vale day - capex, iron ore market, partnerships & cost cuts_04dez13_bbd
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Vale Day detailsTRANSCRIPT
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(BRL mn) 2012A 2013E 2014E 2015E
Key Figures 4-Dec-13
EPS (R$) 4.14 5.95 5.91 4.65
Local price 32.39
Net earnings 21,126 30,388 30,180 23,747
ADR 14.76
EBITDA 36,048 50,446 48,195 45,087
Price range - 52 weeks (BRL) 25.52-43.09
Shareholders' equity 166,101 185,853 205,470 220,905
Shares outstanding (mn) 5,102.90
ROE% 12.72% 16.35% 14.69% 10.75%
3-month ADTV (R$mn) 469.5
P/E 7.82 5.44 5.48 6.96
Market cap (R$mn) 165,283
EV/EBITDA 6.11 4.37 4.57 4.89
EV (R$mn) 220,315
P/BV 1.00 0.89 0.80 0.75
Net debt (R$mn) 50,446
Dividend yield 6.96% 6.37% 6.33% 4.98%
Net debt/EBITDA (LTM) 1.17
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(BRL mn) Reported A/E QoQ % YoY %
Net Revenues
Vale Day: Capex, Iron Ore Market, Partnerships & Cost Cuts Vale hosted its Vale Day 2013 on Dec. 2 in NYC. Overall strategy, project developments and the company’s expectations regarding the various markets in which it operates were discussed in detail. Our main takeaways are: Strategy: Reducing uncertainties while keeping austerity
Settling a major tax dispute with large reduction in the liability (to R$22.3bn, from R$45bn) reduces uncertainties surrounding Vale.
Austerity and simplicity are guiding the overall decision-making process, with a conservative approach.
A strong balance sheet and maintenance of “A” credit rating are paramount to management, especially considering the company’s large capex needs.
Capex: Scaling back budget (US$14.8bn for 2014), with 3
rd consecutive reduction
The focus is still on the main projects: Carajás (35.3%), Moatize (27.7%), Itabiritos (11.5%), distribution network (4.7%) and Salobo II (3.6%).
R&D should remain stable in 2014, with feasibility studies expenses decreasing significantly (down US$192mn).
Sustaining capex budget was also reduced, to US$4.5bn from US$4.8bn, and there is potential for a further reduction of US$107mn related to a non-recurring ERP implementation project.
Iron ore market: Less volatility and healthier market ahead
Iron ore price volatility should decrease as the cap price is limited by new low-cost supply, while the floor is determined by quality deterioration and cost inflation at Chinese mines.
Vale believes 1/3 of new supply will be only filling the depletion gap.
Vale is continuously working on approval for docking Valemax ships in China.
Scrap is not an issue, as Chinese scrap has low quality and is difficult to collect.
Base metals: Rightsizing operations to increase efficiency
Closing of one furnace at Sudbury (two currently in operation) should help reduce sustaining capex by US$1bn, while productivity can be assured by operating the remaining furnace with greater capacity utilization.
Salobo: first quartile cash cost could generate US$1bn in annual cash flow.
Coal/Fertilizers: Partnership for Nacala and Kronau
Vale intends to sell half of its 70% stake in the Nacala corridor, and believes it could also be used to transport grain, boosting domestic agriculture.
Vale could sign a MOU for the Kronau project in the coming weeks.
Caves: S11D project approved already meeting cave legislation requirements
Vale obtained the environmental permit for S11D already complying with cave legislation, therefore not representing an unplanned risk for the project.
(…continued on following pages…)
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Vale FLASH NOTE
BBI Equity Research
Wednesday, December 4, 2013
Vale (VALE5, VALE US) Mining
Outperform Target Price: R$54.00, US$25.00 Upside: 66.7%, 67.6%
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Ibovespa Vale PNA
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COMPANY REPORT BBI Equity Research – Wednesday, December 4, 2013
Strategy: Reducing uncertainties while keeping austerity
Capex downtrend with simultaneous asset divestments:
o The company will only deploy capital in world-class assets.
o Already disinvested US$6.4bn in non-core assets (US$4.5bn in 2013).
o Disinvestment trend may continue going forward (management will
analyze all possibilities involving its non-core assets, but taking a careful
and disciplined approach, avoiding mispricings at all costs).
o Currently searching partners in some businesses to leverage returns.
