,405   13,746,945   B   55   28   92   145   3   28  
Put options   1,209,405   13,746,945   S   30   -   (12 ) -   -   -  
                                       
Forward Freight Agreement (days)                                      
Freight forwards (days)   195   1,625   B   13,288   7   4   24   1   7  

 

  28  

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of United States dollar, unless otherwise stated

 

e) Embedded derivatives in contracts

 

    Notional           Fair value   Financial
settlement
Inflows
(Outflows)
  Value at Risk   Fair value  
Flow   September
30, 2021
  December
31, 2020
  Bought /
Sold
  Average
strike
 

September

30, 2021

  December
31, 2020
  September
30, 2021
  September
30, 2021
  2021+  
Option related to a Special Purpose Entity “SPE” (quantity)                                
Call option   137,751,623   137,751,623   B   3.10   12   18   -   2   12  
                                       
Embedded derivatives in contracts for the sale of part of its shareholding (quantity)                          
Put option   1,105,070,863   1,105,070,863   S   4.47   (1 ) (19 ) -   1   (1 )
                                       
Embedded Derivative in natural gas purchase agreement (volume/month)                          
Call options   729,571   746,667   S   233   (4 ) -   (2 ) 2   (4 )
                                       
Hedge program for finished products                            
Nickel forwards   634   -   S   19,139   1   -   -   1   1  
                                       
Fixed prices sales protection                          
Nickel forwards   360   -   B   16,277   1   -   2   -   1  
                                       
Embedded in raw material purchase contract (ton)                        
Nickel forwards   573   1,979   S   19,271   -   2   -   -   -  
Copper forwards   450   976   S   9,361   -   -   -   -   -  

 

f) Sensitivity analysis of derivative financial instruments

 

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

 

- Probable: the probable scenario was defined as the fair value of the derivative instruments as at September 30, 2021

- 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

 

  29  

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of United States dollar, unless otherwise stated

 

Instrument   Instrument's main risk events   Probable     Scenario I     Scenario II  
CDI vs. US$ fixed rate swap   R$ depreciation     (499 )     (1,016 )     (1,532 )
    US$ interest rate inside Brazil decrease     (499 )     (525 )     (551 )
    Brazilian interest rate increase     (499 )     (538 )     (578 )
Protected item: R$ denominated liabilities   R$ depreciation      n.a.       -       -  
                             
TJLP vs. US$ fixed rate swap   R$ depreciation     (148 )     (243 )     (338 )
    US$ interest rate inside Brazil decrease     (148 )     (151 )     (153 )
    Brazilian interest rate increase     (148 )     (159 )     (169 )
    TJLP interest rate decrease     (148 )     (154 )     (161 )
Protected item: R$ denominated debt   R$ depreciation      n.a.       -       -  
                             
R$ fixed rate vs. US$ fixed rate swap   R$ depreciation     (65 )     (350 )     (634 )
    US$ interest rate inside Brazil decrease     (65 )     (71 )     (77 )
    Brazilian interest rate increase     (65 )     (107 )     (146 )
Protected item: R$ denominated debt   R$ depreciation      n.a.       -       -  
                             
IPCA vs. US$ fixed rate swap   R$ depreciation     (119 )     (223 )     (328 )
    US$ interest rate inside Brazil decrease     (119 )     (124 )     (129 )
    Brazilian interest rate increase     (119 )     (138 )     (156 )
    IPCA index decrease     (119 )     (130 )     (141 )
Protected item: R$ denominated debt   R$ depreciation      n.a.       -       -  
                             
IPCA vs. CDI swap   Brazilian interest rate increase     40       38       35  
    IPCA index decrease     40       39       37  
Protected item: R$ denominated debt linked to IPCA   IPCA index decrease      n.a.       (39 )     (37 )
                             
US$ floating rate vs. US$ fixed rate swap   US$ Libor decrease     3       (2 )     (8 )
Protected item: Libor US$ indexed debt   US$ Libor decrease     n.a.       2       8  
                             
NDF BRL/USD   R$ depreciation     2       (262 )     (527 )
    US$ interest rate inside Brazil decrease     2       (1 )     (5 )
    Brazilian interest rate increase     2       (25 )     (51 )
Protected item: R$ denominated liabilities   R$ depreciation     n.a.       -       -  

 

  30  

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of United States dollar, unless otherwise stated

 

Instrument   Instrument's main risk events   Probable     Scenario I     Scenario II  
Fuel oil protection                            
Options   Price input decrease     28       14       11  
Protected item: Part of costs linked to fuel oil prices   Price input decrease     n.a.       (14 )     (11 )
                             
Forward Freight Agreement                            
Forwards   Freight price decrease     7       5       2  
Protected item: Part of costs linked to maritime freight prices   Freight price decrease     n.a.       (5 )     (2 )
                             
Nickel sales fixed price protection                            
Forwards   Nickel price decrease     1       (1 )     (3 )
Protected item: Part of nickel revenues with fixed prices   Nickel price decrease     n.a.       1       3  
                             
Hedge program for products acquisition for resale                            
Forwards   Nickel price increase     1       -       (1 )
Protected item: Part of revenues from products resale   Nickel price increase     n.a.       -       1  
                             
Nickel Revenue Hedging Program                            
Options   Nickel price increase     (14 )     (77 )     (146 )
Protected item: Part of nickel future revenues   Nickel price increase     n.a.       77       146  
                             
Palladium Revenue Hedging Program                            
Options   Palladium price increase     33       13       (2 )
Protected item: Part of palladium future revenues   Palladium price increase     n.a.       (13 )     2  
                             
Thermal Coal Revenue Hedging Program                            
Forwards   Thermal coal price increase     (51 )     (77 )     (103 )
Protected item: Part of thermal coal future revenues   Thermal coal price increase     n.a.       77       103  
                             
Coking Coal Revenue Hedging Program                            
Forwards   Coking coal price increase     (2 )     (8 )     (14 )
Protected item: Part of coking coal future revenues   Coking coal price increase     n.a.       8       14  
                             
Option - SPCs   SPCs stock value decrease     12       5       2  

 

Instrument   Main risks   Probable     Scenario I     Scenario II  
Embedded derivatives - Raw material purchase (nickel)   Nickel price increase     -       (3 )     (6 )
Embedded derivatives - Raw material purchase (copper)   Copper price increase     -       (1 )     (2 )
Embedded derivatives - Gas purchase   Pellet price increase     (4 )     (8 )     (11 )
Embedded derivatives - Guaranteed minimum return   Stock value decrease     (1 )     (43 )     (280 )

 

g) Financial counterparties’ credit risk ratings

 

The table below presents the credit risk ratings published by Moody’s regarding the main financial institutions that we hire derivative instruments, cash and cash equivalents transactions.

