DBRS Confirms Ratings on Vale S.A., Vale Overseas Limited and Vale Canada Limited at BBB (low) with Stable Trends

DBRS Limited (DBRS) confirmed the Issuer Rating and Senior Unsecured Debt rating of Vale S.A. (Vale or the Company) as well as the Senior Unsecured Debt rating of Vale Overseas Limited and the All Series Debentures & Notes rating of Vale Canada Limited at BBB (low) with Stable trends. The confirmations are the result of Vale’s business and financial risk profiles remaining strong for the rating, considering the Brumadinho tailings dam failure on January 25, 2019, and management’s robust and comprehensive response to the failure. Vale has announced curtailments of approximately 90 million tonnes as part of its response, which has contributed to a market-driven price response that has seen benchmark iron ore prices increase materially since January (now tracking significantly higher than Bloomberg consensus estimates as of June 5, 2019), thereby mitigating the revenue impact associated with the reduced production. While returning to full production is not an immediate priority, Vale is in the process of re-certifying its tailings dams (excluding its inactive upstream dams that will be reclaimed) under the new standards to allow for wet processing; however, in the interim, the Company is using the dry-processing mining method, which produces no tailings but results in lower-quality iron ore concentrates.

The impact of the Brumadinho events has been essentially neutral with respect to Vale’s key credit metrics for the last 12 months ending March 31, 2019, which remain in the BBB (high) range. DBRS expects these metrics to weaken in 2019, but remain at the low end of the BBB (high) range because of lower shipment volumes as well as the 2019 Bloomberg consensus benchmark iron ore price as of June 5, 2019, at approximately $78 per tonne. For 2020 to 2022, DBRS expects production to gradually return to pre-Brumadinho levels with a commensurate improvement in its credit metrics. That said, year to date, benchmark 62% Fe iron ore prices have averaged $90 per tonne and are currently over $100 per tonne. As such, there is market-driven upside to DBRS’s expectations that could result in additional windfall EBITDA and cash flow. Vale’s credit metrics are also supported by its debt reduction of approximately $7.0 billion in 2018. Although the Company drew down $1.9 billion in Q1 2019 of its new credit facilities to replace cash deposits frozen by authorities, this should eventually be released back to Vale. As a result, DBRS believes that the Company has some latitude to pursue further debt reduction, especially if iron ore prices remain at current levels for a sustained period.

Despite the Brumadinho events, Vale’s key credit metrics remain supportive of a higher rating within the investment-grade BBB category. Brazil’s current sovereign rating of BB (low) with a Stable trend by DBRS does not preclude Vale from having an investment-grade rating; however, if Brazil’s credit outlook does not remain stable going forward and a further downgrade to the B-rating category ensues, then a negative rating action to the non-investment-grade BB category could follow for Vale, irrespective of its current credit strength.

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

The principal methodologies are Rating Companies in the Mining Industry (September 2018) and DBRS Criteria: Guarantees and Other Forms of Support (January 2019), which can be found on dbrs.com under Methodologies & Criteria.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

DBRS will publish a full report shortly that will provide addi¬tional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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