Important milestones to reduce uncertainties achieved in recent months:
o Several tax disputes solved with no major cash flow pressure:
ICMS tax in Minas Gerais successfully negotiated.
CNI claimed unconstitutionally of state inspection fees.
Tax liability claimed by Swiss government settled.
o REFIS settlement of income tax on non-Brazilian subsidiaries
20% upfront with a remaining 15-year refinancing.
50% discount.
Reduced tax exposure to R$22.3bn from R$45.0bn – NPV of
R$14.4bn tax exposure for 2002-2013 was not included.
If a court rules in favor of Vale, it will have the right to stop paying
installments and request a refund of payments made.
Uncertainties regarding cave regulation: In light of the technical work Vale has
been performing, it is optimistic about sorting out issues.
Structure of controlling group: Although a formal decision has yet to be made, the
chairman said there is no reason not to renew the shareholders agreement.
o Approval of the S11D project could be an early indicator of renewal of the
agreement, as cash flow generation will only happen after the
agreements expire, while investments will mostly occur before it.
Figure 1: Capex Plan for 2014
Source: Company
Capex: Scaling back budget (US$14.8bn for 2014), with 3rd consecutive reduction
Third consecutive year of capex reduction (-5% vs. 2013, -16% vs. 2012).
2014 budget: US$14.8bn (using average BRL/USD rate of 2.35).
o US$9.3bn in projects, highly concentrated in key ones:
Carajás (iron ore): US$3.3bn (35.3%).
Moatize II (coal): US$2.6bn (27.7%).
Itabiritos (iron ore): US$1.1bn (11.5%).
Iron ore distribution network: US$436mn (4.7%).
Salobo II (copper): US$332mn (3.6%).
o US$4.5bn in maintenance and sustaining current operations.
Fourth year of stability in sustaining investments.
o US$0.9bn in R&D.
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COMPANY REPORT BBI Equity Research – Wednesday, December 4, 2013
Guidance for 2015 and 2016: US$13.6bn and US$10.4bn, respectively, for
approved projects only.
Still investing US$107mn in ERP implementation – potential to lower future
sustaining capex.
R&D – Feasibility studies on a downtrend, as focus on key projects increases.
Strategy: Vale is on the path to becoming cost competitive.
o 2013: “low-hanging fruit” (COGS down 5% YoY, R&D down 47% YoY,
SG&A expenses down 39% YoY – 9M12 vs. 9M13).
o 2014: “efficiency and productivity” (simplification of organizational
structures – potential for additional 10% reduction in SG&A expenses).
o 2015: “structural changes”.
Growth – Divestitures and partnerships may allow for potential dividends and
lower leverage.
Figure 2: EBITDA Growth for 2014
Source: Company
Iron ore market: Lower volatility and healthier market ahead
Vale’s outlook: Iron ore seaborne market and steel production will continue to
enjoy healthy growth (+34% and +23%,respectively, between 2012 and 2020).
Scrap should not be an issue until 2023-2025.
o Scrap from construction in China is difficult to collect, and has low quality.
o China does not have a proper collection network.
o Electricity is scarce and expensive.
Vertical integration (iron ore production controlled by the steel industry)
decreased from 28% in 2004 to 23% in 2012 (increasing seaborne market).
Depletion will increase with lower prices.
o 1/3 of new capacity will replace depletion.
o Vale does not see an oversupplied market.
Figure 3: Iron Ore Supply
Source: Company
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COMPANY REPORT BBI Equity Research – Wednesday, December 4, 2013
Chinese steel consumption intensity: on a very steep path and still in the
beginning of an uptrend, still having a long way still to go.
Figure 4: Steel Intensity versus GDP
Source: WSA, IMF, Company
Prices should remain stable going forward, and volatility is decreasing as new
low-cost supply curbs the cap, while cost inflation/deterioration of Chinese
producers’ mines increases the price floor.
