New York, October 01, 2020 -- Moody's Investors Service ("Moody's") today 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 Ba2 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 senior unsecured 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rating and has withdrawn Vale's Ba1 (global scale) and Aaa.br (national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.
Ratings actions:
Issuer: Vale S.A.
Euro medium term notes due 2023: upgraded to Baa3 from Ba1
senior global notes due 2042: upgraded to Baa3 from Ba1
Issuer: Vale Overseas Limited
gtd global notes due 2026: upgraded to Baa3 from Ba1
gtd senior notes due 2030: upgraded to Baa3 from Ba1
gtd global notes due 2034: upgraded to Baa3 from Ba1
gtd global notes due 2034: upgraded to Baa3 from Ba1
gtd global notes due 2036: upgraded to Baa3 from Ba1
gtd global notes due 2039: upgraded to Baa3 from Ba1
Issuer: Vale Canada Ltd.
senior unsecured bonds due 2032: upgraded to Ba1 from Ba2
Outlook Actions:
Issuer: Vale Overseas Limited
Outlook, Stable
Issuer: Vale Canada Ltd.
Outlook, Stable
RATINGS RATIONALE
The upgrade of Vale's ratings to Baa3 reflects the improvements observed
in Vale's ESG practices, which has enhanced risk management
and governance oversight, supporting reparation of the population
and areas affected by the tailings dam accident in Brumadinho in January
2019, and materially reduced the risk of a similar accident in the
future.
Accordingly, Vale has established a new Tailings Management System,
aligned with best international practices, which includes new roles
and responsibilities and three lines of defense to enhance safety of operations.
As part of the tailings dam risk management, the company increased
the frequency of geological monitoring of its structures, reviewed
all dams and issued safety statements, building up additional structures
to reinforce safety when needed. Moreover, the decommissioning
of upstream tailings dam, when completed, will further reduce
operational risk, while continuous investments in dry processing
production will decrease the reliance on tailings dams.
Enhancements in corporate governance also support the upgrade, including
the revised risk management policy, the creation of new roles,
including the Safety and Operational Excellence Officer, reporting
to the CEO, and the Chief Compliance Officer, reporting to
the Board of Directors and additional committees to support the Board
and Executives. Vale also changed its remuneration policy,
including ESG targets as an important component of annual compensation.
All of the aforementioned initiatives contribute to the reinforcement
of controls and risk standards.
Despite the financial implications of the tailings dam accident,
Vale managed to maintain strong liquidity and access to banks and debt
markets, with limited volatility in credit metrics. As Vale
continues to generate positive free cash flows ($5.4 billion
in the twelve months ended June 2020), we do not expect a material
impact in the company's liquidity coming from expenses directly related
to Brumadinho. Vale already disbursed about $2.6
billion for decommissioning of tailings dams and socioeconomic and environmental
recovery in the affected areas, and out of the $6.6
billion provisioned mainly in 1Q19, $3.4 billion remains
outstanding as of June 30, 2020. Cash disbursement will occur
over the next years, with about 90% of the total to be disbursed
by 2022.
The Baa3 rating is supported by Vale's strong production profile,
its portfolio of long lived assets (in iron ore, nickel, copper
and coal), low cost position and strong balance sheet, with
leverage below 2x (total debt/EBITDA) since 2017, which better position
Vale to withstand volatility in the prices for iron ore and base metals.
The gradual return of operations suspended after the accident with the
tailings dam in Brumadinho in January 2019 is also a consideration to
the rating, and we expect Vale to achieve its iron ore production
capacity (400 million tons) in 2022-2023. The normalization
in production will occur once Vale develops dry stacking/processing capacity
in the southeastern system and addresses alternatives related to tailings
disposal in the southern system,
Vale has a very strong liquidity profile and long-term debt amortization
schedule. Proforma for the repayment of its $5 billion committed
credit facilities and $3.7 billion in dividends/interest
on capital payments, all in the 3Q20, we estimate that Vale's
cash position amounts to about $9 billion. This comfortably
compares with $3 billion in debt maturities until the end of 2023.We
expect Vale's liquidity to remain strong, supported by solid
cash flows from operations and high iron ore prices that reached $118/ton,
on average, in 3Q20, above the $100/ton average for
2020.
The rating remains constrained by the potential for additional financial
implications related to the tailings dam accident in Brumadinho and the
safety risks still present in its tailings dams structure. Accordingly,
despite the initiatives taken to enhance the risk management control of
its operations, particularly as the company progresses with the
build-up of backup dams and containment structures, further
de-risking will only be observed when the decommissioning of upstream
dams is concluded, between 2022-2027. Vale remains
exposed to contingent liabilities related to Brumadinho and to Samarco,
as well as to the volatility of iron ore and base metals prices.
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 rating continues to reflect
the fact that Vale S.A. does not guarantee the 2032 notes
and incorporates this subsidiary's major position in the global nickel
market, its asset base and strategic importance to Vale.
The stable outlook considers the higher visibility into the costs and
financial liabilities that Vale will incur as a result of the accident
with the tailings dam in Brumadinho. The stable outlook also reflects
our expectation of a gradual recovery of production levels, as well
as advancements in the decommissioning of upstream tailings according
to the company's schedule. We expect to see continued evidence
of stricter risk management and oversight of all operations and higher
scrutiny in the company's corporate governance practices, with a
strong strategic focus on safety and operational excellence. With
Vale's strong liquidity and positive FCF, we do not expect a significant
impact on the company's liquidity or leverage as a consequence of additional
provisions and cash disbursements related to Brumadinho.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade of Vale's rating would require continued evidence of enhanced
risk control and governance oversight, with production gradually
normalizing and no material additional provisions or cash disbursements
related to the accident in Brumadinho. An upgrade would also depend
on the maintenance of a solid liquidity and positive free cash flow generation,
supported by leading market positioning in its main segments and low-cost
operations. 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, with (CFO-dividends)/debt
consistently above 40%. An upward rating movement would
also be subject to the relative position to Brazil's sovereign ratings.
Conversely, Vale's ratings could be downgraded should the ultimate
costs related to the disaster in Brumadinho be materially above the amounts
already provisioned due to higher fines and settlements, litigations
and class actions, or if operations do not fully recover within
the expected timeframe, affecting cash costs and free cash flow
generation. Evidence that ESG initiatives are not on track to further
de-risk the company could also lead to a negative rating action.
Quantitatively, 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 2.75x or above, EBIT/Interest expense falling
below 4.5x and (CFO-dividends)/debt sustained below 35%.
A marked deterioration in the company's liquidity position would also
precipitate a downgrade. In addition, a downgrade of Brazil's
sovereign rating (Government of Brazil, Ba2 stable) could strain
Vale's ratings.
The principal methodology used in these ratings was Mining published in
September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1089739.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Headquartered in Rio de Janeiro, Brazil, Vale S.A.
(Vale) is one of the world's largest mining enterprises. The company
has substantive positions in iron ore and nickel, relevant operations
in copper and coal, and supplemental positions in energy and steel
production. Vale is among the largest global supplier of iron ore
and nickel. The company's principal mining operations are in Brazil,
Canada, Indonesia, New Caledonia and Mozambique. In
the twelve months ended in June 2020, Vale reported net revenues
of $34.7 billion.
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