DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Senior Unsecured Debt rating of Vale S.A. (Vale or the Company) at BBB (low). DBRS Morningstar also confirmed the Senior Unsecured Debt rating of Vale Overseas Limited and the All Series Debentures & Notes rating of Vale Canada Limited at BBB (low). All trends are Stable. The confirmations result from (1) Vale’s business risk profile remaining strong for the rating based on long-life reserves, low operating cost structure, and significant size with strong logistics supply chains, especially with China; and (2) Vale’s financial risk profile remaining strong for the rating as the Company recovers from the Brumadinho dam failure in Q1 2019 and navigates the impacts of the Coronavirus Disease (COVID-19) on both its operations and its customers.
In response to the Brumadinho event, Vale curtailed approximately 90 million tonnes of production in early 2019 but has planned or is planning on re-starting up to 40% or about 35 million tonnes. The coronavirus pandemic has also caused production outages that Vale estimates have put up to 15 million tonnes of its 2020 production at risk. That said, the lower production combined with robust demand from Chinese steel mills have contributed to higher benchmark iron ore prices that are now in the $100 per tonne range for 62% Fe iron ore concentrates.
DBRS Morningstar notes that on March 24, 2020, Vale drew down its $5 billion in credit facilities but, prior to that, had reduced debt in 2019. The Company redeemed the remaining $281 million and $908 million of its 2021 and 2022 Notes, respectively, in August 2019 and November 2019, respectively, and repurchased $1.08 billion of debt in September 2019. That said, Vale’s cash flow and EBITDA have remained robust because of the strong pricing environment that has largely mitigated the impact of the higher debt levels. As a result, adjusted cash flow-to-debt declined to “A” from A (high) during the last 12 months ended March 31, 2020, compared with the last 12 months ended March 31, 2019. Adjusted debt-to-EBITDA remained in the “A” range while EBITDA interest coverage was unchanged and debt-to-capital declined to BBB (high) from A (low).
Despite the Brumadinho events, Vale’s key credit metrics remain supportive of a higher rating within the investment-grade BBB category. DBRS Morningstar’s sovereign rating for Brazil is BB (low) with a Stable trend, which does not preclude Vale from having an investment-grade rating; however, if Brazil’s credit outlook does not remain stable going forward and a further downgrade to the B rating category ensues, then a negative rating action to the non-investment-grade BB category could follow for Vale, irrespective of its current credit strength.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
All figures are in U.S. dollars unless otherwise noted.
The principal methodologies are Rating Companies in the Mining Industry (August 23, 2019), DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
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