Weak 1Q Results Won’t Prevent Vale S.A.

(S&P, 4.May.2020) — S&P Global Ratings said today that Vale S.A.’s (BBB-/Negative/–) strong balance sheet and ability to adjust capital expenditures (capex) and dividends provide adequate cushion at the current rating level amid the company’s currently volatile sales and cash flows.

Vale reported poor volumes as a result of rainfall postponing mining activity in the first quarter of 2020. However, we still estimate Vale will produce around 330,000 tons of iron ore and slightly below 40 million tons of pellets, with suspended operations after the Brumadinho incident gradually reopening after the deadly accident last year. Despite the global economic crisis caused by COVID-19 and the likely sharp reduction of steel production, iron ore prices are currently fairly supportive at above $80 per ton, which provides a cushion to our price deck where we estimate $75 per ton for 2020.

We estimate Vale’s EBITDA of around $14 billion this year, with weaker copper and nickel volumes offset by the depreciation of the Brazilian real (in which most of the company’s cost is allocated), lower fuel prices and shipping costs, and the higher iron ore prices in the first quarter. In addition, the company already reduced projected capex by around 10% to around $4.5 billion and keeps dividends suspended, although our base-case scenario assumes an annual payment of more than $2 billion. Assuming dividends, we estimate that free operating cash flow should still exceed $3 billion, despite potentially weaker working capital stemming from support of small suppliers. The coronavirus’s spread has stopped Vale’s operations in the port terminal in Malaysia and in Voisey’s Bay, Canada, and postponed the coal plant maintenance project in Mozambique.

In this scenario and given that the company has already drawn down the entire $5 billion revolving credit facilities, we estimate its debt to EBITDA below 2x and funds from operations to debt above 40% for the year (1.6x and 49.7%, respectively, in first quarter 2020). These metrics are in line with our current ratings, with ample cushion of more than $10 billion in additional debt to withstand debt to EBITDA below 2.6x. The negative outlook reflects ESG-related risks, mainly regarding the decommission of all risk upstream dams and the board’s effectiveness in mapping and mitigating risk exposures.

The ratings on Vale are constrained by Brazil’s transfer and convertibility (T&C) assessment at a maximum of a one notch above the T&C, which is currently ‘BB+’. Therefore, a one-notch downgrade of Brazil could result in the same rating action on Vale.

This report does not constitute a rating action.

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