DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating and Senior Unsecured Debt rating of Vale S.A. (Vale or the Company) at BBB (low).

Morningstar DBRS also confirmed the Senior Unsecured Debt rating of Vale Overseas Limited and All Series of Debentures & Notes for Vale Canada Limited at BBB (low). All trends are Stable.

KEY CREDIT RATING CONSIDERATIONS

The confirmations are primarily a recognition of Vale's investment-grade business-risk profile as well as its robust financial risk profile that continues to benefit from robust iron ore prices relative to historical levels. Morningstar DBRS previously upgraded the Federative Republic of Brazil's (Brazil) Long-Term Foreign Currency-Issuer Rating to BB with a Stable trend on July 28, 2023 (refer to the Press Release: https://dbrs.morningstar.com/research/417838). In the determination of Brazilian-domiciled Vale's Issuer Rating, we consider a two-notch uplift from Brazil's sovereign rating as appropriate. Generally, the uplift is limited to no more than three notches.

CREDIT RATING DRIVERS

Vale's key credit metrics are supportive of a higher rating within the investment-grade BBB category. Morningstar DBRS' sovereign rating for Brazil is BB with a Stable trend, which does not preclude Vale from having an investment-grade rating. However, if Morningstar DBRS assesses Brazil's credit outlook as weakening and a downgrade to the B rating category or lower results, a negative rating action could follow for Vale, tipping the Company into the non-investment-grade category, irrespective of its strong credit metrics.

EARNINGS OUTLOOK

Morningstar DBRS expects total 2024 iron ore production volumes to be in line with the midpoint of management guidance of between 310 million and 320 million tonnes and 2024 sales to align with production volumes. Based on Bloomberg consensus commodity price forecasts (as of June 11, 2024), Morningstar DBRS expects 2024 net income to be between $12.0 billion and $12.5 billion, mainly because of 15% higher forecast iron ore sales volumes offset by a 7% lower benchmark 62% Fe iron ore prices, compared with the last 12 months (LTM) ended March 31, 2024.

FINANCIAL OUTLOOK

We expect Vale to generate robust net free cash flow (i.e., after capital expenditure, dividends, and noncash changes to working capital) in 2024 of between $1.5 billion and $2.0 billion (based on Bloomberg consensus estimates as of June 11, 2024) that should allow the Company to continue to fund its responsibilities in the aftermath of the Brumadinho event.

CREDIT RATING RATIONALE

The ratings are supported by Vale's business risk profile, including the Company's long-life iron ore reserves, low operating cost structure, significant size, and strongly integrated supply chain, particularly with China.

Vale continues to recover from the Brumadinho event. Production has been gradually increasing with management guidance of between 310 million tonnes and 320 million tonnes of iron ore in 2024. Management expects production capacity to return to between 340 million tonnes to 360 million tonnes-per-year level in the medium term. Morningstar DBRS notes that Vale reported a net decline of only approximately 8% in its proven and probable iron ore reserves at the end of 2023, with the decrease due to mine depletion, mine design reviews, boundary constraints, mining recovery assumptions changes, and environmental constraints across the Southeastern, Northern, and Southern Systems. At the end of 2023, Vale reported approximately 10.9 billion tonnes of iron ore reserves and had approximately 22.8 billion tonnes of iron ore resources that could potentially be upgraded to reserves in a cost-effective manner.

Vale's financial metrics weakened slightly in the LTM ended March 31, 2024, with adjusted cash flow-to-debt declining to 91.3% compared with 93.8% in the LTM ended March 31, 2023, but with all of the metrics except EBITDA interest coverage and debt-to-capital remaining within the AA category. We expect Vale's key credit metrics to improve in 2024 compared with the LTM ended March 31, 2024, because of higher revenue from increased production, with the cash flow-to-debt and debt-to-EBITDA metrics expected to remain in the AA category, the EBITDA interest coverage metric improving to the 'A' category (from the BBB category), and the debt-to-capital metric remaining at 'A.'

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental, Social, and Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030 (January 23, 2024).

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)

(A) Weighting of BRA Factors

In the analysis of Vale, the relative weighting of the BRA factors was approximately equal.

(B) Weighting of FRA Factors

In the analysis of Vale, the relative weighting of the FRA factors was approximately equal.

Weighting of the BRA and the FRA

In the analysis of Vale, the BRA carries greater weight than the FRA.

Notes:

All figures are in U.S. dollars unless otherwise noted.

Morningstar DBRS applied the following principal methodology:

Global Methodology for Rating Companies in the Mining and Forest Products Industries (January 30, 2024), https://dbrs.morningstar.com/research/431176.

Morningstar DBRS credit ratings may use one or more section of the Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186, which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology has also been applied:

Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024), https://dbrs.morningstar.com/research/427030.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/397223.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info-DBRS@morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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