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Fitch Affirms Vale S.A. at ‘BBB’; Outlook Stable

Fitch Ratings has affirmed the foreign- and local-currency Issuer Default Ratings (IDRs) of Vale S.A. at ‘BBB’. Fitch has also affirmed the senior unsecured debt ratings of Vale Overseas Limited and Vale Canada Limited at ‘BBB’ and affirmed the national scale rating of Vale at ‘AAA(bra)’. The Rating Outlook for all ratings remains Stable.

The rating actions follow Vale’s efforts to mitigate the risk of dam failures and the impacts they might have upon the environment and surrounding communities. These ratings are underpinned by Vale’s low leverage and strong FCF. The company can withstand downturns in iron ore prices and unexpected legal liabilities related to the Brumadinho dam failure.

Vale Overseas and Vale Canada are wholly owned subsidiaries of Vale. Due to the strong legal, operational and strategic linkage between these entities and Vale, their bonds have been directly linked to Vale’s rating through Fitch’s Parent and Subsidiary Rating Criteria.

KEY RATING DRIVERS
Solid Business Profile: Vale is a leading producer of seaborne iron ore with one of the lowest industry cost positions. Its market position is viewed to be sustainable due to its abundant reserves and the competitiveness of its Northern System. Vale’s business strength as a low-cost producer is enhanced by the high grade of its iron ore, which allows the company to receive market premiums; these factors largely offset the transportation advantage Australian producers enjoy in delivering ore to China. Although more than 85% of the company’s EBITDA comes from iron ore, Vale also has material operations in copper and nickel; these operations annually generate more than USD3 billion of EBITDA.

Strong Capital Structure: Vale’s strong business position is matched by an equally strong capital structure. The company had USD4.8 billion of net debt at the end of September. Vale generated USD30.6 billion of EBITDA and USD11.9 billion of Fitch-calculated FCF during the LTM ended Sept. 30, 2021. The company’s total debt/EBITDA ratio during this period was 0.5x while its net debt/EBITDA ratio was 0.2x.

For 2021, Fitch projects that Vale will end the year with a close to null net leverage ratio. Through dividends, share repurchases and payments of interest on capital, Fitch expects Vale to increase its net debt to around USD7 billion by the end of 2023, which would result in longer term net leverage ratios that range between 0.3x and 0.5x depending upon iron ore prices.

Robust FCF: The coronavirus pandemic has had a marginal impact in Vale’s results and its FCF will remain high. The easing of supply disruptions stemming from weather events and Vale’s dam accident and the onset of demand concerns related to the Chinese property market weigh down on still historically high iron ore prices. FCF is expected to remain high in 2022 at around USD9.6 billion before capex and dividend distributions. This figure assumes iron ore prices average USD90 per ton, EBITDA is USD16 billion, and capex of USD6 billion, allowing for higher investments in new projects.

Brumadinho Reparation Plan Settled: In February 2021, Vale reached a final settlement of the Integral Reparations Agreement with the authorities of Minas Gerais for damages caused by the collapse of the company’s tailings dam at Brumadinho. It amounts BRL37.7 billion (USD7 billion) and its effects are factored into the company’s rating. After an upfront payment of nearly USD1 billion, USD6.2 billion were provisioned by September 20 2021 of which USD1.5 billion are expected to be paid in 2022.

The settlement plan establishes guidelines and governance for socio-environmental reparations allowing Vale to continue dam decommissioning, and donations, while focusing on improving output toward its medium-term resumption target of 400 Mt per year of iron ore and pellets capacity. In addition, near to USD1 billion expenses related to Samarco are expected in 2022.

Piercing Country Ceiling: Vale’s ratings are not constrained by Brazil’s ‘BB’ Country Ceiling as the EBITDA generated by its nickel North Atlantic Division covers the company’s hard currency interest expense by more than 1.0x. If this external coverage ratio is not maintained in the future due to a sustained decline in the EBITDA from the company’s Canadian operations or an increase in Vale’s hard currency debt service, the rating would become subject to constraints imposed by the ‘BB’ Country Ceiling of Brazil. Per Fitch’s criteria, uplifts above the Country Ceiling of more than three notches are reserved for credits with a strong, supportive foreign parent and/or substantial multinational operations.

