Fitch Rates Vale's Proposed Debentures 'AAA (bra)'
CHICAGO -- December 16, 2013
Fitch Ratings has assigned an expected rating of 'AAA (bra)' to Vale S.A.
proposed BRL750 million debentures. The proceeds from these debentures, which
could be issued in four series, are expected to be used to fund the Ramal
Ferroviario Sudeste do Para (RFSP) project, which is part of CLN S11D.
KEY RATING DRIVERS
Leading Iron Ore Position
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 450 million tons by 2018.
Strong Cash Flow Despite Lower Iron Ore Prices
Vale's credit ratings also reflect its strong balance sheet, conservative
capital structure and solid cash flow from operations (CFFO). Vale generated
USD20.4 billion of EBITDA and USD16.3 billion of CFFO during the LTM ended
Sept. 30, 2013. These figures are relatively similar to those generated during
2012 and are below the company's record levels for EBITDA and CFFO of USD33.8
billion and USD24.5 billion, respectively, during 2011. The drop in cash flow
was due almost exclusively to a decline in the price of iron ore. As of Sept.
30, 2013, Vale's net debt-to-EBITDA ratio was 1.1x, and its CFO net leverage
ratio was 1.5. These ratios compare with five year average ratios of 0.9x for
net debt-to-EBITDA and 1.1x for CFFO net leverage.
Tax Settlement Reduces Uncertainty
During November, Vale reached an agreement with the government to settle BRL45
billion of disputes related to social contributions and income taxes due from
foreign subsidiaries. The settlement reduced Vale's obligation to BRL22.3
billion. The agreement calls for Vale to make an upfront payment of BRL6.0
billion and to make installment payments over a 15-year period for the
remaining BRL16.3 billion. The settlement results in a waiver of the fines,
interest and other charges associated with the years 2003, 2004 and 2006. For
the remaining years, fines were reduced by 80% and interest on the principal
and fines was decreased by 50%. From an NPV perspective the economic loss
associated with the foreign profit settlement is approximately USD6.3 billion.
Liquidity and Leverage Remain Strong Following Tax Settlement
Vale had USD29.8 billion of total debt and USD7.2 billion of cash and
marketable securities as of Sep.30, 2013. This level of cash compares
favorably with USD3.2 billion of short-term debt as of Sep. 30, 2013 and debt
amortizations of USD1.3 billion in 2014, USD1.2 billion in 2015, and USD1.9
billion in 2016. Vale has USD5 billion of revolving credit lines that have not
been drawn upon. Vale has numerous credit lines related to investments. These
credit lines are primarily with export credit agencies and Brazil's
development bank, BNDES. During November 2013, Vale sold its minority stake in
Norsk Hydro for USD1.8 billion. Proceeds from this sale will be used to fund
most of Vale's initial BRL6 billion tax settlement obligation. Fitch expects
Vale's net debt to grow to approximately USD29 billion by the end of 2013.
Versus a forecasted EBITDA for 2013 of around USD20 billion this would result
in a projected net debt/EBITDA ratio of 1.5x.
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
ore). Fitch's uses conservative, market-based iron ore price of USD120 per ton
iron ore in 2014 and USD110 per ton in 2015 and USD90 per ton in the long-term
for its base case scenario. For nickel, the prices used in Fitch's base case
were USD7.50 per pound in 2014 and USD7.90 per pound in 2015 and USD8.62 in
the long-term. Fitch projects that Vale will generate about USD20 billion of
EBITDA in 2013 and USD22 billion in 2014. With USD30 billion of investments
projected by Fitch to occur during these two years, free cash flow will be
negative and net leverage should be 1.4x in 2014 and CFO net leverage should
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 USD90 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. 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. 5, 2013)
Applicable Criteria and Related Research:
Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013
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