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Rating Action:

Moody's upgrades Vale to Baa3; stable outlook

23 Jul 2018

New York, July 23, 2018 -- Moody's Investors Service ("Moody's") has upgraded to Baa3 from Ba1 Vale S.A. ("Vale")'s senior unsecured ratings and the ratings on the debt issues of Vale Overseas Limited (fully and unconditionally guaranteed by Vale). Moody's also upgraded to Ba1 from Ba3 the rating for the senior unsecured ratings of Vale Canada Ltd.

At the same time, Moody's América Latina Ltda upgraded to Baa3 from Ba1 the senior unsecured notes (Debentures de Infraestrutura) issued by Vale. The Aaa.br ratings (national scale) remain unchanged. Moody's América Latina also assigned to Vale a Baa3 (global scale) and Aaa.br (national scale) issuer rating and has withdrawn Vale's Ba1 (global scale) and Aaa.br (national scale) corporate family rating.

The outlook for all ratings is stable.

Rating Actions:

..Issuer: Vale S.A.

....Senior Unsecured Notes due 2023, upgraded to Baa3 from Ba1

....Senior Unsecured Notes due 2042, upgraded to Baa3 from Ba1

..Issuer: Vale Canada Ltd.

....Senior Unsecured Bonds due 2032, upgraded to Ba1 from Ba3

..Issuer: Vale Overseas Limited

....Gtd Senior Unsecured Notes due 2021, upgraded to Baa3 from Ba1

....Gtd Senior Unsecured Notes due 2022, upgraded to Baa3 from Ba1

....Gtd Senior Unsecured Notes due 2026, upgraded to Baa3 from Ba1

....Gtd Senior Unsecured Notes due 2034, upgraded to Baa3 from Ba1

....Gtd Senior Unsecured Notes due 2036, upgraded to Baa3 from Ba1

....Gtd Senior Unsecured Notes due 2039, upgraded to Baa3 from Ba1

The outlook of all ratings is stable

RATINGS RATIONALE

The upgrade of Vale's ratings reflects the continued improvement in its credit metrics supported by enhanced production profile and reduction in absolute debt levels. The conclusion of S11D allowed for a substantial raise in low cost production, while the increased focus on blending of better quality iron ore and higher premiums supported the company´s profitability. Stronger cash generation and lower capital expenditures compared to pre-2016 years have led to positive free cash flows, which we expect to continue through 2020 should iron ore prices remain within our medium-term price sensitivity levels ($45-$75/ton). Furthermore, Vale's debt reduction initiatives (target net debt of $10 billion) have materially reduced leverage, which declined, on an adjusted basis, from a peak of 5.6x at the end of 2015 to 1.5x in the last twelve months ended March 2018. We do expect leverage to remain in the 1x-1.5x should iron ore prices remain around $60/ton. Lower debt levels, greater production capacity, a lower-cost operation and Vale's good liquidity will furthermore allow the company to uphold a more robust position against commodity price volatility.

The upgrade also incorporates the governance agreement signed on June 25, 2018 with Vale, BHP and Brazilian authorities regarding Samarco´s remediation liabilities. Accordingly, the arrangement settled a public civil action of BRL20 billion and dismissed some claims from a public civil action of BRL155 billion that overlaps with claims already settled under the framework agreement signed in March 2016. Although Samarco and its shareholders could face higher amounts than those already contemplated by the provisions, the governance agreement significantly reduces risks to liquidity and credit metrics when compared with the very large initial claims. Vale's ratings continue to reflect the long term overhang represented by the uncertainties regarding the level of support Vale will provide to Samarco or the final outcome of existing litigations and the impact it could have on the company's liquidity and debt profile.

Vale's Baa3 ratings continue to be supported by the company's diversified product base and competitive cost position, and substantive portfolio of long lived assets of iron ore, nickel, copper and coal. Despite Vale's geographic and commodity diversification, 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. The ratings acknowledge Vale's more disciplined approach to capital allocation, dividend distribution, divestiture of non-strategic assets, maintenance of competitive cost position and focus on debt reduction, which better positions Vale to withstand volatility in the prices for its major products.

Vale remains exposed to iron ore and base metals. More robust economic growth rates in 2017 contributed to greater base metal and iron ore consumption and a price rally. There could be a moderate correction in iron ore prices in the medium term, supported by additional, low-cost iron ore supply coming to the market as well as environmental concerns in China. This could increase operating costs for blast furnace (BOF) processes compared with electric-arc furnace (EAF) processes, favoring scrap consumption in detriment of iron ore. Any indications of a slowdown in iron ore demand, particularly from China, would lead to price correction in the medium-term.

Vale Canada's upgrade to Ba1, one notch below Vale's rating, reflects Vale S.A. improved credit profile and stronger ability to support Vale Canada. The Ba1 ratings continue to reflect Vale Canada's weaker operating performance and the fact that Vale S.A. does not guarantee the 2032 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.

The stable outlook on the ratings reflects our expectation that Vale will maintain strong credit metrics and its ongoing focus on profitability and cost efficiency, with financial discipline regarding expansion capital expenditures and dividend distribution.

An upgrade on Vale's rating would require the maintenance of a solid credit profile and positive free cash flow generation, supported by leading market positioning in its main segments and low-cost operations. A sound liquidity is also a necessary condition for an upgrade. Quantitatively, an upgrade would also require Vale's adjusted total debt/EBITDA to remain below 2x and EBIT/interest expense above 5.5x on a sustainable basis.

The ratings or outlook could suffer negative pressure should conditions for iron ore and base metals deteriorate, leading to lower profitability, with leverage ratios (total debt to EBITDA) trending towards 3x or above and EBIT/Interest expense falling below 4.5x. A marked deterioration in the company's liquidity position would also precipitate a downgrade. Negative pressure would arise to the extent Vale is required to provide material financial support to Samarco, or faces liabilities from litigation and class actions resulting from the Samarco's accident, in addition to the amount related to the Framework Agreement set with Brazilian Authorities in March 2016 and the announced support to Samarco's working capital needs. Deterioration in Brazil's sovereign credit quality could negatively pressure Vale's ratings or outlook.

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 and coal, as well as supplemental positions in energy and steel production. Vale is the largest global supplier of iron ore, with approximately 367.2 million metric tons (t) of production during the last twelve months ended June 2018 and the largest global producer of nickel, with around 275,500t produced during the same period. Vale's principal mining operations are located in Brazil, Canada, Indonesia, and Mozambique. For the twelve months through March 2018, Vale had net operating revenues of USD 34.1 billion.

The principal methodology used in these ratings was Mining Industry published in April 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in May 2016 entitled "Mapping National Scale Ratings from Global Scale Ratings". While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1113601.

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
Senior Vice President
Corporate Finance Group
Moody's America Latina Ltda.
Avenida Nacoes Unidas, 12.551
16th Floor, Room 1601
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Brazil
JOURNALISTS: 800 891 2518
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Marianna Waltz, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 800 891 2518
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
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New York, NY 10007
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JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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