DBRS Confirms Vale Ratings at BBB (high) with Stable Trend

DBRS has today confirmed the ratings of Vale S.A. (Vale or the Company) and its subsidiaries at BBB (high). The trend on the ratings is Stable. Vale is one of the largest mining companies in the world, with a solid business base as the world’s largest iron ore producer as well as a growing output of nickel, copper, fertilizer, steel and other materials. The Company, with its sound financial profile and good liquidity, demonstrated resilience during the 2009 economic downturn followed by a very strong recovery in 2010, generating record operating cash flow and net income.

Vale’s credit metrics rebounded significantly in 2010 and in many cases strengthened over pre-recession 2007-2008 levels despite the Company’s $5.0 billion in shareholder payments in addition to large expansionary capital expenditure and acquisition programs, which led to a $3.3 billion increase in net debt levels. Exceptional earnings in 2010 were driven by an 85% increase in average iron ore prices and an 11% increase in iron ore sales tonnage over 2009 levels.

Vale made a $5.8 billion acquisition of fertilizer assets in Brazil in 2010, embarking on an added diversification path. In addition, the Company brought on six major organic growth projects during the year, including increases in iron ore and pellet production; new nickel, copper and phosphate mines; and a new steel slab plant. The Company also significantly restructured and reduced its investment in the aluminum business. These undertakings, combined with $2.0 billion in share buybacks, led to the $3.3 billion increase in net debt levels and a modest increase in net leverage to 17% of capitalization.

The prospects for Vale’s businesses remain good, but in the near term remain closely tied to iron ore demand despite the Company’s diversification efforts and the expectation of a strong year in nickel and copper following the negative impact of work stoppages in 2009 and 2010. Iron ore prices remain very high, with robust growth expected in China in 2011 and ongoing recovery in Europe and North America. At the same time, the Company has a very aggressive 2011 capital budget ($24 billion) and a proposed minimum dividend level of $4.0 billion. Further acquisitions can be expected since among Vale’s goals is a desire to become the largest mining company in the world.

The recent change to Vale’s senior management has highlighted the impact the Brazilian government has on the Company (Brazil is rated BBB (low) by DBRS) and the ongoing concern that Vale’s strategy may not be fully business oriented, even though the new nominee for president of Vale appears well qualified and has experience with the Company.

Although impressed with current results and near-term expectations, we remain cautious in terms of the longevity of the iron ore boom as new capacity comes on stream and as Vale continues to rapidly expand – often into less stable political jurisdictions. Furthermore, additional acquisitions, along with their heightened risks, are not ruled out.

Notes:
The Senior Unsecured Debt of Vale Overseas Limited and the Guaranteed Mandatory Convertible Notes of Vale Capital Limited and Vale Capital II are irrevocably and unconditionally guaranteed by Vale.

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.