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Rating Action:

Moody's downgrades Vale to Baa3; maintains negative outlook

10 Dec 2015

New York, December 10, 2015 -- Moody's Investors Service downgraded to Baa3 from Baa2 the senior unsecured ratings on the foreign currency debt issues of Vale S.A. and Vale Overseas Limited (guaranteed by Vale). Moody's also downgraded to Baa3 the senior unsecured ratings of Vale Canada Ltd. (not guaranteed by Vale). The outlook remains negative.

Rating Actions:

..Issuer: Vale S.A.

....Senior Unsecured Regular Bond/Debenture (Foreign Currency) Sep 11, 2042, Downgrade to Baa3

....Senior Unsecured Regular Bond/Debenture (Foreign Currency) Mar 24, 2018, Downgrade to Baa3

....Senior Unsecured Regular Bond/Debenture (Foreign Currency) Jan 10, 2023, Downgrade to Baa3

..Issuer: Vale Canada Ltd.

....Senior Unsecured Regular Bond/Debenture (Foreign Currency) Sep 15, 2032, Downgrade to Baa3

..Issuer: Vale Overseas Limited

....Senior Unsecured Regular Bond/Debenture (Foreign Currency) Jan 17, 2034, Downgrade to Baa3

....Senior Unsecured Regular Bond/Debenture (Foreign Currency) Jan 11, 2016, Downgrade to Baa3

....Senior Unsecured Regular Bond/Debenture (Foreign Currency) Jan 11, 2022, Downgrade to Baa3

....Senior Unsecured Regular Bond/Debenture (Foreign Currency) Sep 15, 2019, Downgrade to Baa3

....Senior Unsecured Regular Bond/Debenture (Foreign Currency) Sep 15, 2020, Downgrade to Baa3

....Senior Unsecured Regular Bond/Debenture (Foreign Currency) Jan 23, 2017, Downgrade to Baa3

....Senior Unsecured Regular Bond/Debenture (Foreign Currency) Nov 10, 2039, Downgrade to Baa3

....Senior Unsecured Regular Bond/Debenture (Foreign Currency) Nov 21, 2036, Downgrade to Baa3

Outlook for all ratings is negative.

RATINGS RATIONALE

The downgrade of Vale's ratings to Baa3 reflects our expectation of weaker performance over the next 12 to 18 months resulting from the substantial decline in iron ore and base metals prices observed to date in 2015 and our expectation that prices will not likely experience any meaningful recovery before 2017. As a consequence, Vale's revenues and cash flows will continue to drop and credit metrics, particularly leverage, will remain challenged, and likely trending towards 5x-6x (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.

The rating action follows Moody's rating action on December 9, 2015 that has placed Brazil's sovereign Baa3 issuer and bond ratings on review for downgrade. A negative rating action on the sovereign rating would not necessarily trigger a downgrade of Vale's rating. Despite the company's weaker credit metrics, its strong competitive position as the world's largest iron ore and nickel producer, and a business that draws 82% of its revenues outside Brazil, provide reasonable insulation from Brazil's macroeconomic and political environment and make Vale less vulnerable to a decline in sovereign credit quality.

Vale's Baa3 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 adequate liquidity position with cash balance of USD 4.4 billion and USD 5 billion available in revolving credit facilities is also a positive consideration in the rating.

Constraining the ratings are 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 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 (Baa3) 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 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 maintain or reduce debt levels during the execution of its major capital expansion, and EBIT margins above 10%. In addition, a sustainable cash from operations less dividends to debt ratio trending towards 30% and EBIT/interest expense above 5 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 to execute 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 evidence a trend back to 3.5x 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. 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 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 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 346 million metric tons (t) of production in the twelve months ended in September 2015 (including its share of Samarco), and the largest global producer of nickel, with around 282,000 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 September 30, 2015, Vale had net operating revenues of $28.8 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.

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.
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New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades Vale to Baa3; maintains negative outlook
No Related Data.
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