 

  31  

 

 

Selected Notes to the Interim Financial Statements
Expressed in millions of United States dollar, unless otherwise stated

 

    Consolidated  
    September 30, 2021     December 31, 2020  
    Cash and cash equivalents and
short-term investment
    Derivatives     Cash and cash equivalents
and short-term investment
    Derivatives  
Aa1     101       -       2,210       36  
Aa2     207       21       363       15  
Aa3     251       33       1,681       41  
A1     1,029       6       2,812       21  
A2     3,945       40       4       20  
A3     1,259       32       5       36  
Baa1     -       -       4       -  
Baa2     12       -       1       -  
Ba1     -       3       2,986       -  
Ba2     3,037       6       4,189       6  
Ba3     1,524       -       -       -  
Others     13       39       3       25  
      11,378       180       14,258       200  

 

17.          Financial assets and liabilities

 

a) Financial instruments classification

 

    September 30, 2021     December 31, 2020  
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 (note 19)     10,857       -       -       10,857       13,487       -       -       13,487  
Short-term investments (note 19)     -       -       521       521       -       -       771       771  
Derivative financial instruments (note 16)     -       -       145       145       -       -       134       134  
Accounts receivable (note 9)     1,183       -       (310 )     873       1,514       -       3,479       4,993  
Investments in equity securities     -       1,221       -       1,221       -       -       -       -  
Related parties (note 26)     -       -       -       -       195       -       -       195  
      12,040       1,221       356       13,617       15,196       -       4,384       19,580  
Non-current                                                                
Judicial deposits (note 23)     1,221       -       -       1,221       1,268       -       -       1,268  
Restricted cash     121       -       -       121       38       -       -       38  
Derivative financial instruments (note 16)     -       -       35       35       -       -       66       66  
Investments in equity securities     -       6       -       6       -       757       -       757  
Related parties (note 26)     -       -       -       -       923       -       -       923  
      1,342       6       35       1,383       2,229       757       66       3,052  
Total of financial assets     13,382       1,227       391       15,000       17,425       757       4,450       22,632  
                                                                 
Financial liabilities                                                                
Current                                                                
Suppliers and contractors     4,096       -       -       4,096       3,367       -       -       3,367  
Derivative financial instruments (note 16)     -       -       334       334       -       -       328       328  
Loans, borrowings and leases (note 19)     1,345       -       -       1,345       1,136       -       -       1,136  
Dividends payable     35       -       -       35       1,220       -       -       1,220  
Liabilities related to the concession grant (note 14)     392       -       -       392       209       -       -       209  
Related parties (note 26)     132       -       -       132       725       -       -       725  
Other financial liabilities (note 11)     699       -       -       699       644                       644  
      6,699       -       334       7,033       7,301       -       328       7,629  
Non-current                                                                
Derivative financial instruments (note 16)     -       -       630       630       -       -       689       689  
Loans, borrowings and leases (note 19)     12,240       -       -       12,240       13,891       -       -       13,891  
Related parties (note 26)     -       -       -       -       895       -       -       895  
Participative stockholders' debentures (note 18)     -       -       4,128       4,128       -       -       3,413       3,413  
Liabilities related to the concession grant (note 14)     1,657       -       -       1,657       2,103       -       -       2,103  
Financial guarantees (note 13)     -       -       538       538       -       -       877       877  
      13,897       -       5,296       19,193       16,889       -       4,979       21,868  
Total of financial liabilities     20,596       -       5,630       26,226       24,190       -       5,307       29,497  

 

  32  

 

 

Selected Notes to the Interim Financial Statements

Expressed in millions of United States dollar, unless otherwise stated

 

b) Hierarchy of fair value

 

    September 30, 2021     December 31, 2020  
    Level 1     Level 2     Level 3     Total     Level 1     Level 2     Level 3     Total  
Financial assets                                                                
Short-term investments     521       -       -       521       771       -       -       771  
Derivative financial instruments     -       168       12       180       -       182       18       200  
Accounts receivable     -       (310 )     -       (310 )     -       3,479       -       3,479  
Investments in equity securities     1,227       -       -       1,227       757       -       -       757  
Total     1,748       (142 )     12       1,618       1,528       3,661       18       5,207  
                                                                 
Financial liabilities                                                                
Derivative financial instruments     -       963       1       964       -       998       19       1,017  
Participative stockholders' debentures     -       4,128       -       4,128       -       3,413       -       3,413  
Financial guarantees     -       538       -       538       -       877       -       877  
Total     -       5,629       1       5,630       -       5,288       19       5,307  

 

There were no transfers between levels 1, 2 and 3 of the fair value hierarchy during the nine-month period ended September 30, 2021.

 

b.i) Changes in Level 3 assets and liabilities during the period

 

    Derivative financial instruments  
    Financial assets     Financial liabilities  
Balance at December 31, 2020     18       19  
 Gain and losses recognized in income statement     (6 )     (17 )
 Translation adjustments     -       (1 )
Balance at September 30, 2021     12       1  

 

  33  

 

 

Selected Notes to the Interim Financial Statements

Expressed in millions of United States dollar, unless otherwise stated

 

c) Fair value of loans and financing

 

    September 30, 2021     December 31, 2020  
    Carrying amount     Fair value     Carrying amount     Fair value  
Quoted in the secondary market:                                
 Bonds     7,448       9,343       7,448       10,025  
 Eurobonds     -       -       920       985  
Debentures     399       408       496       496  
Debt contracts in Brazil in:                                
R$, indexed to TJLP, TR, IPCA, IGP-M and CDI     394       396       860       857  
R$, with fixed interest     18       18       34       35  
Basket of currencies and bonds in US$ indexed to LIBOR     22       54       56       56  
Debt contracts in the international market in:                                
US$, with variable and fixed interest     3,335       3,290       3,225       3,278  
Other currencies, with variable interest     89       11       -       -  
Other currencies, with fixed interest     108       119       120       134  
Total     11,813       13,639       13,159       15,866  

 

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.

 

18. Participative stockholders’ debentures

 

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

 

Holders of participative stockholders’ debentures have the right to receive semi-annual payments equal to an agreed percentage of revenues less value-added tax, transport fee and insurance expenses related to the trading of the products, derived from these mineral resources. On October 1, 2021 (subsequent event), the Company made available for withdrawal as remuneration the amount of US$236 (R$1,244 million) for the first semester of 2021, as disclosed on the “Shareholders’ debentures report” made available on the Company’s website.

 

To calculate the fair value of the liability, the Company uses the weighted average price of trades in the secondary market for the last month of the quarter. The average price increased from R$45.65 per debenture for the year ended December 31, 2020 to R$57.78 per debenture for the period ended September 30, 2021 (R$36.76 for the period ended September 30, 2020), resulting in an expense of US$1,109 (R$5,886 million) recorded in the income statement for the nine-month period ended September 30, 2021 (US$833 (R$4,341 million) for the nine-month period ended September 30, 2020), respectively. As at September 30, 2021 the liability was US$4,128 (R$22,452 million) (US$3,413 (R$17,737 million) as at December 2020).

 

The average price decreased from R$60.34 per debenture for the period ended June 30, 2021 to R$57.78 per debenture for the period ended September 30, 2021 (R$29.04 for the period ended June 30, 2020), resulting in a gain of US$152 (R$825 million) recorded in the income statement for the three-month period ended September 30, 2021 (US$553 (R$3,002 million) for the three-month period ended September 30, 2020).

 

19. Loans, borrowings, leases, cash and cash equivalents and short-term investments

 

a) Net debt

 

    September 30, 2021     December 31, 2020  
Debt contracts (d.i)     11,951       13,360  
Leases (d.ii)     1,634       1,667  
Total of loans, borrowings and leases     13,585       15,027  
                 
(-) Cash and cash equivalents     10,857       13,487  
(-) Short-term investments     521       771  
Net debt     2,207       769  

 

  34  

 

 

Selected Notes to the Interim Financial Statements

Expressed in millions of United States dollar, unless otherwise stated

 

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 US$5,061 (US$2,849 as at December 31, 2020) denominated in R$, indexed to the CDI, US$5,523 (US$10,195 as at December 31, 2020) denominated in US$ and US$273 (US$443 as at December 31, 2020) denominated in other currencies as at September 30, 2021.

 

c) Short-term investments

 

At September 30, 2021, the balance of US$521 (US$771 as at December 31, 2020) is substantially comprised of investments in an exclusive investment fund immediately liquid, whose portfolio is composed of committed transactions and Brazilian Financial Treasury Bills (“LFTs”), which are floating-rate securities issued by the Brazilian government.

