DBRS Comments on Vale’s Growing Stake in Fertilizers

DBRS notes that Vale S.A. (Vale or the Company) today announced that it intends to increase its stake in the fertilizer business through a series of transactions, which if completed as contemplated, will see the Company acquire Brazilian phosphate rock mines and phosphate fertilizer production assets through a series of transactions with Bunge Ltd. and its related subsidiaries, the owners of Bunge Participações e Investimentos S.A. (BPI) and the owners of the minority interest in Fertilizantes Fosfatados S.A. - Fosfertil (Fosfertil), a partially-owned subsidiary of BPI. The cost of the acquisitions in aggregate is estimated at approximately $6.4 billion. DBRS views these transactions as a positive step for Vale providing diversification from its core iron ore businesses, further growth and development opportunities and complementing its existing fertilizer production business. The transactions contemplated are also consistent with the Company’s stated strategy to build a global fertilizer business through acquisitions and organic growth. From a financial perspective, Vale, with $13 billion in cash on hand (at September 30, 2009) and a healthy balance sheet, is not expected to need to seek external financing for the acquisitions and has the capacity to exploit the growth opportunities inherent in the assets being acquired. DBRS does not expect that the acquisitions in the short term will have a material impact on the Company’s earnings and cash flow but will over the longer term contribute to meeting Vale’s objectives of becoming a significant player in fertilizer markets. Accordingly, DBRS does not expect that the transactions, if completed as contemplated, will have a short-term impact on Vale’s rating; hence no rating action is warranted at this time.

In the announcement today, Vale stated that it has agreed to acquire for $3.8 billion in cash a 100% interest in BPI, which has phosphate fertilizer production assets plus 53.8% of the common shares and 36.4% of the preferred shares of Fosfertil. The parties attribute $1.65 billion of the transaction to BPI’s fertilizer production related assets, and the remaining $2.15 billion for BPI direct and indirect interests in the shares of Fosfertil. Vale also announced today that it has secured option agreements to acquire for $41.9 million 1.46% of the shares of a private company, which holds 56.73% of Fosfertil’s equity. The exercise of the options is subject to certain conditions including Vale’s effective acquisition of the fertilizer assets of Bunge Ltd. in Brazil. Vale indicates that it will launch a mandatory offer to buy out the common shares held by the minority shareholders of Fosfertil upon the satisfaction of such conditions and the closing of the BPI transaction. The transactions do not involve any retail and/or distribution businesses.

BPI is Brazil’s second largest producer of phosphates fertilizers, with a market share of 14.2%. It owns two phosphate rock mines, which produced 1.6 Mt of phosphate rock in 2008. Vale has estimated BPI’s proven and probable reserves at 339 million tonnes of 8.4% phosphoric anhydride (P2O5). BPI also has four processing plants for the production of phosphate-based fertilizers. Fosfertil is the largest producer of phosphate- and nitrogen-based fertilizers in Brazil supplying just over 20% of Brazilian consumption of these fertilizers. Fosfertil has nominal production capacity of 3.4 million tonnes per year of phosphate rock. It is also in the process of building a new phosphate operation in Brazil with 2.0 million tonnes per year phosphate rock production capacity. Vale estimates Fosfertil’s proven and probable reserves at 1.189 billion tonnes of 8.4% P2O5.

Vale, headquartered in Brazil, is one of the largest mining companies in the world, with a solid business base in the production of iron ore-related products, nickel, aluminum and copper. The Company also produces and sells manganese, ferroalloys and kaolin, as well as bauxite, alumina, coal, cobalt, precious metals and potash. Vale has a sound financial profile and good liquidity.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Mining, which can be found on our website under Methodologies.

This is a Corporate rating.