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Rating Action:

Moody's upgrades Vale's ratings to Ba2; positive outlook

20 Mar 2017

New York, March 20, 2017 -- Moody's Investors Service ("Moody's") has upgraded to Ba2 from Ba3 Vale S.A. ("Vale")'s ratings and related ratings, including Vale's senior unsecured rating and the ratings on the foreign currency debt issues of Vale Overseas Limited (fully and unconditionally guaranteed by Vale). Moody's also upgraded to B1 from B2 the rating for the senior unsecured ratings of Vale Canada Ltd. The outlook is positive.

Ratings Upgraded:

..Issuer: Vale S.A.

....Senior Unsecured Regular Bond/Debenture due 2018, to Ba2 from Ba3

....Senior Unsecured Regular Bond/Debenture due 2023, to Ba2 from Ba3

....Senior Unsecured Regular Bond/Debenture due 2042, to Ba2 from Ba3

..Issuer: Vale Canada Ltd.

....Senior Unsecured Regular Bond/Debenture due 2032, to B1 from B2

..Issuer: Vale Overseas Limited

....Gtd Senior Unsecured Regular Bond/Debenture due 2019, to Ba2 from Ba3

....Gtd Senior Unsecured Regular Bond/Debenture due 2020, to Ba2 from Ba3

....Gtd Senior Unsecured Regular Bond/Debenture due 2021, to Ba2 from Ba3

....Gtd Senior Unsecured Regular Bond/Debenture due 2022, to Ba2 from Ba3

....Gtd Senior Unsecured Regular Bond/Debenture due 2026, to Ba2 from Ba3

....Gtd Senior Unsecured Regular Bond/Debenture due 2034, to Ba2 from Ba3

....Gtd Senior Unsecured Regular Bond/Debenture due 2036, to Ba2 from Ba3

....Gtd Senior Unsecured Regular Bond/Debenture due 2039, to Ba2 from Ba3

Outlook actions:

..Issuer: Vale S.A.

....Outlook, Changed To Positive From Stable

..Issuer: Vale Canada Ltd.

....Outlook, Changed To Positive From Stable

..Issuer: Vale Overseas Limited

....Outlook, Changed To Positive From Stable

RATINGS RATIONALE

The upgrade to Ba2 reflects the substantial recovery in credit metrics observed during 2016, supported by Vale's improvements in production profile, its low cost structure and financial discipline regarding capital expenditures and dividends, which enhanced the company's operating resilience and overall liquidity. The recovery in credit metrics is also a consequence of higher commodities prices, in particular iron ore, which increased by 81% and closed 2016 at USD78.9/ton. EBITDA margins for FY 2016 were at 43.4% (56.9% in 4Q16), record levels since 2012. Adjusted leverage, in turn, declined to 2.6x at the end of 2016, a steep decrease from 5.6x at the end of 2015.

Vale has taken a number of initiatives targeting leverage reduction in 2016. The company raised about USD 1.32 billion with the gold streaming, sale of vessels and minority participations. For 2017, Vale expects to conclude the fertilizer assets sale -- which totals USD 1.25 billion in cash and USD 1.25 billion in shares to be issued by Mosaic - and the coal transaction in Mozambique, for which Vale will receive, from Mitsui & Co Ltd ((P) A3 negative), USD 770 million for the divestiture of part of its share in the Moatize coal mine and the Nacala Logistics Corridor, and up to USD 2.7 billion from the project finance. On a pro-forma basis, including all transactions, we estimate that Vale's leverage (measured by total debt to EBITDA, including Moody's standard adjustments) would decline to 2.2x from 2.6x at the end of December 2016. We expect Vale's leverage to decline further in the next 12-18 months considering prices at Moody's sensitivity medium-term ranges ($45-65/ton), as the company continues to undertake cost saving measures and reduces its annual capex to average levels of USD 4 billion from 2017 onwards, which will reduce debt requirements and lead to positive free cash flow generation. Notwithstanding, there has not yet been a material reduction in debt levels, which could support a faster decline in gross leverage metrics.

Vale's Ba2 rating continues to be 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 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. 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 non-strategic assets, and focus on cost reduction, which better positions Vale to withstand volatility in the prices for its major products.

Constraining the ratings are the challenging fundamentals for iron ore, its key earning driver, and base metals prices, as a consequence of the slowdown in China's economic growth -- we expect GDP growth to decline to 6.3% in 2017 and 6% in 2018 - and steel demand, which the World Steel Association (WSA) forecasts to decline to 626 mm tons in 2017, a 12% decline over 2014 levels, bringing heightened uncertainty over demand for iron ore and base metals in the next few years. Lower prices relative to 2011-2014 levels could bring volatility to margins and cash flows and delay the pace of deleveraging. Vale's ratings also incorporate the medium term overhang represented by the uncertainties regarding the level of support Vale will provide to Samarco or the outcome of existing litigations and the impact it would have on the company's liquidity and debt profile.

The positive outlook reflects our expectation that Vale's will maintain good liquidity position while reducing debt levels, and keep its ongoing focus on cost reduction, with financial discipline regarding capex and dividend payment that will allow the company to withstand the challenges of commodity price volatility for its main products.

Vale Canada's senior unsecured rating upgrade to B1, two notches below Vale's rating, 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.

An upgrade on Vale's rating would depend on the maintenance of strong credit metrics and market positioning, as well as sound liquidity position and the reduction in absolute debt levels. Quantitatively, an upgrade would also require Vale's adjusted total debt/EBITDA below 3.0x, EBIT/interest expense at 4.0x and positive free cash flow generation 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, and Vale is not able to make meaningful progress in cost reduction and debt levels, with leverage ratios (total debt/Ebitda) trending towards 4.0x or above. A marked deterioration in the company's liquidity position could 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.

The principal methodology used in these ratings was Global Mining Industry published in August 2014. Please see the Rating 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 349 million metric tons (t) of production in 2016, and the largest global producer of nickel, with around 311,000 t produced during the same period. Vale's principal mining operations are located in Brazil, Canada, Indonesia, and Mozambique. In addition, the company is active in exploration activities in nine countries. For the twelve months through December 2016, Vale had net operating revenues of USD 27.5 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

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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