DBRS Confirms Vale S.A.’s Ratings at BBB (low), Changes Trends to Stable

DBRS Limited (DBRS) has today confirmed the ratings of Vale S.A. (Vale or the Company) and its subsidiaries at BBB (low) and changed the trends to Stable from Negative. Vale’s business outlook and key credit metrics strengthened significantly in 2016, compared to 2015. The Company succeeded in monetizing three Valemax and two capsize vessels and sold 25% of the gold production from its Salobo mine for gross proceeds of $1.1 billion. While benchmark iron ore prices were modestly higher in 2016 versus 2015, Vale benefitted from higher premiums in the $12 to $13 per tonne range for its higher-grade Carajás ore that also has low impurities. Additionally, its 50%-owned Samarco pelletizing operations remained shut during 2016, resulting in much more robust price realizations for its remaining pellet sales. As a result, DBRS-adjusted EBITDA improved to $11.8 billion or 78% higher compared to 2015. However, lease-adjusted total gross debt increased by $1.1 billion to $31.0 billion, as the Company refinanced to extend debt maturities resulting in the net issuance of debt.

Benchmark iron ore prices were robust at the end of 2016 and have been trading above $75 per tonne so far in 2017. At these benchmark levels and with Vale’s ability to capture significant high-grade and low impurity premiums, the Company should be generating robust operating cash flow. While consensus Bloomberg iron ore price estimates (as of March 15, 2017) indicate a correction to lower levels at some point this year, prices should remain well above the lows seen in December 2015, allowing Vale to capitalize on its low cost base and continue to generate positive free cash flow. Additionally, its capital spending programs are declining, providing the Company with the opportunity to reduce debt, especially now that the new Eliezer Batista S11D Complex is producing. As a result, DBRS has changed the trends to Stable from Negative.

Vale’s business risk and key credit metrics are robust for its rating. Compared to 2015, adjusted debt-to-EBITDA declined to 2.6 times (x) versus 4.5x, lease-adjusted cash flow-to-debt improved to 27.7% from 8.2% and lease-adjusted EBITDA-to-interest coverage improved to 6.6x from 4.0x. However, DBRS’s sovereign risk rating for Brazil, where over half of its production assets are located, is non-investment-grade at BB (high) for local currency debt and BB for foreign currency debt, with Negative trends. While Brazil’s current sovereign rating does not preclude Vale from having an investment-grade rating, the Negative trends on Brazil’s ratings highlight the potential for increased government involvement in Vale’s activities that could result in a negative rating action for the Company. However, DBRS notes that there is a shareholders meeting to be called for May 2017. The proposed transaction consists of the voluntary conversion of preferred shares into common shares; a change of Vale’s bylaws, to make it in line with the rules of BM&F BOvespa’s Novo Mercado listing segment and the merger of Valepar into Vale. As a result of the transaction, Vale will become a Company with no defined controlling shareholder. Therefore, if achieved, the move would be viewed as beneficial in lessening the potential influence of the government on the Company’s activities and be in support of Vale’s investment-grade rating.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The principal methodologies are Rating Companies in the Mining Industry (September 2016) as well as DBRS Criteria: Guarantees and Other Forms of Support (February 2017), both of which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The Senior Unsecured Debt of Vale Overseas Limited is irrevocably and unconditionally guaranteed by Vale S.A.