Strategy: 2CTS
o Continuous confidence in Asia/China.
o Cost curve and quality:
Being well positioned in the cost curve is essential.
Maintaining very high quality is also indispensable.
o Time to market.
o Tailored to market (focus on Asian growth).
Vale needs to adapt its strategy to maximize returns in the Asian
market.
o Safety and health.
o Sustainability.
o Delivering shareholder value by:
Keeping market leadership.
Keeping FOB cost parity.
Increasing quality advantage.
Reducing logistics costs.
Improving customer services.
Staying in the first quartile is indispensable:
o Vale believes the cost curve is not becoming flatter. On the contrary, it is
actually becoming steeper (costs of high-cost producers are growing).
Figure 5: Iron Ore Industry Cost Curve (Seaborne + China Domestic)
Source: Company
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COMPANY REPORT BBI Equity Research – Wednesday, December 4, 2013
The shift to Asia should continue, representing a key challenge for Vale, due to
the logistics challenge.
o VALEMAX has already transported 44mn tons.
o Vale already has 30 ships in operation, and should receive the remaining
5 ships in 2014.
The company believes it will be able to dock VALEMAX directly in China in the
near future:
o It has already made 121 shipments with this kind of vessel.
o China is becoming a more market-oriented economy, and as VALEMAX
reduces pollution by 25%, it is in line with the Chinese government’s
current strategy.
The company expects 215mtpy of additional capacity, vs. 65mtpy of depletion,
with net growth of 150mtpy.
Many iron ore projects are presently addressing the issue of quality in order to
improve overall iron ore quality.
2018 – expected capacity of 450mtpy with better quality:
o Increase in average iron ore content by 1%.
o Decrease in silica content by almost 2% – in China a smaller silica
premium is being priced in.
Figure 6: Vale’s Iron Ore Capacity
Source: Company
Third-party purchases should stay in the 6-10mtpy range, depending on iron ore’s
overall attractiveness.
Figure 7: Vale’s Total Iron Ore Supply Forecasts
Source: Company
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COMPANY REPORT BBI Equity Research – Wednesday, December 4, 2013
Base Metals: Rightsizing operations to increase efficiency
Strategy (i): Delivering positive cash flow results.
o Gold streaming transaction (US$1.9bn).
o Reduction of operating, SG&A and R&D expenses (US$800mn YTD
through 3Q13).
o Conclusion of ramp-up of new operations.
Strategy (ii): Value over volume in feed generation.
o Idling of unprofitable mines in short/medium term.
o Closing of one furnace in Sudbury.
Instead of using two simultaneously at 50% capacity.
Savings of US$1bn in sustaining capex.
o Synergies in Sudbury basin – concrete results in 1H14.
All assets are in 1st and 2nd quartiles of cost curve.
o All nickel assets’ cash cost below US$10,000/t.
o PTVI should shift from 2nd quartile to 1st soon.
Salobo: Ramp up of world-class asset.
o Phase 1 successfully ramping up and phase 2 to double production
(start-up in mid 2014).
o First quartile of production cash cost with potential to generate US$1bn in
annual cash flow.
o Based on current forecasts, Vale should be able to reach 224ktpy in
2018 (around 20% above previous guidance).
Long Harbor: Investment has to be made to satisfy government requirements.
Rightsizing operations in both Sudbury and Thompson:
o Sudbury: further capex reductions with completion of projects (Totten
and CORe – mill redesign).
New Caledonia:
o Proved that integrated process and new technology worked in 2013.
o Focus is now on improving availability of the plan.
o Issue in November: sub-marine effluent pipeline ruptured without any
environmental impact – unexpected stoppage.
o 40,000t remains the target for 2014.
Onça Puma: very satisfying results from new furnace (15,000t for 2014).
EBITDA:
o US$1.9bn in 2013 (without the gold transaction and other non-recurring
items, US$1.5bn).
o US$2.5bn in 2014.
o Vale’s medium-term expectation is US$4-6bn (If nickel prices are at
$26,000/t, it can reach US$6bn).