 

d) Loans, borrowings and leases

 

d.i) Total debt

 

          Current liabilities     Non-current liabilities  
    Average interest
rate (i)
    September 30, 2021     December 31, 2020     September 30, 2021     December 31, 2020  
Quoted in the secondary market:                                        
US$, Bonds     6.02 %     -       -       7,448       7,448  
Eurobonds             -       -       -       920  
R$, Debentures (ii)     10.48 %     184       107       215       389  
Debt contracts in Brazil in (ii):                                        
R$, indexed to TJLP, TR, IPCA, IGP-M and CDI     10.17 %     117       320       277       540  
R$, with fixed interest     2.74 %     16       20       2       14  
Basket of currencies and bonds in US$ indexed to LIBOR     2.32 %     22       45       -       11  
Debt contracts in the international market in:                                        
US$, with variable and fixed interest     2.23 %     625       182       2,710       3,044  
Other currencies, with variable interest     4.09 %     79       -       10       -  
Other currencies, with fixed interest     3.36 %     12       12       96       107  
Debts contracts             1,055       686       10,758       12,473  
Accrued charges             138       201       -       -  
              1,193       887       10,758       12,473  

 

(i) In order to determine the average interest rate for debt contracts with floating rates, the Company used the rate applicable as at September 30, 2021.

 

(ii) The Company entered into derivative transactions to mitigate the exposure to the cash flow variations of all floating rate debt contracted in Brazil, resulting in an average cost of 2,93% per year in US$.

 

Future flows of debt payments, principal and interest

 

      Principal    

Estimated future

interest payments (i)

 
2021       57       128  
2022       1,076       587  
2023       440       551  
2024       2,006       534  
Between 2025 and 2029       2,117       1,005  
2030 onwards       6,117       3,639  
Total       11,813       6,444  

 

(i) Based on interest rate curves and foreign exchange rates applicable as at September 30, 2021 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.

 

Credit and financing lines

 

The Company has two revolving credit facilities to assist the short-term liquidity management and to enable more efficiency in cash management in the available amount of US$5,000, of which US$2,000 will mature in 2022 and US$3,000 in 2024. As at September 30, 2021, these lines are undrawn.

 

  35  

 

 

Selected Notes to the Interim Financial Statements

Expressed in millions of United States dollar, unless otherwise stated

 

Funding and payments

 

In January 2021, the Company contracted the credit line US$300 with The New Development Bank maturing at 2035 and indexed to Libor + 2,49% per year.

 

In March 2021, the Company redeemed all of its 3.750% bonds due January 2023, in the total amount of US$884 (EUR750 million) and for it paid a premium of US$63, which was recorded as “Expenses with cash tender offer redemption” under the financial results for nine-month period ended September 30,2021. The remaining amount paid were made in connection with the schedule of disbursements in accordance with the terms of the contracted debts.

 

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 (as defined in note 4(a)) and interest coverage. The Company has not identified any instances of noncompliance as at September 30, 2021.

 

Reconciliation of debt to cash flows

 

    Quoted in the
secondary market
    Debt contracts in Brazil     Debt contracts on the
international market
    Total  
December 31, 2020     9,046       959       3,355       13,360  
Additions     -       -       300       300  
Payments (i)     (922 )     (317 )     (284 )     (1,523 )
Interest paid (ii)     (395 )     (103 )     (101 )     (599 )
Effect on cash flow     (1,317 )     (420 )     (85 )     (1,822 )
                                 
Effect of exchange rate     (82 )     (188 )     192       (78 )
Interest accretion     324       84       83       491  
Non-cash changes     242       (104 )     275       413  
                                 
September 30, 2021     7,971       435       3,545       11,951  

 

(i) Includes expenses with the redemption in the amount of US$63.

(ii) Classified as cash flows arising from operating activities.

 

d.ii) Lease liabilities

 

    December 31, 2020     Additions and contract
modifications
    Payments (i)     Interest (ii)     Translation
adjustment
    September 30,
2021
 
Ports     743       -       (62 )     21       (9 )     693  
Vessels     533       -       (48 )     16       -       501  
Pellets plants     137       37       (8 )     5       (7 )     164  
Properties     142       3       (27 )     3       (10 )     111  
Energy plants     62       -       (5 )     4       -       61  
Mining equipment and locomotives (iii)     50       69       (12 )     2       (5 )     104  
Total     1,667       109       (162 )     51       (31 )     1,634  

 

(i) The total amount of the variable lease payments not included in the measurement of lease liabilities, which have been recognized straight to the income statement, for the three and nine-month periods ended September 30, 2021 was US$166 and US$277 (US$10 and US$48 for the three and nine-month periods ended September 30, 2020), respectively. 

(ii) The interest accretion recognized in the income statement is disclosed in note 6. 

(iii) "Additions and contract modifications" includes the effect of US$53 due to the NLC acquisition (note 12).

 

Annual minimum payments

 

    2021     2022     2023     2024     2025 onwards     Total  
Ports     17       61       60       59       799       996  
Vessels     16       64       62       60       404       606  
Pellets plants     35       37       12       12       107       203  
Properties     16       26       22       20       38       122  
Energy plants     2       7       6       6       60       81  
Mining equipment and locomotives     6       21       17       15       80       139  
Total     92       216       179       172       1,488       2,147  

 

The table above presents the undiscounted lease obligation by maturity date. The lease liability recognized in the balance sheet is measured at the present value of such obligations.

 

  36  

 

 

Selected Notes to the Interim Financial Statements

Expressed in millions of United States dollar, unless otherwise stated

 

e) Guarantees

 

As at September 30, 2021 and December 31, 2020, loans and borrowings are secured by property, plant and equipment in the amount of US$83 and US$176, respectively. The securities issued through Vale’s wholly-owned finance subsidiary Vale Overseas Limited are fully and unconditionally guaranteed by Vale.

 

20. 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, including 8 victims still missing, and caused extensive property and environmental damage in the region.

 

As a result of the dam failure, the Company has recognized provisions to meet its assumed obligations, individual indemnification to those affected by the event, remediation of the affected areas and compensation to the society. The Company also recognized a provision for de-characterization of the dams. Below are the changes in during the current period:

 

    December 31,
2020
    Operating
expense
    Monetary and
present value
adjustments
    Disbursements (ii)     Translation
adjustment
    September 30,
2021
 
Global Settlement for Brumadinho     3,989       -       246       (94 )     (189 )     3,952  
Provision for individual indemnification and other commitments     586       -       (9 )     (150 )     (23 )     404  
Liabilities related to Brumadinho     4,575       -       237       (244 )     (212 )     4,356  
                                                 
De-characterization of dams     2,289       -       (81 )     (254 )     (97 )     1,857  
Incurred expenses (i)     -       461       -       (461 )     -       -  
      6,864       461       156       (959 )     (309 )     6,213  

 

(i) The Company has incurred expenses, which have been recognized straight to the income statement, in relation to communication services, accommodation and humanitarian assistance, equipment, legal services, water, food aid, taxes, among others. For the three and nine-month periods ended September 30, of 2021, the Company incurred expenses in the amount of US$161 and US$461, respectively (US$114 and US$382 for the three and nine-month periods ended September 30, 2020).

 

(ii) Disbursement is presented net of the judicial deposits utilization.

 

a) Global Settlement for Brumadinho

 

On February 4, 2021, the Company entered into a Judicial Settlement for Integral Reparation (“Global Settlement”), which was under negotiations since 2019, with the State of Minas Gerais, the Public Defender of the State of Minas Gerais and the Federal and the State of Minas Gerais Public Prosecutors Offices, to repair the environmental and social damage resulting from the Dam I rupture. The Global Settlement was ratified by the Minas Gerais State Court on February 4, 2021, and the res judicata was drawn up on April 7, 2021.

 

With the Global Settlement, the requests contained in public civil actions regarding the socio-environmental and socioeconomic collective damages caused by the dam rupture were substantially resolved and the parameters for the reparation and compensation of said damages were established. As a result, the Company recorded an additional provision as at December 31, 2020.

