Fitch: Vale's Covenants Remain Manageable

CHICAGO & RIO DE JANEIRO--(BUSINESS WIRE)-- Under Fitch's Base Case, Vale S.A. (Vale, LT FC IDR 'BBB+'/Outlook Stable) is not projected to breach the financial covenants relating to its facilities with development and export agencies in 2015. The covenants relating to the Brazilian Development Bank (BNDES) portion of the facilities are gross debt to adjusted EBITDA lower or equal to 4.5x and adjusted EBITDA to gross interest higher or equal to 2.0x. The financial covenant calculations exclude USD6.3 billion relating to the company's Brazilian tax settlement program (REFIS).

These facilities totaled USD7.7 billion as of Dec. 31, 2014 of which USD5.1 billion are held with BNDES, and the remaining USD2.6 billion are held with an assortment of different agencies. The facilities comprise approximately 20% of Vale's total debt including REFIS. There are no financial covenants on the remaining 80% of Vale's total adjusted debt.

Fitch does not expect these covenants to be breached under an average iron ore (62% CFR China basis) price scenario of USD50/tonne in 2015, which is considered unlikely. Excluding REFIS, the company's total debt to adjusted EBITDA ratio would be around 3.8x and net debt/adjusted EBITDA ratio 2.9x for 2015.

Should prices be lower than USD50/tonne on average for the year, Fitch believes Vale will not have issues negotiating long-term waivers for the USD5.1 billion facilities with BNDES due to the development banking role of this institution. The company could simply prepay the remaining USD2.6 billion of facilities using cash, new debt, or a combination of both to free itself of the covenants relating to this portion of debt.

Vale would also likely scale-down planned capex for 2015 from the announced USD10 billion to around USD7.5 billion focusing almost entirely on its iron ore expansion should iron ore prices continue at below USD50/tonne. Announced dividend payments in 2015 totaling USD2 billion, will be paid in two tranches during April and October. The second tranche is unlikely to be approved by the Board of Directors under such a prolonged low iron ore price scenario. The minimum dividend required by Brazilian law for 2015 was prepaid during 2014 allowing for this possibility and dividend payments could also be frozen in 2016.

Vale has a number of options to bolster its capital structure through a prolonged period of lower iron ore prices until its expansion plan to realize high grade, low cost iron ore at production levels above 400K tonnes materializes from 2018. During February 2015, the company announced a second gold stream transaction with Silver Wheaton for USD900 million. Other possible divestitures could include transactions relating to the company's ship fleet, coal and base metal assets.

Liquidity remains comfortable. In addition to Vale's substantial cash and marketable securities position of over USD4 billion in 2014, excluding the gold stream transaction in early 2015; the company has a USD5 billion revolving credit facility available to it.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'2015 Outlook: Latin American Metals and Mining (Transitional Year Ahead)' (Nov. 14, 2014);

--'Introducing Ratings Navigators for Corporates' (Nov. 5, 2014);

--'Mining: Ratings Navigator Companion' (Nov. 18, 2014).

Applicable Criteria and Related Research:

2015 Outlook: Latin American Metals and Mining (Transitional Year Ahead)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=807168

Introducing Ratings Navigators for Corporates

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=769428

Mining: Ratings Navigator Companion

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=803888

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Fitch Ratings
Primary Analyst
Jay Djemal
Director
+1-312-368-3134
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Debora Jalles
Director
+55 21 4503 2629
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
[email protected]

Source: Fitch Ratings

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