New York, April 11, 2014 -- Moody's Investors Service changed the rating outlook for Vale S.A.
(Vale) and related ratings to positive 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).
Outlook Actions:
..Issuer: Vale Canada Ltd.
....Outlook, Changed To Positive From
Stable
..Issuer: Vale Overseas Limited
....Outlook, Changed To Positive From
Stable
..Issuer: Vale S.A.
....Outlook, Changed To Positive From
Stable
Affirmations:
..Issuer: Vale Canada Ltd.
....Senior Unsecured Regular Bond/Debenture
Sep 15, 2032, Affirmed Baa2
....Senior Unsecured Regular Bond/Debenture
Oct 15, 2015, Affirmed Baa2
..Issuer: Vale Overseas Limited
....Senior Unsecured Regular Bond/Debenture
Jan 17, 2034, Affirmed Baa2
....Senior Unsecured Regular Bond/Debenture
Jan 11, 2016, Affirmed Baa2
....Senior Unsecured Regular Bond/Debenture
Jan 17, 2034, Affirmed Baa2
....Senior Unsecured Regular Bond/Debenture
Jan 11, 2022, Affirmed Baa2
....Senior Unsecured Regular Bond/Debenture
Sep 15, 2019, Affirmed Baa2
....Senior Unsecured Regular Bond/Debenture
Sep 15, 2020, Affirmed Baa2
....Senior Unsecured Regular Bond/Debenture
Jan 23, 2017, Affirmed Baa2
....Senior Unsecured Regular Bond/Debenture
Nov 10, 2039, Affirmed Baa2
....Senior Unsecured Regular Bond/Debenture
Nov 21, 2036, Affirmed Baa2
....Senior Unsecured Shelf Oct 22, 2015,
Affirmed (P)Baa2
..Issuer: Vale S.A.
....Senior Unsecured Regular Bond/Debenture
Sep 11, 2042, Affirmed Baa2
....Senior Unsecured Regular Bond/Debenture
Mar 24, 2018, Affirmed Baa2
....Senior Unsecured Regular Bond/Debenture
Jan 10, 2023, Affirmed Baa2
....Senior Unsecured Shelf Oct 22, 2015,
Affirmed (P)Baa2
The change in outlook to positive from stable 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. This is exemplified by the company's
reduction in research and development costs in 2013 by approximately 45%
to around $663 million, reduction in capital expenditures
by about $2 billion to around $14.2 billion,
and overall reduction in production and general costs, although
some benefit in these last areas was derived from favorable currency movements,
which might not be sustainable. The outlook change also considers
the company's resolution in late 2013 of disputed tax issues covering
the period from 2003 to 2012, as exemplified by its participation
in a federal tax settlement (REFIS) which Moody's views as credit
positive in that it crystallizes the amounts to be paid, which can
be accommodated within the company's liquidity profile, and
resolves a material event risk for the company. These actions are
viewed as better positioning the company to tolerate headwinds on prices
for its major products, particularly iron ore, over the next
twelve to eighteen months.
RATINGS RATIONALE
Vale's Baa2 rating reflects the company's diversified product base,
strong coverage ratios, competitive cost position -- with iron
ore FOB cash costs of about $21/metric ton, and substantive
portfolio of long lived assets. The rating also considers the ability
of the company to perform well, given its asset base, in a
down market environment and maintain ratios generally in line with its
rating. 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 $5 billion in revolving
credit facilities (unused) is also a consideration in the rating.
However, the rating considers the challenges that will continue
to impact the company's operating cost profile, particularly for
labor as well as increasing royalties. The rating also incorporates
the volatility in iron ore and metal prices (copper and nickel) as well
as metallurgical coal and fertilizers, and Vale's earnings
and cash flow sensitivity to movement in these prices of its key minerals,
particularly iron ore given the dominance of this segment in the overall
performance of the company. Given the new iron ore industry wide
production coming on line in the later part of 2014 and the slower year-on-year
growth in steel production in China, our sensitivity analysis for
2014 incorporates seaborne iron ore prices (62%Fe) averaging between
$100 - $120/MT, potentially falling below Vales
average realized iron ore prices of around $107/MT in 2013.
Additionally, the company remains sensitive to exchange rates,
particularly the US dollar relative to the Brazilian Real and the Canadian
dollar. While Vale has indicated a relatively flat capital expenditure
spending (capex) in 2014 at around $13.8 billion (excluding
research and development expenditures of around $900 million) relative
to 2013 spending levels, and a more disciplined focus on capital
allocation, capex, these outflows, in combination with
dividend levels ($4.2 billion committed to for 2014) remain
high, in our view, relative to the potential contraction in
earnings and remain a consideration in the rating. While we note
that the company has redefined and moderated its growth objectives,
which include focusing on fewer projects simultaneously and projects that
are long lived and low cost, reducing R&D expenditures,
and being disciplined in the management of its capital structure the cash
outflow requirements, absent asset sales in the near term,
the company will generate minimal free cash flow and have limited debt
reduction opportunities. Nonetheless, given actions taken
to date, Vale has better positioned itself to deal with a weaker
price environment.
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.
Vale's rating could be favorably impacted should the company maintain
or reduce absolute debt levels over the next 15 months, successfully
complete its major capital expansion projects without significant cost
overruns, maintain operating cash flow minus dividends to debt of
at least 30%, and free cash flow to debt in the 10%
range, at a minimum. Further considerations would include
greater clarity with the company's acquisition strategy and financial
policies.
Given the company's current strong financial profile and liquidity
position, a ratings downgrade is unlikely. However,
the ratings and/or outlook could come under pressure should the company
pursue substantial acquisitions or capex projects at the detriment of
its credit profile. Other factors that could contribute to downward
pressure would include debt/EBITDA increasing above 3.0x,
operating cash flow minus dividends to debt falling below 25% or
persistent negative free cash flow generation.
The principal methodology used in this rating was Global Mining Industry
published in May 2009. 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. The company has announced the sale of approximately
62.4% of its logistic business segment (VLI S.A.).
In the 2013 financials this is accounted for as assets held for sale.
Vale is the largest global supplier of iron ore, with approximately
311 million metric tons of production in 2013 (including its share of
Samarco), and the second largest global producer of nickel,
with around 260,000 metric tons produced in 2013.
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 December 31,
2013, Vale had net operating revenues of $46.8 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.
Carol Cowan
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Brian Oak
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's changes Vale's outlook to positive; affirms all ratings