 

The provision is discounted at presented value using an observable rate that reflects the current market assessments of the time value of money and the risks specific to the liability at the reporting date. During the current year, the discount rate applied on the provisions for the Global Settlement, individual indemnification and other commitments, has increased from 2.0% at December 31, 2020 to 4.6% at September 30, 2021. Additionally, the provisions were updated by the consumer price index (IPCA), as required by the Global Agreement, resulting in an impact of US$329 (R$1,737 million), recorded in income statement for the three-month period ended September 30, 2021.

 

  37  

 

 

Selected Notes to the Interim Financial Statements

Expressed in millions of United States dollar, unless otherwise stated

 

Based on the present value of the projected cash outflows, the provision related to Global Settlement is detailed as follows:

 

    September 30, 2021     December 31, 2020  
Cash settlement obligation, net of judicial deposits     2,327       2,343  
Provision for socio-economic reparation and others     859       860  
Provision for social and environmental reparation     766       786  
      3,952       3,989  

 

    September 30, 2021     December 31, 2020  
Current liabilities     2,101       1,561  
Non-current liabilities     1,851       2,428  
Liabilities     3,952       3,989  

 

(a.i) Cash settlement obligation

 

The cash settlement obligation relates to the socio-economic reparation and socio-environmental compensation projects that will be carried out or managed directly by the State of Minas Gerais and Institutions of Justice, mainly aiming to develop the urban mobility program and strengthening public service programs, as well as other projects that will be proposed by the affected population. In addition, resources will be used in a program of income transfer to those affected by the event, which will be carried out by Institutions of Justice. Of the total amount, US$809 (R$4,400 million) relates to the income transfer program that will be fully paid in 2021. The remaining amount of US$1,518 (R$8,256 million) is the present value of the semiannual fixed payments obligation, which will last 5 years on average.

 

(a.ii) Provision for socio-economic reparation and others

 

The Global Settlement includes remediation projects for Brumadinho and other affected municipalities of the Paraopeba basin. The socioeconomic reparation actions aim to strengthen the productive activities of the affected region, through measures for greater economic diversification of the municipality of Brumadinho, reducing its historical dependence on mining, and, for the rest of the Basin, finding ways to support the transformation of the economy of the impacted municipalities. These projects will be carried out directly by the Company for an average period of 3 years.

 

The estimated amounts for the project execution, although set in the agreement, may vary since the implementation of those projects are Vale's responsibility and changes against the original budget may result in changes in provision in future reporting periods.

 

(a.iii) Provision for social and environmental reparation

 

The Global Settlement establishes the rule for the development of the environmental reparation plan, and projects for the compensation of environmental damage already known. These measures aim to repair the damage caused, restore the ecosystems disruption, restore local infrastructure, repair social and economic losses, recover affected areas and repair the loss of memory and cultural heritage caused by the dam rupture. It also includes several actions to clean up the affected areas and improvements to the water catchment system along the Paraopeba River and other water collection points near the affected area. These measures and compensation projects will be carried out directly by the Company for an average period of 5 years.

 

The estimated amount to carry out the environmental recovery actions is part of the Global Settlement. However, it has no cap due to the Company's legal obligation to fully repair the environmental damage caused by the dam rupture. Therefore, this provision may change in the future depending on several factors that are not under the control of the Company.

 

b) Provision for individual indemnification and other commitments

 

For the individual indemnification, Vale and the Public Defendants of the State of Minas Gerais formalized an agreement on April 5, 2019, under which those affected by the Brumadinho’s Dam failure may join an individual or family group out-of-Court settlement agreements for the indemnification of material, economic and moral damages. This agreement establishes the basis for a wide range of indemnification payments, which were defined according to the best practices and case law of Brazilian Courts, following rules and principles of the United Nations (“UN”). As at September 30, 2021, the provision recorded is US$127 (US$179 as at December 31, 2020).

 

In addition to the Global Settlement, the Company has been working 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 of Dam I. As at September 30, 2021, the provision recorded is US$224 (US$267 as at December 31, 2020).

 

In addition, 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 US$46 (R$250 million). The Company signed an agreement with IBAMA, of which US$27 (R$150 million) will be used in environmental projects in 7 parks in the state of Minas Gerais, covering an area of approximately 794 thousand hectares, and US$18 (R$100 million) will be used in basic sanitation programs in the state of Minas Gerais.

 

  38  

 

 

Selected Notes to the Interim Financial Statements

Expressed in millions of United States dollar, unless otherwise stated

 

c) De-characterization of other dams in Brazil

 

Following the Brumadinho Dam rupture, the Company has decided 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. In September 2020, the federal government enacted Law no. 14,066, which modified the National Dam Safety Policy (Law no. 12.334/2020), reinforcing the prohibition of constructing and raising upstream dams in Brazil. The statute also requires companies to decharacterize the structures built using the upstream method by 2022, or by a later date if it is proven that the decharacterization is not technically feasible by 2022.

 

The Company’s projects of de-characterization of dams are projected to last 8 years on average and were discounted at the present value using an observable rate, which increased from 3.5% at December 31, 2020 to 5.0% at September 30, 2021. The Company has a total provision to comply with these assumed obligations in the amount of US$1,857 at September 30, 2021 (US$2,289 as at December 31, 2020).

 

(c.i) Operation stoppages

 

The Company has suspended some operations due to judicial decisions or technical analysis performed by Vale on its upstream dam structures. The Company has been recording losses in relation to the operational stoppage and idle capacity of the ferrous mineral segment in the amounts of US$63 and US$256 for the three and nine-months periods ended September 30, 2021 (US$111 and US$378 for the three and nine-months periods ended September 30, 2020), respectively. The Company is working on legal and technical measures to resume all operations at full capacity.

 

d) Contingencies and other legal matters

 

(d.i) Requests for fines or forfeit of assets

 

On August 26, 2020, the Public Prosecutor's Office of Minas Gerais (“MPMG”) and other plaintiffs of the Public Civil Actions presented a request for ruling condemning Vale to indemnify alleged economic losses of the State of Minas Gerais and collective moral damages, both claims already considered in said Public Civil Actions filed against Vale in January 2019 as a result of the Brumadinho dam rupture. In that submission, the plaintiffs also requested the immediate freezing of US$4.9 billion (R$26.7 billion) from the Company as a guarantee for the reimbursement of the alleged economic losses, which was dismissed by the judge of the 2nd Lower Court of Public Treasury of Belo Horizonte on October 6, 2020. This claim was extinguished with the Global Settlement.

 

In other proceeding, in May 2020, the MPMG requested the imposition of fines or forfeit of assets, rights and amounts of the Company, allegedly based on Article 5, item V of Brazilian Law 12.846/2013. According to the MPMG, Vale would have, through its employee’s actions, hindered the inspection activities of public agencies in the complex. Vale was not required to present any guarantees of US$1.4 billion (R$7.9 billion) based on a judicial decision. The Company believes that the likelihood of loss is remote.

 

In January 2021, the Comptroller General of the State of Minas Gerais (“CGE”) notified Vale to present it defense against the Administrative Liability Proceeding (“PAR”) initiated based on the same article. Vale presented its defense in March 2021, and filed a writ of mandamus in the face of the establishment of this PAR, which had the injunction granted to suspend the proceeding of the PAR.

 

In October 2020, the Company was informed that the Brazilian Office of the Comptroller General (“CGU”) initiated an administrative proceeding based on the same allegations made by the MPMG. As this is a discretionary procedure from the CGU, the Company estimates its likelihood of a loss during the administrative phase as possible, but it reaffirms its assessment of loss as remote in the annulment lawsuit to be instituted against any decision by CGU, if necessary.

