DBRS Comments on Vale Equity Transactions

DBRS notes that Vale S.A. (Vale or the Company) has announced a series of transactions that, if completed as stated, will reduce the Company’s equity base by approximately $4.75 billion over the next six months. DBRS recognizes that Vale has a strong business model and that its credit metrics are compatible with its BBB (high) rating. The ongoing recovery of the world economy and the persistence of growth in China and in other developing countries is expected to allow the Company to internally generate significant cash flow to help fund the proposed transactions without a material impact on its financial profile. However, in our view, the reduction in the Company’s equity base implied by its proposed dividend and share repurchase programs does raise certain concerns regarding the Company’s ability to carry out its growth ambitions in the event of another serious economic downturn and still maintain its financial health.

The transactions announced by Vale include a proposed payment of the second tranche of the Company’s minimum dividend of $1.250 billion, payment of an additional dividend of $500 million and payment of an extraordinary dividend of $1 billion. Separately, the Company has announced a proposal to establish a share buyback program that will repurchase up to $2 billion of its common or preferred shares prior to March 22, 2011.

DBRS’s outlook for Vale’s iron ore and other commodity output is relatively positive. The Company’s operating cash flow generation for the first half of 2010 was robust at $7.5 billion, the second highest rate in its history on an annualized basis. Nonetheless, in the first half of 2010, Vale’s capital spending continued at a high rate ($4.1 billion); the Company remained acquisitive (approximately $1.5 billion in acquisitions net of dispositions) and was required to fund added working capital, dividends and other items to the tune of $4.1 billion, resulting in $2.2 billion in funding requirements from cash on hand and debt for the period. We also note that Vale went into the last recession with a cash and investment horde of $13 billion (September 30, 2008); however, that cushion was cut in half, to $6.2 billion, at June 30, 2010. The Company has committed an aggressive capital budget of $12.9 billion for 2010 and further acquisitions cannot be ruled out.

Vale, headquartered in Brazil, is one of the largest mining companies in the world, with a solid business base in the production of iron ore-related products, nickel, aluminum and copper. The Company also produces and sells manganese, ferroalloys and kaolin, as well as bauxite, alumina, coal, cobalt, precious metals and fertilizers. Vale continues to aggressively expand its operations by organic growth and acquisitions.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Mining, which can be found on our website under Methodologies.