DBRS Assigns Provisional BBB (low) Rating with a Negative Trend to Vale’s New Long-Term Debt Issue

DBRS Limited (DBRS) has today assigned a provisional rating of BBB (low) with a Negative trend to the proposed $1 billion long-term notes (the Notes) to be issued by Vale Overseas Limited (Vale Overseas or the Company) in the U.S. capital markets. Vale Overseas intends to use the net proceeds from the offering to pay part of the redemption price of the 6.250% Notes due in 2017, issued by Vale Overseas and guaranteed by Vale S.A. (Vale)., which mature in January 2017, and to pay the balance of such redemption price using available cash. Vale plans to issue a notice of redemption promptly after the closing of the offering of the Notes and to redeem, 30 days thereafter, the entire $1.25 billion outstanding amount of 6.250% Notes due in 2017.

The Notes will be offered by way of a supplemental prospectus to the Company’s prospectus dated September 29, 2015, and filed with the U.S. Securities and Exchange Commission (SEC). A preliminary version of the supplementary prospectus was filed with the SEC on August 3, 2016.

The Notes will be general obligations of Vale Overseas and are not secured by any collateral. The rights of holders to payment under the Notes will be (1) junior to the rights of secured creditors of Vale Overseas to the extent of their interest in Vale Overseas’ assets and (2) equal with the rights of creditors under all of Vale Overseas’ other unsecured and unsubordinated debt.

The Notes will be irrevocably and unconditionally guaranteed by Vale. The rights of holders to payment under the guaranty will be: (1) junior to the rights of holders of secured debt of Vale that amounted to $477 million as at June 30 2016, (2) equal with the rights of creditors under all of Vale’s other unsecured and unsubordinated debt and (3) effectively subordinated to the rights of any creditor of a subsidiary of Vale over the assets of that subsidiary.

On July 28, 2016, Vale released its Q2 2016 results. Net income during the second quarter was $1.106 billion compared to $1.776 billion in Q1 2016. The lower sequential net income was largely a result of a $1.038 billion provision related to its Samarco joint-venture. Adjusted EBITDA during the quarter was $2.383 billion, up by 18.9% compared to Q1 2016, driven by better results from its Ferrous Minerals and Base Metals divisions.

On August 2, 2016, Vale announced that it had sold an additional 25% premium of the gold stream in copper concentrate from its Salobo copper mine to Silver Wheaton Corp. (Silver Wheaton). Vale will receive, among other considerations, an initial cash payment of $800 million that will be used to reduce its debt position.

DBRS expects that the $800 million cash proceeds from the Salobo streaming sale to Silver Wheaton should substantially cover the difference between the redemption amount and the use of proceeds from the proposed Notes and continue management’s plan to reduce debt.

The assignment of final ratings is subject to receipt by DBRS of final documentation that is consistent with that which DBRS has already received.

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

The applicable methodology is Rating Companies in the Mining Industry (October 2015), which can be found on our website under Methodologies.