Fitch Affirms Vale's IDRs at 'BBB+'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed Vale S.A.'s (Vale) ratings as follows:

--Foreign currency (FC) and local currency (LC) Issuer Default Rating (IDR) at 'BBB+';

--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

Vale S.A.'s (Vale) credit ratings are supported by its position as the leading producer of iron ore with a 2013 market share of approximately 22% in the seaborne iron ore trade. Vale's low cost position allows it to generate positive cash flow from operations (CFFO) at extremely low iron ore prices and should shield its credit profile during downturns. Vale's iron ore position will be enhanced through two expansion projects in the Carajas region that will increase the company's annual output of iron ore to approximately 450 million tons in 2018 from 300 million tons during 2013.

Carajas Plant 2 was successfully completed in late 2013. This investment will incrementally increase the company's annual output of iron ore by an additional 40 million tons beginning in 2015. The second project, S11D, will increase the company's annual 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 at below USD20/metric ton (FOB) of iron ore. Vale's proven iron ore reserve life amounted to approximately 30 years at 2013 production levels. Including probable resources, this amount is 60 years.

Strong Capital Structure

Vale's credit ratings also reflect its strong balance sheet, conservative capital structure and solid CFFO. Vale generated USD22.7 billion of EBITDA and USD14.8 billion of CFFO in 2013. These figures compare with EBITDA and CFFO of USD18.6 billion and USD16.6 billion, respectively in 2012. A key reason why EBITDA increased by USD4 billion while CFFO decreased by USD1.8 billion in 2013 compared to 2012 was that while iron ore sales volumes increased by 4% year-on-year, Vale paid USD2.6 billion as part of its settlement in relation to offshore taxes generated by foreign subsidiaries between 2003 through 2012. This impact was more than offset by the divestiture of its minority stake in Norsk Hydro for USD1.8 billion and the Goldstream transaction with Silver Wheaton for USD1.9 billion. As of the LTM ended March 31, 2014, Vale's total adjusted debt to EBITDA ratio was 1.8x including the outstanding tax liability of USD7 billion under the REFIS program, while total adjusted net debt to EBITDA ratio was 1.5x.

Capital expenditures decreased to USD14 billion in 2013 from USD16 billion in 2012. Vale responded to the downturn in prices by reducing dividends and share buybacks to USD4.5 billion in 2013 from USD6 billion in 2012 and USD12 billion in 2011. Free cash flow (FCF) after dividends and capex was negative USD3.6 billion. Net debt remained stable at USD26 billion in 2013 from USD26.1 billion in 2012 mainly due to a number of non-core asset sales. Vale is expected to streamline its operations while continuing to divest non-core assets, estimated at around USD2 billion per year.

Robust Liquidity

Vale had USD39 billion of total adjusted debt including the remaining tax obligation to be paid over 15 years under the REFIS scheme, and USD7.4 billion of cash and marketable securities as of March 31, 2014. Short-term debt totaled USD2.6 billion. Liquidity is further enhanced by Vale's undrawn USD5 billion revolving lines of credit and strong capital markets access. Fitch projects Vale will generate EBITDA of about USD17 billion in 2014. With USD30 billion of investments projected by Fitch during 2014 and 2015, FCF would be negative and adjusted net leverage should climb to around 1.9x in 2014, while FFO adjusted net leverage should reach around 2.1x.

Challenging Environment

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 80% of its EBITDA in 2013. China was the key market for Vale's iron ore, accounting for 49% of 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.

RATING SENSITIVITIES

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. Debt financed acquisitions could also lead to a negative rating action. 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 2014 through 2017. 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.

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014);

--'National Ratings - Methodology Update' (Jan. 19, 2011).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

National Scale Ratings Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=837457

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Contacts

Fitch Ratings
Primary Analyst
Jay Djemal, +1 312-368-3134
Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Debora Jalles, +55 21 4503 2629
Director
or
Tertiary Analyst
Ricardo Carvalho, +55-21-4503-2627
Senior Director
or
Committee Chairperson
Joe Bormann, CFA, +1 312-368-3349
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Jay Djemal, +1 312-368-3134
Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Debora Jalles, +55 21 4503 2629
Director
or
Tertiary Analyst
Ricardo Carvalho, +55-21-4503-2627
Senior Director
or
Committee Chairperson
Joe Bormann, CFA, +1 312-368-3349
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com