Fitch: No Impact To Vale's Ratings From Weak Results
CHICAGO -- October 25, 2012
Vale S.A. released its third quarter results on Wednesday, October 24. Vale's
EBITDA dropped to USD3.7 billion during the third quarter 2012 (3Q'12) from
USD5.1 billion during 2Q'12, according to Fitch Ratings. The drop was more
pronounced versus 3Q'11, when the company generated USD9.6 billion of EBITDA.
The company's weak results reflect harsh market conditions due to low levels
of economic activity globally.
Vale, which is rated at 'BBB+' and 'AAA (bra)', has responded to less than
ideal market conditions in a manner consistent with Fitch's expectations.
Measures taken by Vale include: divesting non-core assets, closing production
facilities, reducing capital expenditures and adjusting dividend levels to
ensure a strong capital structure that will enable key projects such as S11D
and Moatize to be funded without a dramatic change in the company's underlying
For the latest 12 months (LTM) ended Sept. 30, 2012, Vale generated USD21.3
billion of EBITDA, a 37% decline from USD33.8 billion during 2011. The company
had USD8.6 billion of cash and marketable securities at the end of September
and USD30.6 billion of total debt. Liquidity is manageable with only USD2
billion of the company's debt falling due in the next 12 months. Additional
liquidity support is provided by a USD3 billion revolving credit line that the
company has with a syndicate of 27 banks. This facility had not been drawn
upon by the company as of Sept. 30, 2012. In addition to this revolver, Vale
has numerous credit lines related to investments. These credit lines are
primarily with ECAs and BNDES.
Fitch projects that the company's annual EBITDA will fall to about USD18
million for 2012 and that net debt will be around USD23 million, resulting in
a net debt to EBITDA ratio around 1.3x for 2012. This ratio is considered
strong for the category given difficult market conditions. Vale has a low
production cost structure that would allow it to sustain sales volumes at high
levels vis-a-vis its peers during 2013 should the markets conditions
deteriorate and remain weak. Under a sever scenario, Fitch forecasts a trough
EBITDA for Vale of about USD12 billion. Given the adjustments to market
conditions that have been announced by Vale's management, net leverage ratio
would likely not exceed 2.0x under an extreme cyclical trough.
Fitch's global growth forecast is 2.1% for 2012, 2.6% in 2013 and 3% in 2014%.
These modest growth levels are projected despite forceful monetary policy
interventions by the Fed, ECB and BoJ during the second half of the year. They
highlight sluggish economic growth in the major advanced economies where
economic growth is projected at 1% in 2012, followed by only a modest
acceleration to 1.4% in 2013 and 2% in 2014.
In contrast to the weak economic outlook in the developed markets, the outlook
is more positive Latin America. Fitch forecasts GDP growth to be 3.9% in 2013
in Latin America and 3.9% in 2014. These figures represent an increase from
forecasted growth of 3% in 2012. Key growth engines vis-a-vis 2012 will be
Brazil at 4.2%, Peru at 6.2% and Colombia at 4.8%.
Factors that could lead to a negative rating action for Vale and its
subsidiaries are: a large, debt-funded acquisition; a change in management's
strategy with regard to the conservative capital structure that the company
has maintained; or an increase in the government's influence upon the
company's capital structure and investment program. A reduction in demand for
Vale's products from its Chinese clients and/or a deterioration of its
relationship with its customers in China could also lead to a negative rating
action. During 2011, China accounted for 32.4% of the company's sales
Key considerations for a positive rating action would be an upgrade of the
Brazilian sovereign rating, a continued commitment to a strong capital
structure, broader product and geographic diversification, and/or the
resolution of the litigation related to taxes and royalties.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 8, 2012;
--'National Ratings Criteria', Jan. 19, 2011;
--'Parent and Subsidiary Rating Linkage', Aug. 12, 2011;
--'Rating Corporates Above Country Ceiling', Jan. 30, 2012.
Applicable Criteria and Related Research:
Corporate Rating Methodology
National Ratings Criteria
Parent and Subsidiary Rating Linkage
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL,
COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM
THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
Joe Bormann, CFA, +1 312-368-3349
70 West Madison
Chicago, IL 60602
Jay Djemal, +1 312-368-3134
Ricardo Carvalho, +55-21-4503-2627
Daniel Kastholm, CFA, +1 312-368-2070
Elizabeth Fogerty, +1 212-908-0526
Press spacebar to pause and continue. Press esc to stop.