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Rating Action:

Moody's changes Vale's outlook to negative; affirms all ratings

12 May 2015

New York, May 12, 2015 -- Moody's Investors Service changed the rating outlook for Vale S.A. (Vale) and related ratings to negative from stable. At the same time, Moody's affirmed Vale's Baa2 senior unsecured rating, its (P)Baa2 senior unsecured rating under its well-known seasoned issuer shelf registration, and the Baa2 ratings on the foreign currency debt issues of Vale Overseas (guaranteed by Vale) as well as Vale Overseas' (P)Baa2 senior unsecured shelf rating. Moody's also affirmed the Baa2 senior unsecured ratings of Vale Canada (not guaranteed by Vale).

At the same time, Moody's América Latina affirmed Vale's Baa2 global scale local currency rating and Aaa.br National Scale Rating (NSR) as well as the Baa2 global scale local currency rating and Aaa.br NSR on Vale's BRL 750 million senior unsecured notes (Debentures de Infraestrutura). For further information, please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.br.

Outlook Actions:

..Issuer: Vale Canada Ltd.

....Outlook, Changed To Negative From Stable

..Issuer: Vale Overseas Limited

....Outlook, Changed To Negative From Stable

..Issuer: Vale S.A.

....Outlook, Changed To Negative From Stable

Affirmations:

..Issuer: Vale Canada Ltd.

....Senior Unsecured Regular Bond/Debenture (Foreign Currency) Sep 15, 2032, Affirmed Baa2

..Issuer: Vale Overseas Limited

....Senior Unsecured Regular Bond/Debenture (Foreign Currency) Jan 17, 2034, Affirmed Baa2

....Senior Unsecured Regular Bond/Debenture (Foreign Currency) Jan 11, 2016, Affirmed Baa2

....Senior Unsecured Regular Bond/Debenture (Foreign Currency) Jan 17, 2034, Affirmed Baa2

....Senior Unsecured Regular Bond/Debenture (Foreign Currency) Jan 11, 2022, Affirmed Baa2

....Senior Unsecured Regular Bond/Debenture (Foreign Currency) Sep 15, 2019, Affirmed Baa2

....Senior Unsecured Regular Bond/Debenture (Foreign Currency) Sep 15, 2020, Affirmed Baa2

....Senior Unsecured Regular Bond/Debenture (Foreign Currency) Jan 23, 2017, Affirmed Baa2

....Senior Unsecured Regular Bond/Debenture (Foreign Currency) Nov 10, 2039, Affirmed Baa2

....Senior Unsecured Regular Bond/Debenture (Foreign Currency) Nov 21, 2036, Affirmed Baa2

....Senior Unsecured Shelf (Foreign Currency) Oct 22, 2015, Affirmed (P)Baa2

..Issuer: Vale S.A.

....Senior Unsecured Regular Bond/Debenture (Foreign Currency) Sep 11, 2042, Affirmed Baa2

....Senior Unsecured Regular Bond/Debenture (Foreign Currency) Mar 24, 2018, Affirmed Baa2

....Senior Unsecured Regular Bond/Debenture (Foreign Currency) Jan 10, 2023, Affirmed Baa2

....Senior Unsecured Shelf (Foreign Currency) Oct 22, 2015, Affirmed (P)Baa2

The affirmation of Vale's Baa2 ratings and change in outlook to negative from stable reflect Moody's view that the company's credit profile and operations remain solid, but incorporate the deterioration in market fundamentals for iron ore and base metals, pressuring commodity prices in a period in which Vale is undergoing a large expansion phase with substantial capital expenditures. Iron ore prices are expected to remain under pressure at least through 2016 and, as a consequence, Vale's credit metrics, particularly margins, leverage and interest coverage, will continue to be challenged, with Ebitda margins declining to around 20% and leverage (total debt to Ebitda) likely trending towards 5x-6x. These metrics incorporate Moody's standard adjustments. The increase in volumes and ore grades resulting from ongoing investments will partially offset low commodity prices, but will not be fully reflected in the company's credit metrics until 2017-2018.

