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

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debt rating of Vale S.A. (Vale or the Company) at BBB (low). DBRS Morningstar also confirmed the Senior Unsecured Debt rating of Vale Overseas Limited and the All Series Debentures & Notes rating of Vale Canada Limited at BBB (low). All trends are Stable. The confirmations are primarily a recognition that DBRS Morningstar does not consider a more than three-notch differential between the Federative Republic of Brazil’s (Brazil) BB (low) Long-Term Foreign Currency – Issuer Rating and Brazilian-domiciled Vale’s Issuer Rating likely. Other factors include (1) Vale’s completion on June 14, 2022, of a cash tender for approximately $1.3 billion of its debt, extending the favourable debt maturity schedule with no maturities representing more than 10% of total gross debt until 2030 and (2) Vale’s financial risk profile continuing to benefit from the ongoing strength in iron ore prices. The Stable trends are a result of Vale’s business risk profile remaining strong for the rating based on long-life reserves, low operating cost structure, and significant size with strong logistics supply chains, especially with China.

Vale continues to recover from the Brumadinho event and has been gradually increasing production with management guidance for between 320 million tonnes and 335 million tonnes in 2022, with the expectation of production capacity returning to the 400 million tonnes-per-year level in the medium term. DBRS Morningstar notes that Vale reported a net decline of approximately 13% in its proven and probable iron ore reserves at the end of 2021, with the decrease including (1) a 1.6 billion tonne decline in the Southeastern System because of the reduction in run-of-mine ore from the Mariana operations for pellet production that is being replaced by low-grade itabirites and due to pit optimization reviews at the Minas Centrais complex and (2) other declines due to the incorporation of new geological information, as well as depletion in the Northern System. DBRS Morningstar notes that new disclosure rules by the U.S. Securities Exchange Commission (SEC), which came into effect on January 1, 2021, require resources as well as reserves to be published. At the end of 2021, Vale reported a total of approximately 22.7 billion tonnes of iron ore resources that could potentially be upgraded to reserves in a cost-effective manner.

Overall, Vale’s key credit metrics remain supportive of a higher rating within the investment-grade BBB category. DBRS Morningstar’s sovereign rating for Brazil is BB (low) with a Stable trend, which 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, a negative rating action placing the Company in the non-investment-grade BB category could follow, irrespective of Vale's current credit strength.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

DBRS Morningstar notes that last year in applying the ESG Criteria, the Emissions, Effluents and Waste and Resource and Energy Management factors related to the Reserves Quality and Related Attributes BRA factor were identified as Relevant but not Significant. This determination was based upon the re-classification of reserves to resources in response to government regulations regarding aboriginal caves and tailings disposal requirements and resulted in a half-notch downgrade. However, the new SEC disclosure rules for reporting reserves and resources that came into effect on January 1, 2021, have had a greater non-ESG impact from a potential economic perspective such that these two factors are no longer considered Relevant.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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

The principal methodologies are Rating Companies in the Mining Industry (August 16, 2021; https://www.dbrsmorningstar.com/research/383106) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022; https://www.dbrsmorningstar.com/research/396929).

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 [email protected].

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

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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