 

(d.ii) U.S. Securities putative class action suit

 

Vale is defending itself in a putative class action brought before a Federal Court in New York and filed by holders of securities - American Depositary Receipts ("ADRs") - issued by Vale. 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.

 

  39  

 

 

Selected Notes to the Interim Financial Statements

Expressed in millions of United States dollar, unless otherwise stated

 

Following the decision of the Court, in May 2020, that denied the Motion to Dismiss presented by the Company, the Discovery phase has started, and the fact Discovery was expected to be concluded by June 2021. However, due to the pandemic, the fact Discovery term has been extended to be concluded by March 2022, the fact Discovery is currently ongoing. In parallel, in February 2021 the Plaintiff filed a motion for class certification, which we opposed in April, 2021. In June, 2021 a Reply was filed by the Plaintiff and rebuttal expert reports were filed by the parties. A decision by the Court on the motion for class certification is expected to be issued in the upcoming weeks.

 

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

 

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

 

In Brazil, Vale is a defendant in (i) one arbitration filed by 351 minority shareholders, (ii) one arbitration filed by a class association allegedly representing all Vale’s minority shareholders, and (iii) one arbitration filed by foreign investment funds.

 

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

 

Based on the evaluation of the Company's legal counsel and given the very preliminary stage, the expectation of loss of these proceedings is classified as possible.

 

Specifically, in the proceeding filed by foreign funds, the Claimants estimated the amount of the alleged losses at approximately US$330 (R$1,800 million). However, the Company disagrees with the estimated losses alleged by the foreign funds and believes that the likelihood of loss is remote based on the current status of the proceeding.

 

(d.iv) Investigation by the Securities and Exchange Commission (“SEC”) and CVM

 

Vale has been notified that the SEC staff has made a preliminary determination to recommend that the SEC commence proceedings against Vale alleging violations of U.S. securities laws related to Vale’s disclosures about its dam safety management and the dam at Brumadinho. If the SEC authorizes an action against Vale, the SEC could seek an injunction against future violations of U.S. federal securities laws, the imposition of civil monetary penalties, disgorgement and other relief within the SEC’s authority in a lawsuit filed in a federal court.  The CVM is also conducting investigations relating to Vale’s disclosure of relevant information to shareholders, investors and the markets in general, especially regarding the conditions and management of Vale’s dams. At the time, it is not yet possible to estimate the value or a range of potential loss to the Company.

 

(d.v) Criminal proceedings and investigations

 

In January 2020, the MPMG brought criminal charges against 16 individuals (including former executive officers of Vale and former employees) for a number of potential crimes, including homicide, and against Vale S.A. for alleged environmental crimes. These charges were accepted by the state criminal judge in the city of Brumadinho on February 14, 2020, however, on October 19, 2021, the Superior Court of Justice annulled this decision and determined that it should be judged by the Federal Court. Vale intends to vigorously defend itself against the criminal claims, and the Company cannot estimate when a decision on this criminal proceeding will be issued.

 

(d.vi) Labor Collective Civil Action

 

In 2021, public civil actions were filed by a labor union in the Labor Court of Betim in the Brazilian State of Minas Gerais, claiming the indemnification payment for death damage to each direct and outsourced employee who has died due to the Dam I rupture. They are claiming to represent 246 workers and have requested indemnification payments ranging between US$276 thousand (R$1.5 million) and US$552 thousand (R$3 million) to each fatal victim. There has been an initial decision condemning Vale to pay US$184 thousand (R$1 million) per each direct employees (131 fatal victims). Vale is defending itself against these actions and believes that, despite the lack of provision in the Brazilian legal framework, the likelihood of loss is deemed possible.

 

  40  

 

 

Selected Notes to the Interim Financial Statements

Expressed in millions of United States dollar, unless otherwise stated

 

e) Insurance and financial guarantees

 

(e.i) 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.

 

(e.ii) Financial guarantees

 

In April 2021, the financial guarantees related to the Brumadinho event were released, due the Global Settlement. As at December 31, 2020, the Company had financial guarantees in the amount of US$1,124 (R$5,843 million).

 

21.            Liabilities related to associates and joint ventures

 

In November 2015, the Fundão tailings dam owned by Samarco Mineração S.A. (Samarco) failed, releasing tailings downstream, flooding certain communities and causing impacts on communities and the environment along the Doce river. The rupture resulted in 19 fatalities and caused property and environmental damage to the affected areas. Samarco is a joint venture equally owned by Vale S.A. and BHP Billiton Brasil Ltda. (‘‘BHPB’’).

 

In June 2016, Samarco, Vale and BHPB created the Fundação Renova, a not-for-profit private foundation, to develop and implement (i) social and economic remediation and compensation programs and (ii) environmental remediation and compensation programs in the region affected by the dam rupture. The creation of Fundação Renova was provided for under the agreement for settlement and conduct adjustment (the ‘‘Framework Agreement’’) signed in March 2016 by Vale, BHPB, Samarco, the Brazilian federal government, the two Brazilian states affected by the rupture (Minas Gerais and Espírito Santo) and other governmental authorities.

 

In June 2018, Samarco, Vale and BHPB entered into a comprehensive agreement with the offices of the federal and state (Minas Gerais and Espírito Santo) prosecutors, public defenders and attorney general, among other parties, improving the governance mechanism of Fundação Renova and establishing, among other things, a process for potential revisions to the remediation programs provided under the Framework Agreement based on the findings of experts hired by Samarco to advise the MPF (Federal Prosecutor’s Office) over a two-year period (the ‘‘June 2018 Agreement’’). Under the Framework Agreement, the June 2018 Agreement and Renova’s by-laws, Fundação Renova must be funded by Samarco, but to the extent that Samarco is unable to fund, Vale and BHPB must ratably bear the funding requirements Under the Framework Agreement.

 

On April 9, 2021, Samarco announced the request for Judicial Reorganization (“RJ”) was filed with the Minas Gerais Court to renegotiate its debt, which is held by bondholders abroad. The purpose of RJ is to restructure Samarco’s debts and establish an independent and sustainable financial position, allowing Samarco to keep working to resume its operations safely and to fulfill its obligations related to the Renova Foundation.

 

The RJ does not affect Samarco's obligation to remediate and compensate the impacts of the Fundão tailings dam failure. However, as Samarco began the gradual resumption of operations in December 2020, it is not yet possible to reliably estimate when Samarco will generate cash to comply with its assumed obligation in the TTAC. Thus, the liability recorded by Vale on September 30, 2021 does not consider Samarco's potential cash flows generation. Therefore, the RJ did not have any additional impact on these interim financial statements.

 

Therefore, the provision related to Renova is US$2,061 (R$11,212 million) as at September 30, 2021 (US$1,853 (R$9,634 million) as at December 31, 2020). In addition, the Company has a provision of US$204 (R$1,110 million) (US$221 (R$1,148 million) as at December 31, 2020) for the de-characterization of the Germano dam.

 

  41  

 

 

Selected Notes to the Interim Financial Statements

Expressed in millions of United States dollar, unless otherwise stated

 

Movements during the period

 

    2021     2020  
Balance at January 1,     2,074       1,700  
Provision     560       566  
Disbursements     (131 )     (306 )
Present value valuation     (101 )     34  
Translation adjustment     (137 )     (509 )
Balance at September 30,     2,265       1,485  

 

      September 30, 2021       December 31, 2020  
Current liabilities     1,551       876  
Non-current liabilities     714       1,198  
Liabilities     2,265       2,074  

 

Renova Foundation

 

During the second quarter of 2021, Fundação Renova reviewed the assumptions used on the preparation of the estimates incorporated into the mitigation and compensation programs mainly due recent judicial decisions increasing the scope of some TTAC programs. The periodic review, resulted in an additional provision of US$560 (R$2,820 million), recorded in the nine-month period ended September 30, 2021, which corresponds to its portion of the responsibility to support the Renova Foundation. There was no additional provision for the three-month period ended September 30, 2021.

