Fitch Affirms Vale S.A.'s Credit Ratings at 'BBB+'
CHICAGO -- July 2, 2013
Fitch Ratings has affirmed Vale S.A.'s (Vale) ratings as follows:
--Foreign currency (FC) and local currency (LC) Issuer Default Rating (IDR) at
--Unsecured debt at 'BBB+';
--National Scale Rating at 'AAA (bra)';
--Unsecured Brazilian real denominated debentures at 'AAA (bra)'.
Fitch has also affirmed the 'BBB+' FC IDRs of Vale Overseas Limited and Vale
Canada Limited, as well as the 'BBB+' foreign currency ratings of the senior
unsecured debt issued by these companies. The ratings of Vale Canada Limited
and Vale Overseas Limited have been linked to those of Vale S.A. through
Fitch's 'Parent Subsidiary Rating Linkage' criteria. Vale Overseas Limited,
whose debt is guaranteed by Vale S.A., is domiciled in the Cayman Islands.
Vale Canada Limited is an operating company with operations in Canada and
Indonesia. Its debt is not guaranteed by Vale S.A.
The Rating Outlooks for Vale S.A., Vale Canada Limited and Vale Overseas
Limited are Stable.
KEY RATING DRIVERS
Leading Iron Ore Position
The Vale's ratings are supported by its solid business position, as a result
of being the world's leading producer of iron ore. During 2012, the company
had a market share of approximately 24% in the seaborne market. Vale's
position in the market is enhanced by its cost position, which is estimated to
be in the lowest quartile. The company's low cost position allows it to
continue to generate positive cash flow from operations during downturns in
the industry. Vale's position in the market is being enhanced through two
expansion projects in the Carajas region that will contribute to an increase
in the company's annual output of iron ore from 303 million tons during 2012
to a Fitch projected level of 430 million tons by 2017. Carajas Additional 40,
which is scheduled to be completed in the second half of 2013, will increase
the company's annual output of iron ore by 40 million tons annually. The
second project, S11D, will increase the company's output by an additional 90
million tons by 2017. The projected costs of production at S11D will be among
the lowest in the world globally.
Strong Capital Structure
Vale's credit ratings also reflect its strong balance sheet, conservative
capital structure and solid cash flow from operations (CFFO). Vale generated
$18.6 billion of EBITDA and $16.6 billion of CFFO during 2012. These figures
were significantly lower than the company's EBITDA and CFFO generation of
$33.8 billion and $24.5 billion, respectively, during 2011. The reduction in
cash flow was due almost exclusively to a drop in the average price of iron
ore by a drop in average iron ore prices from $170 per ton to $130 per ton
during the past year.
Capital expenditures remained relatively unchanged between 2012 and 2011 at
about $16 billion. Vale responded to the downturn in prices by reducing
dividends and share buybacks to $6 billion in 2012 from $12 billion in the
prior year. Free cash flow after dividends and capex was negative $5.2
billion. This resulted in an increase in net debt to $26.1 billion from $20.9
billion. Vale's net debt-to-EBITDA ratio was 1.4x during 2012, while its CFFO
net leverage ratio was 1.6x. These ratios compare with five year average
ratios of 0.9x for net debt-to-EBITDA and 1.1x for CFFO net leverage.
Liquidity is manageable. Vale had $32.2 billion of total adjusted debt and
$6.6 billion of cash and marketable securities as of March 31, 2013.
Short-term debt totaled $2.4 billion. Liquidity is further enhanced by Vale's
undrawn $3.0 billion revolving line of credit and strong capital markets
Vale's profit is highly reliant upon iron ore sales and the Chinese market,
despite significant investments in the areas of copper, coal, nickel and
fertilizers. The company's ferrous minerals business accounted for more than
90% of the company's EBITDA during 2012; China was the key market for Vale's
iron ore sale, accounting for 49% of its iron ore sales. Prices are expected
to weaken in the future due to extensive increases in production capacity by
Vale, BHP Billiton and Rio Tinto that will erase a scarcity premium that has
existed for much of the past decade. Against a backdrop of rising supply,
demand from China for iron ore continues to grow at a declining pace, further
exacerbating pricing pressure. Vale's considerable investments in nickel,
coal, fertilizers and copper will only partially mitigate the impact of the
increase in iron ore mining capacity globally.