Figure 8: Base Metals EBITDA Trend (US$bn)
Source: Company
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COMPANY REPORT BBI Equity Research – Wednesday, December 4, 2013
Coal/Fertilizers: Partnership for Nacala and Kronau
Moatize coal:
o Chipanga (Moatize’s coal product) is already seen as premium hard
coking coal (HCC).
o Australian operations becoming cash positive (sustainable cost
reductions and improving efficiency); will be put together with global
assets (partnership could be considered).
o Moatize:
Cost of US$64/t and improving conditions of Sena-Beira railroad.
Great scalability, world-class project.
Moatize + Eagle Downs: key projects for coal.
Figure 9: 2023 Seaborne FOB Cash Cost Forecast for HCC (Hard Coking Coal)
Source: Wood Mackenzie, Moatize – Vale cost projection
Nacala corridor:
o Open access railroad line.
o Vale will remain in charge of operations but is considering reducing its
stake in the Nacala corridor from 70% to 34-35% (discussions have
already begun, and moving towards an MOU).
o The company expects to find partners to share usage (Northeast of
Mozambique, which features strong grain production).
Figure 10: Potential Partnership for Nacala
Source: Company
Vale has expertise in mining and excellent logistics that could be used to improve
the value of the fertilizer business.
o Bayovar is an example of optimizing distribution.
Potential to unlock hidden value: bringing partners at both the project level and in
the fertilizer business itself.
Advanced discussions to develop Kronau potash project in Canada (possibility of
signing an MOU in the coming weeks).
Caves & safety: S11D approved already meeting cave legislation requirements
Caves:
o As per Brazilian legislation, any underground cave accessible to a human
being is protected by the regulation.
It took 24 years for the rules to become clear (only in 2012).
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COMPANY REPORT BBI Equity Research – Wednesday, December 4, 2013
o Cave relevance studies normally take 1 year to be completed, as they
are executed in both the dry and rainy seasons.
o The company expects favorable results in 2013, as some studies were
submitted in 2012.
Successful example with S11D – project conceived complying with cave
legislation, already taking into consideration the existence of the caves.
o 137 caves were preserved.
Licensing is usually a complicated process, extending for long periods since each
step depends on conclusion of the previous step.
o Simpler for new projects.
o For actual operations, a compensation for existing caves is needed.
Vale has 200 caves and needs a one-year period to classify
them by relevance – those with greatest relevance should be
compensated.
Massive improvement in rate of accidents, with recordable injuries/million hours
worked falling from 3.33 in 2011 to 2.66 in 2013.
Vale is including contractors in health and safety projects.
Figure 11: Total Recordable Injuries Frequency Rate¹ (per million hours worked)
Source: Company (¹ Medical treatment, restricted work, fatalities and lost time. Includes employees and contractors.
Capital Projects: Discipline in the Development/Completion Phase Transaction
Pre-feasibility studies (FEL2) and feasibility studies (FEL3) are only being
approved after a complete and rigorous maturity assessment.
The company is striving to avoid, at all costs, changing suppliers and contractors
after the initiation of projects.
In addition, contractors are charging fees that are lower than they used to be,
since demand has decreased.
Key projects (delivered in 2013):
o Additional 40mtpy:
Start-up in 3Q13.
Capex of US$3.5bn.
Already produced almost 3mn tons.
Sinter feed with dry processing method.
Figure 12: Additional 40mtpy
Source: Company
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COMPANY REPORT BBI Equity Research – Wednesday, December 4, 2013
o CLN150 – railroad and port facilities:
Railroad capacity of 128mtpy (after 5 sections being delivered).
Port capacity is currently 150mtpy.
Capex of US$3.9bn, and development as expected.
Already shipped 6mn tons in 25 VALEMAX vessels.
o Conceição Itabiritos:
High-quality pellet feed.
Presently in ramp-up phase; should start up in 4Q13.
Being delivered on time and on budget – capex of US$1.2bn
Possible positive surprise for 2014.