 

Samarco’s working capital

 

In addition to the provision, Vale S.A. made available US$21 (R$113 million) during the first quarter of 2021 (2020: US$56), which was fully used to fund Samarco’s working capital. This expense was recognized as “Equity results and other results in associates and joint ventures”. No additional amount was made available during the nine-month period ended September 30, 2021 (2020: US$119 (R$594 million)). Vale S.A. may provide an additional short-term credit facility up to US$64 (R$348 million) in 2021.

 

Contingencies related to Samarco accident

 

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

 

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

 

The Framework Agreement (“TAC-Gov”) considers the renegotiation of the Renova Foundation's reparation programs depending on the results of the studies carried out by the experts. The negotiations started in April 2021 and a letter of principles was signed in June 2021 by Vale, BHP and Samarco with the representatives of the government and various justice institutions. Negotiations, with mediation by the National Council of Justice, are ongoing.

 

There has been issued judicial decisions in relation to the “Eixo Prioritário 7”, which aims individual indemnification, including new categories in the scope of the compensation, other municipalities that are not part of the TTAC and the increase of the compensation system related to the municipality of Mariana, which already has its specific conditions set for individual indemnification. Therefore, considering that those decisions are still being disputed and depending on the definitive decisions of these proceedings, the provision recorded by the Company may increase in future reporting periods.

 

On January 31, 2020, “Eixo Prioritário 10” was created to address the different understanding of parties regarding the scope, deadlines and purpose of the experts hired to assist the affected people, which is a requirement of the TacGov. On October 4, 2021 (subsequent event), a decision was issued determining adjustments to the work plans presented by the experts. Additionally, considering that some groups of affected people have filed a request to dismiss the hiring of these experts, a hearing was scheduled, and it did not yet happen. The Company is assessing the aspects related to this decision, which is not yet definitive and is subject to appeal. Therefore, depending on the judicial developments of this proceeding, the provision recorded by the Company may increase in future reporting periods.

 

  42  

 

 

Selected Notes to the Interim Financial Statements

Expressed in millions of United States dollar, unless otherwise stated

 

(ii) Class Action in the United States

 

In March 2017, the holders of securities issued by Samarco Mineração S.A. filed a potential collective action in the New York Federal Court against Samarco, Vale, BHP Billiton Limited, BHP Billiton PLC and BHP Brasil Ltda. based on U.S. Federal Securities laws, which was dismissed without prejudice, in June 2019. In December 2019 the plaintiffs filed a Notice of Appeal to the NY Court of Appeals.

 

In January 2021, it was held a hearing before the Second Circuit of the New York State Court of Appeals. In March 2021 the Second Circuit denied the plaintiff’s appeal. This decision became res judicata in June 2021, since no further appeal has been filed by the Plaintiff. Thus, the case is closed and should be filed by the Court.

 

(iii) Criminal proceeding

 

In September 2019, the federal court of Ponte Nova dismissed all criminal charges against Vale representatives relating to the first group of charges, which concerns the results of the Fundão dam failure, remaining only the legal entity in the passive pole. The second group of charges against Vale S.A. and one of the Company’s employees, which concerns the accusation of alleged crimes committed against the Environmental Public Administration, remained unchanged. In June 2021, the Company filed an appeal with the Superior Court of Justice against the decision of the Federal Regional Court of the 1st Region that did not decided in favor of Vale. In July 2021, the Federal Prosecutor filed an appeal with the Federal Regional Court of the 1st Region, against the judge's decision that rejected the resumption of the procedural instruction, requesting the review of the decision. The Company cannot estimate when a final decision on the case will be issued.

 

Insurance

 

Since the Fundão dam rupture, the Company has been negotiating with insurers the indemnification payments based on its general liability policies. For the nine-month period ended September 30, 2021, the Company received payments in the amount of US$33, and recognized a gain in the income statement as “Equity results and other results in associates and joint ventures”.

 

22.            Provisions

 

    Current liabilities     Non-current liabilities  
    September 30, 2021     December 31, 2020     September 30, 2021     December 31, 2020  
Payroll, related charges and other remunerations     730       877       -       -  
Onerous contracts     37       58       845       838  
Environmental obligations     72       102       175       200  
Asset retirement obligations (i)     82       99       3,589       4,121  
Provision related to VNC sale (note 12)     -       500       -       -  
Provision related to the Candonga Consortium (ii)     72       39       -       -  
Provisions for litigation (note 23)     80       87       1,024       1,004  
Employee postretirement obligations (note 24)     103       103       1,641       2,271  
Provisions     1,176       1,865       7,274       8,434  

 

(i) As at September 30, 2021, the Company has issued letters of credit and surety bonds to guarantee an amount of US$608 of its asset retirement obligation related to the Base Metals operations.

(ii) As at December 31, 2020, the provision related to the Candonga Consortium was presented in the balance sheet under “Others” in the current liabilities.

 

Provision related to the Candonga Consortium - On October 6, 2021 (subsequent event), the Superior Court of Justice issued a judicial decision to suspend the effects of a decision of the Federal Regional Court which assured the maintenance of the Risoleta Neves hydroelectric plant in the Energy Reallocation Mechanism (“MRE”). Thereby, the financial compensation within the MRE for its temporary incapacity of generating electric energy shall not apply to the Candonga Consortium, which is a joint operation between Vale and Aliança Geração de Energia. The plant has been halted since November 2015, due to the dam failure of Fundão, and the carrying value of the consortium assets are fully impaired. Therefore, the Company would be requested by the National Electric Energy Agency (“ANEEL”) and the Chamber of Electric Energy Commercialization (“CCEE”) to pay approximately US$72 (R$392 million), for which the Company has a provision as at September 30, 2021.

 

  43  

 

 

Selected Notes to the Interim Financial Statements

Expressed in millions of United States dollar, unless otherwise stated

 

23.            Litigations

 

a) Provision for legal proceedings

 

The Company has considered all information available to assess the likelihood of an outflow of resources and in the preparation on the estimate of the costs that may be required to settle the obligations. The main litigations refer to:

 

Tax litigations - Mainly refers to the lawsuit filed in 2011 by Valepar (merged by Vale) seeking the right to exclude the amount of dividends received in the form of interest on stockholders’ equity (“JCP”) from the PIS and COFINS tax base. The amount reserved for this proceeding as at September 30, 2021 is US$409 (US$423 as at December 31,2020). This proceeding is guaranteed by a judicial deposit in the amount of US$471 recorded at September 30, 2021 (US$487 as at December 31,2020).

 

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

 

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

 

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

 

    Tax litigation     Civil litigation     Labor litigation     Environmental litigation     Total of litigation provision  
Balance at December 31, 2020     485       260       335       11       1,091  
Additions and reversals, net     -       5       61       1       67  
Payments     (5 )     (20 )     (41 )     (4 )     (70 )
Indexation and interest     5       22       28       -       55  
Translation adjustment     (22 )     (11 )     (15 )     -       (48 )
Acquisition of NLC (note 12)     -       1       8       -       9  
Balance at September 30, 2021     463       257       376       8       1,104  
Current liabilities     7       15       57       1       80  
Non-current liabilities     456       242       319       7       1,024  
      463       257       376       8       1,104  

 

    Tax litigation     Civil litigation     Labor litigation     Environmental litigation     Total of litigation provision  
Balance at December 31, 2019     696       300       455       11       1,462  
Additions and reversals, net     18       41       13       2       74  
Payments     (15 )     (13 )     (46 )     -       (74 )
Indexation and interest     16       20       17       1       54  
Translation adjustment     (178 )     (89 )     (129 )     (4 )     (400 )
Balance at September 30, 2020     537       259       310       10       1,116  
Current liabilities     7       14       61       -       82  
Non-current liabilities     530       245       249       10       1,034  
      537       259       310       10       1,116  

 

b) Contingent liabilities

 

The main contingent liabilities, updated by applicable interest rates, for which the likelihood of loss is not considered remote are presented by nature as follows:

 

    September 30, 2021     December 31, 2020  
Tax litigations     7,978       6,911  
Civil litigations     1,652       1,348  
Labor litigations     523       563  
Environmental litigations     940       907  
Total     11,093       9,729  

 

The contingent liabilities related to the Brumadinho event and Samarco are not presented above. The information is presented in notes 20 and 21.

