CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to Vale S.A.'s (Vale) reopening of USD1.0 billion, 4.375% notes due Jan. 11, 2022 that were issued by Vale Overseas. The reopening will carry the same rating as the original deal of 'BBB+'. These notes have been unconditionally guaranteed by Vale and were originally issued during January 2012. Proceeds from this transaction will be used for general corporate purposes.
The ratings of Vale take into consideration the company's solid business position as one of the world's leading mining companies. The company's strong business position is viewed to be sustainable due to its leading market positions in iron ore; a strong global presence in nickel; low production cost structures for both iron ore and nickel relative to competitors within these industries; and large proven and probable mineral reserves. Vale's business position is being enhanced by significant investments in coal, copper and fertilizer, which will improve the company's product and geographic diversification.
The ratings also reflect Vale's strong balance sheet, conservative capital structure and strong cash flow from operations. Vale generated USD33.8 billion of EBITDA during 2011, an increase from USD26.1 billion during 2010. Cash flow from operations grew by only USD5.3 billion during this time period due to an increase of about USD5.3 billion in cash taxes paid. As of Dec. 31, 2011, Vale had USD24.4 billion of total debt and USD3.5 billion of cash and marketable securities. Net debt increased to USD20.9 billion from USD16.5 billion at the end of 2010. The increase in net leverage despite record operating cash flow was due to USD9.0 billion of dividends and USD3.0 billion of share buybacks.
Vale's profit is still highly reliant upon iron ore sales and the Chinese market, despite significant investments that have improved the company's product and geographic diversification during the past decade. The company's ferrous minerals business accounted for about 90% of its EBITDA during 2011; China was the key market for these products, accounting for 44% of Vale's iron ore sales volumes. Iron ore prices have fallen from peak levels achieved during the first half of 2011; current prices for iron ore of USD145 per dry metric ton delivered to China are supported by projected growth in the country's demand for steel by between 5% and 8% during 2012, which should result in increased demand for seaborne iron ore in a similar range.
Despite an expectation of lower average iron ore prices for 2012, Fitch expects Vale to generate in excess of USD30 billion of EBITDA during the year due to its low cost structure relative to expected prices and an increase in output for many of its other key products. The company has slated about USD19 billion of investment for this year. The actual figure could be lower due to delays in obtaining permits and constraints related to a tight labor market, especially in Brazil. Any free cash flow after capex is likely to be distributed as dividends or used for share repurchases, resulting in no material changes in net debt. Nevertheless, leverage should remain less than 1.0x, which is low for the rating category.
Fitch base case projections include an expectation of a gradual increase in Vale's leverage during the next couple of years. A key driver of higher leverage will be a weakening of iron ore prices due to extensive increases in production capacity by Vale, BHP Billiton and Rio Tinto. Vale's considerable investments in coal, fertilizers and copper will partially mitigate the impact of the increase in iron ore mining capacity globally, and should allow the company's ratings to remain within the current rating categories.
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; or a prolonged downturn in demand and prices for commodities, particularly iron ore. 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.
Fitch currently rates Vale S.A. and Vale Overseas Limited as follows:
--Foreign currency and local currency Issuer Default Rating (IDR) 'BBB+';
--Unsecured
debt 'BBB+';
--National Scale Rating 'AAA (bra)';
--Unsecured
Brazilian real denominated debentures 'AAA(bra)'.
Vale Overseas Limited:
--Foreign currency IDR 'BBB+';
--Unsecured
debt 'BBB+'.
The Rating Outlook for both Vale S.A. and Vale Overseas Limited is Stable.
The ratings of Vale Overseas Limited have been linked to those of Vale S.A. through Fitch's 'Parent Subsidiary Rating Linkage' criteria. Vale Overseas Limited is domiciled in the Cayman Islands.
Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating
Methodology' (Aug. 13, 2010);
--'Parent and Subsidiary Rating
Linkage' (July 14, 2010);
--'National Ratings Criteria' (Jan. 19,
2011);
--'Rating Corporates Above the Country Ceiling' (Jan. 5,
2011).
Applicable Criteria and Related Research:
Corporate Rating
Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
Parent
and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647210
National
Ratings Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=595885
Rating
Corporates Above the Rating Ceiling
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=668909
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