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New York, October 26, 2022 — Moody’s Investors Service ("Moody’s") affirmed Vale S.A. ("Vale")’s Baa3 issuer rating and senior unsecured rating, and the senior unsecured ratings on the debt issued by Vale Overseas Limited (fully and unconditionally guaranteed by Vale). Moody’s also affirmed the Ba1 senior unsecured rating of Vale Canada Ltd. The outlook for all ratings is stable.
Ratings actions:
Issuer: Vale S.A.
..LT Issuer rating: affirmed at Baa3
..Senior Global Notes due 2042: Affirmed at Baa3
Issuer: Vale Overseas Limited
..Gtd Global Notes due 2026: Affirmed at Baa3
..Gtd Senior Notes due 2030: Affirmed at Baa3
..Gtd Global Notes due 2034: Affirmed at Baa3
..Gtd Global Notes due 2036: Affirmed at Baa3
..Gtd Global Notes due 2039: Affirmed at Baa3
Issuer: Vale Canada Ltd.
..Senior Unsecured Bonds due 2032: Affirmed at Ba1
Outlook Actions:
..Issuer: Vale S.A.
Outlook, Remains Stable
..Issuer: Vale Overseas Limited
Outlook, Remains Stable
..Issuer: Vale Canada Ltd.
Outlook, Remains Stable
RATINGS RATIONALE
The affirmation of Vale’s ratings reflects its strong business profile, as one of the largest iron ore producers and one of the largest nickel producers globally, and the ability to resume operations under stricter risk and safety controls after the dam incident in Brumadinho, with greater production flexibility which will lead to cost reduction and allow the company to continue to generate positive FCF even in an environment of weaker commodity prices.
The Baa3 rating is supported by Vale’s strong production profile, its portfolio of long lived assets (in iron ore, nickel and copper), low cost position and strong balance sheet, with leverage below 1x (total debt/EBITDA) since 2020. The gradual return of operations suspended after the accident with the tailings dam in Brumadinho in January 2019 is also a consideration to the rating, and Moody’s expects Vale to achieve its iron ore production capacity (400 million tons) once the company develops dry stacking and wet processing capacity in Minas Gerais and advances with the implementation of projects and with the rolling of mining licenses in Carajás.
The rating is constrained by the sovereign rating of the Government of Brazil (Ba2 stable) because it is unlikely that Moody’s would further widen the rating differential, as a result of Vale’s asset concentration in Brazil (65% of total assets). To be rated more than two notches above the sovereign rating, a company would need to have a substantial majority of its operating assets located outside the country and a substantial majority of its cash flows generated outside of the country.
Despite substantial position in base metals (nickel and copper), Vale’s business profile is also constrained by the concentration in iron ore for cash flow generation (about 92% of EBITDA), which enhances cash flows exposure to the volatility of iron ore prices.
Vale has a strong liquidity profile supported by a cash position of $7.2 billion, $5 billion fully available under revolver facilities and strong cash flow generation at the end of June 2022 – $703 million in free cash flow in the twelve months ended June 2022, which incorporates $10.9 billion in dividend payments and $5.5 billion in capex. This comfortably compares with about 70% of total debt (including leases) of $12.6 billion maturing beyond 2027.
As for the environmental, social and governance (ESG) factors incorporated into Vale S.A. ratings, Moody’s considered environmental risks mainly related to natural capital and waste and pollution, which reflects tailings dams management and risks, reflected in the E-5 issuer profile score. Improvements in safety of operations through initiatives taken to enhance the risk management control, particularly as the company progresses with the de-characterization program, jointly with the construction of backup dams (containment structures) and preventive removal of workers and civil population of riskier areas, have reduced the exposure to social risks, in particular health and safety, and the issuer profile score was revised to S-4 from S-5. The S-4 issuer profile continues to reflect the highly negative risk exposure to responsible production. Vale’s financial strategy, strong balance sheet, solid liquidity and enhanced risk management is balanced by limited track record following the dam collapse in 2019, which is reflected in the G-3 issuer profile score.
The ESG Credit Impact Score is CIS-2 (neutral-to-low), revised from CIS-4, since ESG considerations are no longer the major constraint for the rating, while the rating remains constrained by the sovereign of the Government of Brazil.
Vale Canada’s rating continues to reflect the fact that Vale S.A. does not guarantee the 2032 notes and incorporates its major position in the global nickel market, its asset base and strategic importance to Vale.
The stable outlook reflects Moody’s expectation of a gradual recovery of production levels, as well as advancements in the decommissioning of upstream tailings according to the company’s schedule. Moody’s expects to continue to see evidence of stricter risk management and oversight of all operations and higher scrutiny in the company’s corporate governance practices, with a strong strategic focus on safety and operational excellence. The stable outlook also incorporates the expectation of no material increase in provisions and cash disbursements related to Brumadinho or Samarco that could impact on the company’s liquidity or leverage.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upward rating movement would be subject to the relative position to Brazil’s sovereign rating (Government of Brazil, Ba2 stable). Moreover, an upgrade of Vale’s rating would require continued evidence of enhanced risk control and governance oversight, with production gradually normalizing and no material additional provisions or cash disbursements related to the incidents in Brumadinho or Samarco. An upgrade would also depend on the maintenance of a solid liquidity and positive free cash flow generation, supported by leading market positioning in its main segments and low-cost operations. Quantitatively, an upgrade would also require Vale’s adjusted total debt/EBITDA to remain below 2x and EBIT/interest expense above 5.5x on a sustainable basis, with (CFO-dividends)/debt consistently above 40%.
Conversely, Vale’s ratings could be downgraded should the ultimate costs related to the disasters in Brumadinho or disbursements related to Samarco be materially above the amounts already provisioned due to higher fines and settlements, litigations and class actions, or if operations do not fully recover within the expected timeframe, affecting cash costs and free cash flow generation. Evidence that ESG initiatives are not on track to further de-risk the company could also lead to a negative rating action. Quantitatively, the ratings or outlook could suffer negative pressure should conditions for iron ore and base metals deteriorate, leading to lower profitability, with leverage ratios (total debt to EBITDA) trending towards 2.75x or above, EBIT/Interest expense falling below 4.5x and (CFO-dividends)/debt sustained below 35%. A marked deterioration in the company’s liquidity position would also precipitate a downgrade. In addition, a downgrade of Brazil’s sovereign rating (Government of Brazil, Ba2 stable) could strain Vale’s ratings.
The principal methodology used in these ratings was Mining published in October 2021 and available at https://ratings.moodys.com/api/rmc-documents/76085. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
Headquartered in Rio de Janeiro, Vale S.A. (Vale) is one of the world’s largest mining companies. The company has substantive positions in iron ore and nickel, relevant operations in copper, and supplemental positions in energy and steel production. The company’s principal mining operations are in Brazil, Canada and Indonesia. Despite Vale’s geographic and commodity diversification, its Brazilian iron ore operations and major position in the seaborne iron ore markets remain the main drivers of revenue, earnings and cash flow. As June 2022, ferrous minerals (primarily iron ore and pellets) accounted for around 90% of the company’s net revenue. In the last 12 months ended in June 2022, Vale reported net operating revenue of $47.4 billion.
REGULATORY DISCLOSURES
For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.
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Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.
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