RATINGS RATIONALE

Vale's Baa2 rating is supported by the company's diversified product base and competitive cost position, and substantive portfolio of long lived assets. While Vale has diversified its geographic footprint through various acquisitions in Canada, Australia and elsewhere, the dominant revenue, earnings and cash flow driver continues to be its Brazilian-based iron ore operations and its major position in the seaborne iron ore markets (Vale, Rio Tinto and BHP Billiton combined having an approximate 70% - 75% market share). The company's strong liquidity position with USD 5 billion in revolving credit facilities (unused) is also a positive consideration in the rating.

The rating acknowledges Vale's more focused and disciplined approach to project development, capital allocation, resizing of its asset portfolio to strategically important business segments, divestiture of such non-strategic assets, and focus on cost reduction, which better positions Vale to withstand the challenges of prices for the company's major products over the next twelve to eighteen months.

Constraining the ratings are the negative outlook for iron ore prices, and our expectation that prices will not experience any meaningful recovery before 2017, as a consequence of the slowdown in China's economic growth and steel production. The new iron ore industry wide production coming on line in the 2015-2018 period (adding about 260 mm tons of new capacity) will also contribute to continued pressure in iron ore prices. Low iron ore, base metals (nickel/copper) and coal prices for a prolonged period will pressure Vale's credit metrics and cash flow generation ability, increasing leverage and weakening interest coverage.

Although Vale does not guarantee the debt at Vale Canada, the equalization of Vale Canada's senior unsecured rating (Baa2) to that of its parent reflects this subsidiary's major position in the global nickel market, the strength of its asset base, and its strategic importance to its parent.

Although the likelihood of an upgrade is limited in the next 12 to 18 months, given the challenges faced by Vale and its main markets, a stabilization of the outlook could be considered if iron ore and base metals prices improve and are sustained above our sensitivity ranges (from USD 40 to USD 50/ton for iron ore), easing existing pressure on metrics. An upward rating movement would require that Vale maintain a strong liquidity position and maintain or reduce debt levels during the execution of its major capital expansion, and EBIT margins above 13%. In addition, a sustainable cash from operations less dividends to debt ratio trending towards 35% and EBIT/interest expense above 7 times, at a minimum.

The ratings or outlook could suffer negative pressure should conditions in iron ore and base metals remain weak, leading to lower profitability, and Vale is not able to make meaningful progress in cost reduction. Downward pressure could also affect the ratings if the company is unable to continue with its asset divestiture and partnership strategies, which will help Vale to maintain stable debt levels and reduce pressure on leverage. A downgrade could be considered if leverage ratio (total debt to Ebitda) does not return to 3x on a sustainable basis over the long-term. A marked deterioration in the company's liquidity position, or dividends at levels such that the cash from operations less dividends to debt ratio remains below 25% for a prolonged period, could also precipitate a downgrade.

The principal methodology used in these ratings was Global Mining Industry published in August 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in Rio de Janeiro, Brazil, Vale is one of the largest mining enterprises in the world, with substantive positions in iron ore, nickel, copper, and coal, as well as supplemental positions in energy production and positions in steel production. Vale is the largest global supplier of iron ore, with approximately 337 million metric tons of production in the last twelve month ended March 2015 (including its share of Samarco), and the largest global producer of nickel, with around 277,000 metric tons produced in the same period. The company's principal mining operations are located in Brazil, Canada, Australia, Indonesia, and Mozambique. In addition, the company is active in exploration activities in a number of countries. For the twelve months through March 31, 2015, Vale had net operating revenues of USD 34.3 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Barbara Mattos
Vice President - Senior Analyst
Corporate Finance Group
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
Sao Paulo, SP 04578-903
Brazil
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

Marianna Fernandes Rodrigues Waltz
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

Releasing Office:
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JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's changes Vale's outlook to negative; affirms all ratings
No Related Data.
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