 

As reported in the annual financial statements for 2020, the Company is a counterparty in several actions and the main updates on contingent liabilities since then, are discussed as follows:

 

(b.i) Assessments regarding the disallowance of JCP:

 

In 2021, Vale received tax assessment for collection of corporate income taxes (IRPJ and CSLL) and penalties regarding the disallowance of the JCP deducted from the 2017 and 2018 taxable income, in the amount of US$ 979 (R$5,323 million). There was also a reduction in tax losses, with the corresponding tax impact of US$128 (R$698 million). The Company had filed administrative appeals and the decision is pending. As of September 30,2021, the likelihood of loss is possible for both tax assessments.

 

  44  

 

 

Selected Notes to the Interim Financial Statements

Expressed in millions of United States dollar, unless otherwise stated

 

(b.ii) Proceeding related to income tax paid abroad:

 

In March 2021, Vale was assessed for the collection of US$399 (R$2,171 million) due to the disregard of taxes paid abroad that were offset by the IRPJ debt in 2016. Tax authorities allege the Company has failed to comply with the applicable rules relating to the offset, in Brazil, of income taxes paid abroad. The Company had filed an administrative appeal and a decision is pending. As at September 30, 2021, the likelihood of loss is possible.

 

c) Judicial deposits

 

    September 30, 2021     December 31, 2020  
Tax litigations     974       988  
Civil litigations     76       85  
Labor litigations     148       177  
Environmental litigations     23       18  
Total     1,221       1,268  

 

d) Guarantees contracted for legal proceedings

 

In addition to the above-mentioned tax, civil, labor and environmental judicial deposits, the Company contracted US$2.2 billion (R$12.1 billion) in guarantees for its lawsuits.

 

e) ICMS included in PIS and COFINS computation tax base

 

Vale has been discussing the issue regarding the exclusion of ICMS in PIS and COFINS tax basis in two judicial proceedings filed before March 2017. In one of the proceedings includes refers to the taxable events from March 2012 onwards and has a definitive favorable decision (res judicata). This proceeding gave rise to the recognition of a gain in the amount of US$63 (R$313 million) in the income statement for the year ended December 31, 2020. This amount was calculated based on the thesis that the collected ICMS was supposed to be excluded from the contribution basis. With the definition of the subject by Federal Supreme Court in the leading case (RE 574.706), which is binding to all taxpayers, and has determined that the ICMS to be excluded shall be the amount stated in the invoices, the Company recognized an additional gain of US$29 (R$146 million) for the three-month period ended June 30, 2021.

 

The other proceeding, which covers the taxable events occurred between December 2001 and February 2012, resulted in a gain of US$162 (R$808 million) for the three-month period ended June 30, 2021, due to the favorable decision to the Company, in accordance with the recent decision of the Federal Supreme Court about the referred leading case.

 

24.            Employee benefits

 

a) Long-term incentive programs

 

For the long-term awarding of eligible executives, the Company compensation plans includes Matching program and Performance Share Unit program (“PSU”), with three years-vesting cycles, respectively, with the aim of encouraging employee’s retention and encouraging their performance.

 

Matching Program

 

For the Matching program, the participants can acquire Vale’s common shares in the market without any benefits being provided by Vale. If the shares acquired are held for a period of three years and the participants keep it employment relationship with Vale, the participant is entitled to receive from Vale an award in shares, equivalent to the number of shares originally acquired by the executive. It should be noted that, although a specific custodian of the shares is defined by Vale, the share initially purchased by the executives have no restriction and can be sold at any time. However, if it’s done before the end of the three-year-vesting period, they would lose its right of receiving the related award to be paid by Vale.

 

Performance Shares Units

 

For PSU program, the eligible executives may receive during a three year-vesting cycle an award equivalent to the market value of a determined number of common shares and depending on the Vale’s performance factor, which is measured based on indicators of the total return to the shareholders (“TSR”) and Environmental, Social, and Governance (“ESG”). It is comprised by 80% of TSR metrics and 20% of ESG indicators.

 

  45  

 

 

Selected Notes to the Interim Financial Statements

Expressed in millions of United States dollar, unless otherwise stated

 

At the Annual and Extraordinary Shareholders' Meeting ("AGOE") held on April 30, 2021, the Company's shareholders approved changes in the PSU program to be implemented as from the 2021 grant, consisting of (i) a change in the payment of the program award, which will be paid with common shares of the Company, and (ii) additional payment at the end of each cycle based on the remuneration that will be paid by Vale to its stockholders during the cycle.

 

b) Modification altering manner of settlement

 

Both programs were classified as “cash-settled” due to the PSU requirements and the Company’s settlement practice for the Matching program and, therefore, presented as a liability. However, the decision taken at the AGOE (“modification date”) demonstrates the Company's declared intention to change the form of liquidation of the programs. As a result, those programs were modified to become “equity-settled” and were remeasured at the modification-date fair value.

 

Fair value at modification date

 

The fair value of the Matching program was estimated using the Company’s stock price and ADR at the modification date, which was R$109.02 and US$20.12 per share, respectively. The number of shares granted for the 2019, 2020 and 2021 cycles were 1,222,721, 2,154,534 and 1,046,255, respectively. The fair value of the program will be expensed on a straight-line basis over the three-year required service period, net of estimated forfeitures.

 

For the PSU, the program was measured using Monte Carlo simulations to estimate the TSR indicator and ESG indicators. The assumptions used in the Monte Carlo simulation to estimate the fair value of the TSR indicator are shown below:

 

PSU   2021  
Granted shares     1,474,723  
Date shares were granted     04/30/2021  
VALE (BRL)     109.02  
VALE ON (USD)     20.12  
Expected volatility     39.00%p.y.  
Expected dividend yield (i)     3.18%p.y.  
Expected term (in years)     3  
Expected value of the total shareholder return (TSR)     51.20 %
Expected value of the performance factor (Total)     60.96 %

 

(i) Source: Bloomberg April 30, 2021

 

Reclassification from cash-settled to equity-settled

 

Matching   April 30, 2021     Remeasurement     Reclassification     May 1, 2021     Expense (i)     September 30, 2021  
Liability     33       5       (38 )     -       -       -  
Stockholders' equity     -       -       38       38       12       50  
Net income     -       (5 )     -       (5 )     (12 )     (17 )

 

PSU   April 30, 2021     Remeasurement     Reclassification     May 1, 2021     Expense (i)    

September 30,

2021

 
Liability     3       (1 )     (2 )     -       -       -  
Stockholders' equity     -       -       2       2       3       5  
Net income     -       1       -       1       (3 )     (2 )

 

(i) The Company has incurred in expenses in the amount of US$7 and US$2 with Matching and PAV programs, respectively, for the three-month periods ended September 30, 2021.

