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Rating Action:

Moody's downgrades Vale to Ba3; negative outlook

26 Feb 2016

New York, February 26, 2016 -- Moody's Investors Service downgraded the rating for Vale S.A. ("Vale") and related ratings to Ba3 from Baa3, including Vale's senior unsecured rating and the ratings on the foreign currency debt issues of Vale Overseas Limited (guaranteed by Vale). Moody's also downgraded to B2 from Baa3 the senior unsecured ratings of Vale Canada Ltd. (not guaranteed by Vale). The outlook is negative. These rating actions conclude the review initiated on January 21, 2016.

At the same time, Moody's América Latina downgraded Vale's ratings to Ba3 from Baa3 in the global scale local currency and to A3.br from Aa1.br in the national scale rating (NSR) and the ratings assigned to the senior unsecured notes (Debentures de Infraestrutura) issued by Vale S.A. At the same time, Moody's has withdrawn Vale S.A. ("Vale")'s issuer rating and assigned a Ba3 corporate family rating. For further information, please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.br.

Rating Actions:

..Issuer: Vale S.A.

....Senior Unsecured Regular Bond/Debenture, Sep 11, 2042, Downgrade to Ba3

....Senior Unsecured Regular Bond/Debenture, Mar 24, 2018, Downgrade to Ba3

....Senior Unsecured Regular Bond/Debenture, Jan 10, 2023, Downgrade to Ba3

..Issuer: Vale Canada Ltd.

....Senior Unsecured Regular Bond/Debenture Sep 15, 2032, Downgrade to B2

..Issuer: Vale Overseas Limited

....Gtd Senior Unsecured Regular Bond/Debenture, Jan 17, 2034, Downgrade to Ba3

....Gtd Senior Unsecured Regular Bond/Debenture, Jan 17, 2034, Downgrade to Ba3

....Gtd Senior Unsecured Regular Bond/Debenture, Jan 23, 2017, Downgrade to Ba3

....Gtd Senior Unsecured Regular Bond/Debenture, Nov 21, 2036, Downgrade to Ba3

....Gtd Senior Unsecured Regular Bond/Debenture, Sep 15, 2019, Downgrade to Ba3

....Gtd Senior Unsecured Regular Bond/Debenture, Nov 10, 2039, Downgrade to Ba3

....Gtd Senior Unsecured Regular Bond/Debenture, Sep 15, 2020, Downgrade to Ba3

....Gtd Senior Unsecured Regular Bond/Debenture, Jan 11, 2022, Downgrade to Ba3

Outlook for all ratings is negative

RATINGS RATIONALE

The downgrade of Vale's ratings to Ba3 reflects our expectation of weaker performance over the next 12 months resulting from the substantial decline in iron ore and base metals prices observed in 2015 and our expectation that prices will not likely experience any meaningful recovery before 2017. The rating action also incorporates Moody's view that there has been a fundamental downward shift in the mining sector with the downturn being deeper and prospects for a recovery extended, resulting in increased credit risk and weaker metrics for Vale as well as the global mining sector. Consequently, ratings need to be recalibrated to reflect expected performance over a more protracted challenging operating environment. The slowing economic growth rates in China materially impact the demand for base metals while the reducing steel production rates impact demand for iron ore and metallurgical coal - leading to lower prices. Supply imbalances, particularly in iron ore, the major earnings and cash flow driver for Vale, will maintain pressure on prices for several years. While lower oil prices, lower freight costs, and currency depreciation contribute to reduced costs, the drop in prices has and will continue to significantly impact performance.

As a consequence, Vale's revenues and cash flows will continue to drop and credit metrics, particularly leverage and interest coverage, will remain challenged, with total debt to Ebitda trending above 4x and EBIT to interest expenses below 2x (incorporating Moody's standard adjustments). The substantial progress Vale has made on reducing costs, and the increase in volumes and ore grades resulting from ongoing investments will help offset low commodity prices, but will not be fully reflected in the company's credit metrics until 2017-2018. Although we recognize that Vale continues to undertake a number of steps to respond to the challenging business environment and adjust operations accordingly, the level of adjustment required may be higher, while the timing of asset sales, which will allow a reduction in debt levels, remain uncertain.

Vale's Ba3 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 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 is the negative outlook for iron ore and base metals 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, which brings heightened uncertainty over demand for iron ore and base metals in the next few years. The new industry wide supply coming on line and the strength of the US dollar will also contribute to continued pressure on 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, reducing the company's ability to reduce leverage.

The negative outlook reflects the deterioration in market fundamentals for iron ore and base metals in a period in which Vale is undergoing a large expansion phase with substantial capital expenditures. As a consequence, margins, leverage and coverage rations will remain challenged through 2016. Additionally, the outlook incorporates potential penalties, fines and claims related to the accident with Samarco's dams.

The downgrade of Vale Canada senior unsecured rating to B2 reflects the weaker operating performance of its business, and the fact that Vale does not guarantee the notes. The rating continues to reflect this subsidiary's major position in the global nickel market, its asset base and strategic importance to its parent.

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 45/ton for iron ore in Moody's base case), easing existing pressure on metrics. An upward rating movement would require that Vale maintains a strong liquidity position and reduce debt levels, with adjusted total debt/EBITDA below 3.5x and EBIT/interest expense above 3.5x 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) trends towards 4x or above. 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 15% for a prolonged period, could also precipitate a downgrade. Negative pressure would arise to the extent which Vale is required to provide material financial support to Samarco, or faces liabilities from litigation and class actions resulting from the Samarco's accident.

The principal methodology used in these ratings was Global Mining Industry published in August 2014. Please see the Ratings Methodologies 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 globally, with substantive positions in iron ore and nickel, and participation in copper, coal and fertilizers, as well as supplemental positions in energy and steel production. Vale is the largest global supplier of iron ore, with approximately 359 million metric tons (t) of production in the full year 2015 (including its share of Samarco), and the largest global producer of nickel, with around 291,000 t produced during the same period. Vale's principal mining operations are located in Brazil, Canada, Australia, Indonesia, and Mozambique. In addition, the company is active in exploration activities in nine countries. For the twelve months through December 31, 2015, Vale had net operating revenues of $25.6 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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, CFA
VP - Senior Credit Officer
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 Waltz, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 800-891-2518
SUBSCRIBERS: 55-11-3043-7300

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 downgrades Vale to Ba3; negative outlook
No Related Data.
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