Vale's 25% Bond Surge Shows Brazil Miner Is Overcoming Turmoil

  • Company is besting rivals BHP, Rio Tinto in bond market
  • Iron-ore prices have jumped 41 percent from a seven-year low

Brazilian miner Vale SA is putting a rash of bad news behind it in the bond market.

The company’s $2.25 billion of notes due in 2022 have surged 25 percent since the start of February as a rebound in iron-ore prices helps restore investor confidence. The advance tops gains in the debt of rivals BHP Billiton Ltd. and Rio Tinto Plc. Bondholders had soured on Vale when the price of iron ore, a key ingredient in steelmaking, fell 23 percent in the fourth quarter. Ratings companies also had downgraded Vale’s debt, and its Samarco Mineracao SA joint venture halted operations after the worst mining disaster in Brazil’s history.

“There was a confluence of negative sentiment,” said Michael Roche, a strategist in New York at Seaport Global Holdings LLC. Now, “the iron-ore recovery acts as a catalyst for investors who are adjusting their positions.”

Iron ore has jumped 41 percent after hitting its lowest price in at least seven years in December, part of a rebound in commodity prices globally.

Vale is slashing costs and unloading assets as it seeks to avoid further ratings cuts following two downgrades in the past three months. The Rio de Janeiro-based company said in February it was open to selling what it described as “core assets.” This marked a shift from a previous cost-cutting strategy that focused on selling peripheral units, including seven iron-ore carriers and a stake in a bauxite operation in northern Brazil.

Standard & Poor’s, Moody’s Investors Service and Fitch Ratings have negative outlooks on Vale’s ratings. Brazil’s real gained 2.4 percent Monday to 3.5079 per dollar as of 1:29 p.m. in New York.

Vale had no comment on the performance of its bonds.

Another important element in the changing investor sentiment is a compensation settlement announced on March 2 between the government and Vale’s joint venture with BHP. Two dams burst at the Samarco mine in the state of Minas Gerais in November, killing at least 17 people and unleashing billions of gallons of sludge into the Rio Doce river.

Samarco agreed to pay at least $1.1 billion during the next three years for the damages; the accord could pave the way for operations to restart later this year.

“The clarity we got on the Samarco deal was important,” Tim O’Brien, a credit analyst at DBRS Ltd., said from Toronto. “It’s not just a question of assessing the amounts of the fines, it’s taking away the uncertainty. It does appear that if Samarco is able to get their operations up and running in the second half, they will be able to pay the fines on their own without requiring cash calls from the parents.”

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