 

  46  

 

 

Selected Notes to the Interim Financial Statements

Expressed in millions of United States dollar, unless otherwise stated

 

c) Employee post-retirement obligations

 

Reconciliation of net liabilities recognized in the statement of financial position

 

    September 30, 2021     December 31, 2020  
    Overfunded
pension
plans
    Underfunded
pension
plans
    Other
benefits
    Total     Overfunded pension
plans
    Underfunded
pension
plans
    Other
benefits
    Total  
Amount recognized in the statement of financial position                                                
Present value of actuarial liabilities     (2,907 )     (4,202 )     (1,536 )     (8,645 )     (3,105 )     (4,632 )     (1,733 )     (9,470 )
Fair value of assets     3,616       3,994       -       7,610       3,969       3,991       -       7,960  
Effect of the asset ceiling     (709 )     -       -       (709 )     (864 )     -       -       (864 )
Liabilities     -       (208 )     (1,536 )     (1,744 )     -       (641 )     (1,733 )     (2,374 )
                                                                 
Current liabilities     -       (47 )     (57 )     (104 )     -       (47 )     (96 )     (143 )
Non-current liabilities     -       (161 )     (1,479 )     (1,640 )     -       (594 )     (1,637 )     (2,231 )
Liabilities     -       (208 )     (1,536 )     (1,744 )     -       (641 )     (1,733 )     (2,374 )

 

25.         Stockholders’ equity

 

a) Share capital

 

As at September 30, 2021, the share capital was US$61,614 corresponding to 5,132,458,410 shares issued and fully paid without par value.

 

    September 30, 2021  
Stockholders   Common shares     Golden shares     Total  
Shareholders with more than 5% of total capital     2,204,322,997       -       2,204,322,997  
Previ     415,366,682       -       415,366,682  
Capital World Investors     335,249,101       -       335,249,101  
Capital Research Global Investors     326,001,911       -       326,001,911  
Bradespar     293,907,266       -       293,907,266  
Mitsui&co     286,347,055       -       286,347,055  
Blackrock, Inc     279,562,772       -       279,562,772  
Capital International Investors     267,888,210       -       267,888,210  
Others     2,687,617,480       -       2,687,617,480  
Golden shares     -       12       12  
Total outstanding (without shares in treasury)     4,891,940,477       12       4,891,940,489  
Shares in treasury     240,517,921       -       240,517,921  
Total capital     5,132,458,398       12       5,132,458,410  

 

The information presented above is based on the communications provided by the stockholders in connection with the Instruction 358 issued by the Brazilian Securities and Exchange Commission (“CVM”).

 

b) Share buyback program

 

On April 1, 2021, the Board of Directors approved a share buyback program for Vale’s common share which will be limited to a maximum of 270,000,000 common shares, and their respective ADRs, representing up to 5.3% of the total number of outstanding shares. The program was approved to be carried out over up to a 12-month period and the repurchased shares will be cancelled after the expiration of the program or utilized on the executive compensation programs (note 24). The shares are acquired in the stock market based on regular trading conditions.

 

As at September 30, 2021, the Company purchased 238,860,947 common shares at an average cost of US$20.28 per share (R$105.76 per share), representing US$4,845 (R$25,261 million). Of that amount, US$1,837 (R$9,687 million) or 99,842,600 shares were purchased through wholly owned subsidiaries and US$3,008 (R$15,574 million) or 139,018,347 shares directly by the parent company.

 

As the Company is close to reaching the limit for the buyback of shares in the current program, the Board of Directors approved on October 28, 2021 (subsequent event), a new share buyback program for Vale’s common share which will be limited to a maximum of 200,000,000 common shares, and their respective ADRs, representing up to 4.1% of the total number of outstanding shares. The program will be carried out over up to an 18-month period.

 

  47  

 

 

Selected Notes to the Interim Financial Statements

Expressed in millions of United States dollar, unless otherwise stated

 

c) Treasury shares

 

The Company utilized 890,482 and 1,628,485 units from its treasury shares, for the share-based payment program of its executives (note 24), corresponding to US$7 and US$14 recognized as “Treasury shares utilized in the period” in the Statement of Changes in Equity, for the periods ended September 30, 2021 and 2020, respectively.

 

On September 16, 2021, the Board of Directors approved the cancellation of 152,016,372 common shares of the Company acquired in previous buyback programs and held in treasury, without reducing its capital stock.

 

d) Stockholder’s remuneration

 

On February 25, 2021, based on the Company’s dividends policy, the Board of Directors approved the stockholder’s remuneration in the amount of US$3,972 (R$21,866 million), equivalent to R$4.262386983 per share, which was fully paid on March 15, 2021. Of the total amount, US$762 (R$4,288 million) was in the form of interest on stockholders’ equity and US$3,122 (R$17,578 million) in the form of dividends.

 

On June 17, 2021, the Board of Directors approved an additional stockholder’s remuneration in the total amount of US$2,200 (R$ 11,046 million), equivalent to R$2.177096137 per share, which was fully paid on June 30, 2021. Of the total amount, US$724 (R$ 3,634 million) relates to the anticipation of the 2021 year-end result and US$1,476 (R$7,412 million) was paid from the balance on the Company’s profit reserves.

 

On September 16, 2021, the Board of Directors approved the stockholder’s remuneration in the total amount of US$7,391 (R$40,200 million), equivalent to R$8.108316476 per share, which was fully paid on September 30, 2021. The amount distributed relates to the anticipation of the 2021 year-end result.

 

26.            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.

 

In June 2021, the Company concluded the transaction for the acquisition of the interests held by Mitsui (related party) in Vale Moçambique and Nacala Logistics Corridor (note 12).

 

a) Transactions with related parties

 

    Three-month period ended September 30,  
    2021     2020  
    Joint Ventures     Associates     Stockholders     Total     Joint Ventures     Associates     Stockholders     Total  
Net operating revenue     179       69       52       300       110       60       48       218  
Cost and operating expenses     (280 )     (6 )     -       (286 )     (223 )     (7 )     -       (230 )
Financial result     (1 )     (1 )     (353 )     (355 )     -       -       (38 )     (38 )

 

    Nine-month period ended September 30,  
    2021     2020  
    Joint Ventures     Associates     Stockholders     Total     Joint Ventures     Associates     Stockholders     Total  
Net operating revenue     520       196       166       882       247       178       135       560  
Cost and operating expenses     (610 )     (15 )     -       (625 )     (751 )     (18 )     -       (769 )
Financial result     (9 )     (2 )     (732 )     (743 )     29       4       (74 )     (41 )

 

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.

 

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 logistics costs for using the Nacala Logistics Corridor, which has been consolidated since June 2021, as described in note 12.

 

  48  

 

 

Selected Notes to the Interim Financial Statements

Expressed in millions of United States dollar, unless otherwise stated

 

b) Outstanding balances with related parties

 

    September 30, 2021     December 31, 2020  
    Joint Ventures     Associates     Stockholders     Total     Joint Ventures     Associates     Stockholders     Total  
Assets                                                
Cash and cash equivalents (i)     -       -       1,250       1,250       -       -       2,082       2,082  
Accounts receivable     151       20       -       171       109       45       2       156  
Dividends receivable     103       -       -       103       19       -       -       19  
Loans (ii)     -       -       -       -       1,118       -       -       1,118  
Derivatives financial instruments (i)     -       -       6       6       -       -       2       2  
Other assets     51       3       -       54       68       2       -       70  
                                                                 
Liabilities                             -                                  
Supplier and contractors     274       7       49       330       121       10       35       166  
Loans (ii)     -       -       -       -       -       1,385       944       2,329  
Derivatives financial instruments (i)     -       -       275       275       -       -       242       242  
Other liabilities     132       79       -       211       235       48       -       283  

 

(i) Refers to regular financial instruments with large financial institutions that are deemed related parties

(ii) Refers to loans settled upon completion of the NLC acquisition (note 12).

 

  49  

 

 

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)
     
  By: /s/ Ivan Fadel
Date: October 28, 2021   Head of Investor Relations

 

  50  

 

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