DBRS Confirms Vale S.A., Vale Overseas Limited and Vale Canada Limited at BBB (low) with Stable Trends

DBRS Limited (DBRS) confirmed the ratings of Vale S.A. (Vale or the Company) and its subsidiaries at BBB (low) with Stable trends. Vale’s business outlook and key credit metrics strengthened significantly in 2017 compared with 2016. An important driver of this improvement was robust export iron ore markets in 2017, as the price of the benchmark 62% Fe iron ore fines increased by 22.6% compared with 2016. As well, the flight-to-quality by Chinese steel mills for higher grade iron ore products has resulted in Vale’s continuing to capture significant premiums for its higher-grade iron ore fines as well as iron ore pellets. Vale’s 50%-owned Samarco pelletizing operations remained shut during 2017, contributing to the 40.7% higher price realizations for its pellet sales from its other operations. As a result, adjusted operating cash flow increased by 30.4% in 2017 compared with 2016. In addition, Vale reduced its total gross debt by 23.3%, or $6.8 billion, during the year, including the redemption of $1.0 billion of its 2019 5.625% Notes, tendering for $501 million of principal value of its 2020 4.625% Notes and retiring bank indebtedness. In early 2018, the Company completed the sale of the bulk of its fertilizer assets to the Mosaic Company and finalized the project financing for the Nacala Logistics Corridor. These transactions resulted in combined proceeds of $3.7 billion that management intends to use for additional debt reduction.

DBRS recently downgraded Brazil’s sovereign risk rating to BB (low) and changed the trend to Stable (please refer to the DBRS press release dated March 16, 2018). The majority of Vale’s operations are in Brazil, including the majority of its Ferrous Minerals assets as well as the Sossego and Salobo copper mines and Onça Puma ferronickel operations, which, as of December 31, 2017, accounted in aggregate for approximately 64% of the Company’s investments in plant, property and equipment, intangible assets and associates and joint ventures. However, only 11% of Vale’s 2017 net operating revenues were generated in Brazil, which DBRS believes is a more relevant consideration than the geographic location of the Company’s assets. Additionally, Vale has successfully transitioned to a single class of common equity and migrated to the Novo Mercado segment of the Brazilian stock market, providing for more transparent corporate governance. Finally, Vale’s business risk and key credit metrics are robust for its low-investment-grade rating. Compared with 2016, adjusted debt-to-EBITDA declined to 1.6 times (x) versus 2.6x, lease-adjusted cash flow-to-debt improved to 45.9% from 28.0% and lease-adjusted EBITDA-to-interest coverage improved to 8.7x from 7.0x, which are all supportive of a higher rating within the investment-grade BBB category. While Brazil’s current sovereign rating does not preclude Vale from having an investment-grade rating, if the credit outlook for Brazil does not remain Stable going forward and a further downgrade to the B rating category ensues, then a negative rating action for Vale to the non-investment-grade BB category could follow irrespective of the Company’s current credit strength.

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

The principal methodologies are Rating Companies in the Mining Industry (August 2017) and the DBRS Criteria: Guarantees and Other Forms of Support (January 2018), which can be found on dbrs.com under Methodologies.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

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