Rocked by Mining Disaster, Vale Bondholders Now Hit by Ore Swoon

Updated on
  • Bonds trade at record discount to BHP Billiton, Rio Tinto debt
  • Iron-ore tumble follows mine disaster at Vale joint venture

In the bond market, Vale SA is falling behind its biggest rivals like never before.

The mining company’s $2.25 billion of notes due in 2022 have plummeted 15 percent to a record low in the past month as a swoon in iron-ore prices deepens, the latest blow to the Rio de Janeiro-based company. The debt is now trading at an unprecedented discount to the bonds of industry peers BHP Billiton Plc and Rio Tinto Plc, and on Thursday Moody’s Investor Service lowered Vale to its lowest investment-grade rating.

Vale, the world’s biggest iron-ore producer, is faring worse than competitors as it spends $6.2 billion to expand production at a time when slowing demand from China has sent metals prices into free fall. Iron-ore sank to the lowest since at least 2009 on Thursday and is now down 80 percent from its 2011 peak. Vale has also been roiled by an unprecedented disaster last month at a mine run by its joint-venture Samarco Mineracao SA and growing aversion to Brazilian assets in the wake of the nation’s political and economic crises.

“Vale has a little more difficulty hunkering down than the others,” Ernie Lalonde, a debt analyst at DBRS Ltd., said by telephone from Toronto. “It’s a tough outlook.”

Vale’s press office didn’t respond to an e-mail seeking comment on the performance of the company’s bonds.

The Nov. 5 spill at the Samarco mine left about 20 people dead or missing and spewed billions of gallons of tailings sludge into the Rio Doce river. With most of its production coming from Brazil, Vale may face more stringent oversight stemming from the accident that could increase costs at other projects.

Vale was lowered one step to Baa3 by Moody’s, with the rating company maintaining a negative outlook, meaning it may be cut again to junk status as low commodity prices weigh on leverage metrics.

The company is betting an expansion of its Carajas complex in northern Brazil, its biggest project ever, will trim costs, boost market share and offset the effect of lower prices. The venture is 75 percent complete and will be ready to operate next year, Vale said in October.

Still, DBRS’s Lalonde said it might not reach full capacity until 2017, delaying the company’s ability to offset the impact of lower prices with cheaper production of higher-quality ore.

“Carajas just took a long time,” he said. “These are all these things that don’t help the story.”

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE