Fitch Rates Vale S.A.'s Bonds 'BBB+'

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to Vale Overseas Limited's proposed guaranteed notes due in 2020 and the reopening of its 6.875% notes due Nov. 2, 2039. Both notes are unconditionally guaranteed by Vale S.A. (Vale). Proceeds from the issuances are intended to be used for general corporate purposes.

Fitch currently rates Vale as follows:

--Foreign currency Issuer Default Rating (IDR) 'BBB+';

--Local currency IDR 'BBB+';

--Unsecured debt 'BBB+';

--National Scale 'AAA(bra)';

--Unsecured Brazilian real denominated debentures 'AAA(bra)'.

The Rating Outlook for Vale is Stable.

The credit ratings of Vale take into consideration the company's solid business profile. During 2009, Vale was the largest iron ore company in the world with an estimated market share of 25% in the seaborne market and the second largest producer of nickel. The company is amongst the lowest cost producers of these products due to high ore grades and its integrated infrastructure system. Vale's favorable position on the cost curve for these commodities allows it to generate healthy cash flows during the troughs in the commodity price cycle. Vale's leading position in iron ore and nickel is viewed to be sustainable due to extensive proven and probable reserves for these commodities. In addition to iron ore and nickel, Vale has important market positions in copper, coal, fertilizer and aluminum.

The ratings also reflect Vale's strong balance sheet, conservative capital structure and strong cash flow from operations (CFFO). The combination of these factors allows the company to fund an aggressive capital expenditure program, primarily focused on organic growth, with cash flow from operations. Between 2005 and 2009, Vale's average net debt/EBITDA ratio was 1.1 times (x) while its CFFO net leverage ratio averaged 1.4x.

Fitch projects that Vale will generate approximately US$23 billion of EBITDA during 2010 and more than US$17 billion of CFFO. These figures compare favorably with US$9.2 billion of EBITDA and US$7.1 billion of CFFO during 2009 and represent an improvement from US$13.6 billion of EBITDA during the LTM ended June 30, 2010 and US$9 billion of CFFO. The sharp increase in cash flow from operations during 2010 is due to strong iron ore prices and volumes.

Vale is expected to spend approximately US$13 billion on capital expenses during 2010 and at least US$6 billion on acquisition and US$2.5 billion on dividends. Assuming offsetting asset sales of US$2.5 billion, Fitch expects Vale's net debt to increase to approximately US$17 billion at the end of 2010 from US$13.3 billion as of Dec. 31, 2009. This would result in a net debt/EBITDA ratio of 0.9x and a CFFO net leverage ratio of 1.0x for 2010.

Vale is also going through a period of very aggressive organic expansion. The heavy capital expenditures associated with this growth are expected to lead to negative free cash flow before acquisitions and could limit future upgrades. Factors that could lead to a negative rating action include a large, debt-funded acquisition; a change in management's strategy with regard to the conservative capital structure that the company has maintained; a prolonged downturn in demand and prices for commodities, particularly steel; or increased substitution by producers of stainless steel to products with no or low nickel content from high nickel content products.

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 2009, China accounted for 37.6% of the company's sales revenues and 56.8% of its iron ore and pellets sales

Additional information is available at 'www.fitchratings.com'.

Criteria and Related Research:

--'Corporate Rating Methodology' dated Aug. 13, 2010;

--'Liquidity Considerations for Corporate Issuers' dated June 12, 2007.

Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646

Liquidity Considerations for Corporate Issuers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=328666

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