Figure 13: Conceição Itabiritos
Source: Company
o Teluk Rubiah unloading facilities:
3 ship loaders already placed.
First VALEMAX to be unloaded in the coming weeks.
Next year will start the exportation facility.
Stockyard - 3.2mn tons of capacity.
Stackers and reclaimers installed.
Capex of US$1.4bn.
Start-up in 2H14.
o Long Harbour.
o Totten.
Projects under construction:
o S11D:
No problems even throughout the rainy season.
109 total modules, with 31 already finished.
47% of physical progress completed.
2-year ramp-up.
Transportation of first module over 48km and was very
satisfactory (important part of the project).
Main energy substation has been concluded.
Duplication of 8 sections out of the railroad’s 48 has already
started.
o Moatize II:
48% of physical progress completed.
Will be delivered in 2H15.
Capex of US$775mn.
13,000 workers working at the site.
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COMPANY REPORT BBI Equity Research – Wednesday, December 4, 2013
Greenfield portion of the railroad is progressing very well, and
whose satisfactory completion is vital for the schedule (should be
exporting in January 2015).
Figure 14: Moatize II
Source: Company
o Nacala corridor:
Railroad progress: 33%.
Start-up: 2H14.
Port progress: 36%.
Start-up: 1H15.
Capacity: 18mtpy.
Capex: US$4.4bn (executed: US$1.1bn).
o Salobo II:
Should be ready in 1H14.
Capex below budget (US$1.7bn budget vs. US$986mn
executed).
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COMPANY REPORT BBI Equity Research – Wednesday, December 4, 2013
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Definition Coverage¹ BR²
Expected to outperform the Ibovespa by more than 10%. 49% 96%
Expected to perform in the range of 10% above or below the Ibovespa. 43% 100%
Expected to underperform the Ibovespa more than 10%. 1% 100%
This indicates that both the target price and the rating are currently being revised. 6% 86%
The analyst cannot express his/her view s on the company. 2% 100%
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COMPANY REPORT BBI Equity Research – Wednesday, December 4, 2013
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statements regarding future prospects may not be realized.
Investors should note that income from securities or other investments, if any, referred to in this report may fluctuate and that price or value of such securities and investments
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and its aff iliates do not accept responsibility for any direct or indirect loss arising due to use of this report. Investors should consider w hether any advice or recommendation in
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Bradesco Corretora Research Team
Dalton Gardimam 55 11 2178 4275 [email protected] Denis Blum 55 11 2178 4224 [email protected]
(Senior Economist)
Tarik Migliorini 55 11 2178 4230 [email protected]
Carlos Firetti, CFA 55 11 2178 5363 [email protected] Luis Azevedo 55 11 2178 5321 [email protected]
Tales Freire 55 11 2178 4527 [email protected]
Banking and Insurance
Carlos Firetti, CFA 55 11 2178 5363 [email protected] Education
Bruno Chemmer, CFA 55 11 2178 4903 [email protected] Luis Azevedo 55 11 2178 5321 [email protected]
Rafael Frade, CFA 55 11 2178 4056 [email protected] Tales Freire 55 11 2178 4527 [email protected]
Financial Services
Rafael Frade, CFA 55 11 2178 4056 [email protected]
Gabriel Gusan, CFA 55 11 2178 5329 [email protected] Ricardo Boiati 55 11 2178 5326 [email protected]
Carlos Firetti, CFA 55 11 2178 5363 [email protected] Pedro Bueno 55 11 2178 4272 [email protected]
Healthcare
Rafael Frade, CFA 55 11 2178 4056 [email protected]
Raquel Erzinian 55 11 2178 5319 [email protected] Auro Rozenbaum 55 11 2178 5315 [email protected]