Leverage Projected to Increase
Vale has responded to the challenging environment by cutting dividends,
selling non-core assets and reducing capex to only the highest return
projects. Nevertheless, Fitch projects that Vale will have a negative free
cash flow during the next few years as it invests heavily in key projects such
as S11D (Brazilian iron ore), Moatize II (Mozambique coal), Nacala Corridor
(Mozambique rail and port terminal for coal), Salobo II (Brazilian copper) and
Conceicao Itabiritos II (Brazil iron ore) and Caue Itabiritos (Brazil iron
Fitch's uses conservative, market-based iron ore price of $120 per ton iron
ore in 2013 and $110 per ton in 2014 and $90 per ton in the long-term for its
base case scenario. For nickel, the prices used in Fitch's base case were
$7.50 per pound in 2013 and $7.90 per pound in 2014 and $8.62 in the
long-term. Fitch projects that Vale will generate about $20 billion of EBITDA
in 2013 and $16 billion in 2014. With $30 billion of investments projected by
Fitch to occur during these two years, free cash flow will be negative and net
leverage should climb to more than 2.0x in 2014 and CFFO net leverage should
reach 2.5x. Should iron ore move more quickly to Fitch's long-term projected
level of $90 per ton, leverage could reach 3.0x, absent additional measures by
Vale to shore up its capital structure.
Legal Uncertainty Continues
Vale is engaged in a number of legal proceedings. The largest dispute revolves
around income taxes and social security contributions due from Vale on the net
income of non-Brazilian subsidiaries and affiliates. These disputes with
Brazilian taxing agencies are widespread amongst exporters and companies that
own subsidiaries or affiliates abroad. As of Dec. 31, 2012, Vale had BRL30.5
billion of taxes, penalties and interest due on tax assessments for the period
from 1996 until 2008. Fitch's base expectation is that Vale's likely loss will
be in the range of $2 billion to $4 billion and that continued litigation
would result in cash payments substantially lower than this level during the
next two years.
Vale's ratings could be negatively affected by a significant reduction in the
company's robust liquidity position, or net leverage in excess of 3.0x at iron
ore prices in the range of $90 per ton for a sustained period of time. Factors
that could also lead to consideration of ratings downgrades include an
unstable macroeconomic environment in China that weakens demand for the
company's products. Debt financed acquisitions could also lead to a negative
rating action, as would a loss on the aforementioned tax disputes in excess of
Fitch's projections. A change in management's strategy with regard to its
conservative capital structure and/or an increase in the government's
influence upon the company would also be viewed negatively. A downgrade of
Brazil's country ceiling from 'BBB+' could also merit negative rating actions.
Vale's ratings are not likely to be upgraded until the company completes its
aggressive capital expenditure program, which will run from 2013 through 2016.
Upgrade considerations would include a consistent improvement in free cash
flow generation capacity due to the new projects, coupled with the maintenance
of strong liquidity position. A substantial equity increase would also be
viewed favorably, as would an upgrade of the Brazilian sovereign rating and
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);
--'Parent and Subsidiary Rating Linkage' (Aug. 10, 2012);
--'National Ratings - Methodology Update' (Jan. 19, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
National Ratings Criteria
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. FITCH MAY HAVE PROVIDED ANOTHER
PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS
OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN
EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER
ON THE FITCH WEBSITE.
Joe Bormann, CFA, +1-312-368-3349
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
Jay Djemal, +1-312-368-3134
Ricardo Carvalho, +55-21-4503-2627
Daniel Kastholm, CFA, +1-312-368-2070
Brian Bertsch, +1-212-908-0549 (New York)
Press spacebar to pause and continue. Press esc to stop.