New York, September 04, 2012 -- Moody's Investors Service assigned a Baa2 senior unsecured foreign currency rating to the notes due in 2042 issued by Vale S.A. (Vale) under its well known seasoned issuer shelf. Proceeds will be used for general corporate purposes. All other ratings remain unchanged. The rating outlook is stable
Vale's Baa2 global local currency rating reflects the company's diversified product base (due to organic growth and acquisition), strong coverage ratios, competitive cost position, and substantive portfolio of long lived assets. The rating also considers the ability of the company to perform well, given its asset base, in a down market environment and maintain ratios generally in line with its rating. While Vale has diversified its geographic footprint through various acquisitions in Canada, Australia and elsewhere, the dominant revenue, earnings and cash flow driver continues to be its Brazilian based iron ore operations and its major position in the seaborne iron ore markets (roughly 30% share, with Vale, Rio Tinto and BHP Billiton combined having an approximate 75% market share).
However, the rating considers the company's exposure to volatile prices in its key commodities, the challenges that will continue to impact the company's operating cost profile, particularly as volumes increase and prices of key input materials continue to rise over time in response to growing global demand. Additionally, the company remains sensitive to exchange rates, particularly the US dollar relative to the Brazilian Real and the Canadian dollar. The rating also contemplates the company's aggressive growth strategy given the significant capital expenditures anticipated over the next several years, as well as its substantive dividend payout levels. Despite the company's strong cash generation, we expect that Vale will continue to issue debt to meet its strategic objectives for organic and inorganic growth over the next several years, to fund increases in its iron ore, copper and coal operating platforms, further investments in fertilizers, and new steel mills, as well as energy resources to support its energy consumption requirements.
The stable outlook reflects Moody's expectation that Vale, despite a weaker iron ore price environment than was enjoyed in 2011, will continue to exhibit solid debt protection coverage ratios and strong earnings performance relative to its rating category. The outlook also anticipates that iron ore prices, while not recovering to the highs reached in early 2011, will remain at a level that allows for continued good profitability although absent reductions in planned capital spending the level of additional funds required is likely to increase. Also incorporated into the outlook is the expectation that any potential settlement associated with the current tax disputes with the Brazilian authorities will be accommodated within the company's liquidity profile. The outlook anticipates that Vale will continue to balance its investments, dividend and other payment requirements, with its cash generating capacity and its absolute levels of debt incurred.
Given current downside pressures on iron ore prices, Vale's rating is unlikely to be upgraded in the near term. However, the rating could be favorably impacted should the company maintain or reduce absolute debt levels over the next 15 months, successfully complete its major capital expansion projects without significant cost overruns, maintain operating cash flow minus dividends to debt of at least 30%, and free cash flow to debt in the 10% range, at a minimum. Further considerations would include greater clarity with the company's acquisition strategy and financial policies. Given the company's current strong financial profile and liquidity position, a ratings downgrade is unlikely. However, the ratings and/or outlook could come under pressure should the company pursue substantial acquisitions or capex projects at the expense of its credit profile. Other factors that could contribute to downward pressure would include debt/EBITDA increasing above 3.0x, operating cash flow minus dividends to debt falling below 25% or persistent negative free cash flow generation. The ratings could also be adversely impacted should liquidity contract beyond expectations due to any potential settlement associated with the current tax disputes or should there be any fundamental downturn in the iron ore market, which compressed EBIT margins on a sustainable basis.
The principal methodology used in rating Vale S.A. was the Global Mining Industry Methodology published in May 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Headquartered in Rio de Janeiro, Brazil, Vale is one of the largest mining enterprises in the world, with substantive positions in iron ore, nickel, copper, and coal, as well as supplemental positions in energy production and logistics and growing positions in steel production. Vale is the largest global supplier of iron ore, with approximately 323 metric million tons of production in 2011 (including its share of Samarco), and the second largest global producer of nickel, with around 242,000 metric tons produced in 2011.The company's principal mining operations are located in Brazil, Canada, Australia, Indonesia, Oman, and Mozambique, following the start-up of its Moatize metallurgical and thermal coal mine in August 2011. In addition, the company is active in exploration activities in a number of countries. For the twelve months to June 30, 2012 Vale had net operating revenues of $53.7 billion.
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Carol Cowan VP - Senior Credit Officer Corporate Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Brian Oak MD - Corporate Finance Corporate Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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