Marcos Dong 55 11 2178 5469 [email protected]
Bruno Arruda 55 11 2178 5310 [email protected]
Alan Glezer, CFA 55 11 2178 5466 [email protected] Fixed Income
Arthur Suelotto, CFA 55 11 2178 6104 [email protected] Altair Pereira 55 11 2178 4279 [email protected]
Caio Lombardi 55 11 2178 4225 [email protected]
André Sonnervig 55 11 2178 5318 [email protected]
Edigimar Maximiliano Jr. 55 11 2178 5327 [email protected]
Luiz Peçanha 55 11 2178 5324 [email protected]
André Mazini 55 11 2178 5109 [email protected] Renata Cristovão 55 11 2178 4273 [email protected]
Leandro Fontanesi 55 11 2178 4274 [email protected]
Homebuilding
Luiz Mauricio Garcia 55 11 2178 4223 [email protected] Gabriel Lima 55 11 2178 5313 [email protected]
Alain Nicolau 55 11 2178 5316 [email protected] Rodrigo Coelho 55 11 2178 5317 [email protected]
Sales - 55 11 3556 3001
Juvenal Neves [email protected] Head of Trading
Tiago Valent [email protected] Orlando Cardoso [email protected]
Gustavo Paiva [email protected]
Catherine Menezes [email protected]
Traders
Fernanda Weber Bratz [email protected] Cássio Garcia cá[email protected]
Lucila Sakakura [email protected] Fábio Brisola [email protected]
Gustavo Ize [email protected]
Ingrid Amorim [email protected]
Rogério Queiroz [email protected] Julio Cesar Rossi [email protected]
Dauro Zaltman [email protected] Mauricio Sanchez [email protected]
Denise Chicuta [email protected] Peter Gil [email protected]
[email protected] Silene Zinhani [email protected]
Traders
Agnaldo Ishikava [email protected] Marcio Aguiar [email protected]
Douglas Vieira Corazza [email protected] Wilson Pereira [email protected]
Eduardo Tosin Bueno [email protected]
Joao Batista Tamassia Santos Junior joã[email protected]
Marcelo Matias Boneri [email protected]
Paulo Silva do Carmo [email protected]
Pedro Fonseca de Souza [email protected] José Lázaro Ferreira - Head [email protected]
Sandoval Marcos Iorio [email protected] [email protected]
Institutional Sales Team - USA, UK & HK
Marcelo Cabral [email protected] Luiz Fernando Silva [email protected]
Juan Briano [email protected] João Paulo Loyola jployo [email protected]
Randall Smalley [email protected]
DeWayne Shaw [email protected]
Bradesco Securities UK, Ltd
Sales – 44 207 382 0070
Shinichiro Fukui [email protected] Robert Hulme [email protected]
Brent Matson [email protected] Roland Campbell ro [email protected]
Robert Vespa [email protected] Sales - Fixed Income – 44 207
382 0074Christopher Barresi [email protected] Guilherme Zraick [email protected]
Sean Harte [email protected] Fernanda Jordan [email protected]
Economics & Research Director
Bradesco Corretora CTVM S.A. | São Paulo
Transportation, Logistics, Malls and Commercial Properties
Bradesco Securities, Inc. | New York (FINRA/SIPC Member) Bradesco Securities Hong Kong Ltd.
Head of Equity Research
Sales Trading - 55 11 3556 3001
Steel, Mining, Pulp & Paper
(Chief Economist)
Consumer Goods and Retail
Telecom, Media and Technology
Electric Utilities, Water & Sewage
Food & Beverage
Each analyst whose name is in bold print is the principal analyst responsible for the content of reports on the respective sector, as well as fulfillment of
the provisions of Art. 16 of CVM Instruction 483/10.
Stock Loans Desk - 55 11 3556 3001
Sales Trading – 01 212 888 9141
Sales - Fixed Income – 01 212 888 9141
Oil & Gas, Petrochemicals and Sugar & Ethanol
Sales – 01 212 888 9141
BM&F Trading Desk - 55 11 3556 3350
Lilian Osti - Commercial Manager
Sales - Local Fixed Income - 55 11 3556 3005
Patricia Cruz Bilezikjian, CFA
Sales – (852)2251 8716 or (852) 2251 8718
Sales - Fixed Income - 55 11 2178 6959
Av. Paulista, 1450 7º andar
CEP: 01310-917 São Paulo – SP