DERIVATION SUMMARY
Vale is the leading low-cost iron ore producer globally, which positions the company well with its peers. Vale has similar business risk to Rio Tinto Plc (A/Stable), as both are highly exposed to a single commodity: iron ore. Rio Tinto benefits from more geographic and commodity diversification compared with Vale. Similarly, BHP Group Plc (A/Stable) is more diversified geographically and by metal commodity products, along with oil and gas, which further differentiates its business risk profile from Vale and Rio Tinto.

All three companies benefit from large-scale operations and low-cost positions. Rio Tinto and BHP’s iron ore businesses are located closer to China, which further differentiates the ratings from Vale’s.

KEY ASSUMPTIONS
Fitch’s Key Assumptions Within the Rating Case for the Issuer

–Benchmark iron ore prices average USD160/ton in 2021, USD90/ton in 2022 and USD85/ton in 2023;

–Iron ore fines and pellets volumes of 315 million tons in 2021, 315 million tons in 2022 and 360 million tons in 2023;

–Copper prices of USD9,250/ton in 2021, USD8,500/ton in 2022 and USD8,000/ton in 2023;

–Capex of USD5 billion in 2021, USD6 billion in 2022 and USD6.5 billion in 2023.

RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:

–Additional progress in dam decommissioning;

–Increased output of iron ore from dry processing;

–Consistent net debt/EBITDA ratio below 1.0x;

–Improvement in Brazilian sovereign rating.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

–Sustained reduction in the ratio of Canadian generated EBITDA to annual hard currency debt service to below 1.0x;

–Net debt/EBITDA above 2.0x on a sustained basis;

–Multi-notch downgrade of the Brazilian government’s rating.

BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance.

LIQUIDITY AND DEBT STRUCTURE
Ample Liquidity: Vale ended Sept. 30, 2021 with USD10.9 billion of cash and USD521 million of marketable securities and only USD16.2 billion of Fitch adjusted total debt and equity credit, including USD1.1 billion of short-term debt payments till 2022. The company further enhanced its liquidity and debt maturity profile during March when it redeemed all of its 2023 bonds for USD884 million. More than half of the company’s debt matures in 2030 or later.

ISSUER PROFILE
Vale is the world’s largest producer of iron ore and iron ore pellets and one of the largest producers of nickel. The company is present in approximately 30 countries. It operates railroads, maritime freight assets, floating transfer stations and distribution centers in Brazil.

SUMMARY OF FINANCIAL ADJUSTMENTS
The financials were adjusted in accordance with Fitch’s treatment of Operating Leases detailed in Fitch’s Corporate Criteria. An adjustment was made to debt for participative stockholders’ debentures and related party debt not classified as debt. Brumadinho provisions (non-cash) were added back to EBITDA.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.

PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
The principal sources of information used in the analysis are described in the Applicable Criteria.

Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary.

ESG CONSIDERATIONS
Vale S.A. has an ESG Relevance Score of ‘4’ for Employee Wellbeing due to the remaining work required to improve dam monitoring and upstream dams de-characterization. By year-end 2021, 24 de-characterization projects are expected to remain from the 30 identified in 2019. Noteworthy advancements include the establishment of Geotechnical Monitoring Center separate from the monitoring systems at the mines and managed by the Safety and Risk Group. This has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.

Fitch has changed the ESG Relevance Score for Management Strategy (GEX) to 3 from 4, given the improvement in the execution of management’s strategy for dam and employee safety. Important steps include the creation of a Safety and Risk Group (SRG) that monitors dam safety independent of the Business Unit and can stop operations, the appointment of a Compliance Office that reports directly to the Board of Directors, the addition of an audit committee, the inclusion of eight independent members, including an independent chairman, and the partial linkage of long-term management incentives to ESG factors. Approximately 18 ESG best practices of the 63 identified by management as gaps from leading ESG providers remain to be undertaken.

Fitch has changed the ESG Relevance Score for Group Structure (GST) to 3 from 4. Vale’s ongoing strategy to divest from non-core assets has streamlined its legal structure between subsidiaries while maintaining or improving reporting standards.

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.
Source: Fitch Ratings

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