OREANDA-NEWS. Fitch Ratings has affirmed the Long-term Local- and Foreign-Currency Issuer Default Ratings (IDRs) for Vale S.A. (Vale) at 'BBB+' and National Scale Rating at 'AAA(bra)'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

Leading Seaborne Iron Ore

Vale's 'BBB+' and 'AAA(bra)' ratings are supported by its position as the leading seaborne producer of low-cost iron ore, with a 2014 market share of approximately 22% in the seaborne iron ore trade, and its resilient capital structure. Reinforcing the company's position, is its ongoing production expansion of high grade and low cost iron ore which will allow it to achieve over 460 million tonnes of annual output by 2018 from 330 million tonnes in 2014. The main driver of the increase in volumes, and the subsequent decline in leverage, is the company's S11D project - a \$16.4 billion project (of which, approximately 40% has been executed as of 1Q15) that will increase the company's annual output by 90 million tonnes alone.

Using \$50 per tonne as it base case in 2015 and 2016, Fitch projects Vale will generate around \$7.4 billion of EBITDA and \$6.3 billion of CFFO in 2015. In 2016, EBITDA will climb to around \$9 billion. These figures compare with \$13.4 billion of EBITDA and \$13.3 billion of CFFO in 2014. The key driver of the drop in cash flow is an assumed decline in average iron ore prices from \$97 per tonne in 2014.

Asset Sales to Bolster Capital Structure

With \$8 billion of investments projected by Fitch during 2015 and \$7 billion during 2016, Vale's FCF would be negative \$2.7 billion and negative \$1.7 billion, respectively. The company's net debt/EBITDA should reach around 3.2x in 2015 declining to 2.5x in 2016. These ratios compare with net leverage of 2.6x as of March 31, 2015. Key to these projections is \$7 billion of asset sales in 2015 and \$3 billion in 2016. The company has already executed around \$1.5 billion. If the balance of these sales were excluded from the projections, net leverage would be around 3.9x in 2015 and 3.4x in 2016.

Positive FCF generation is expected to return in 2017 at around \$700 million, and a substantial increase in FCF is expected in line with significantly increased iron ore sales volumes and lower capex going forward, notwithstanding the amount of dividends paid. For 2017, using \$60 per tonne as the iron ore price, Fitch's base case projects that Vale will generate about \$14 billion of EBITDA and its net leverage will be 1.5x. Following the full ramp-up of S11D, Vale's EBITDA should climb to around \$20 billion in 2018 - at \$70 per tonne for iron ore - and its net leverage should fall to 1.0x or below.

Low Cost Position to be Reinforced

In additional to its strong financial profile, Vale's business position continues to be a key consideration for its 'BBB+' and 'AAA (bra)' ratings. Vale's production cost is the lowest in the world. Its cost position will be further enhanced by S11D, a high grade project with low impurities that relies on truckless mining. The projected costs of production at S11D will be the lowest in the world at approximately \$10/tonne (FOB) of iron ore. This iron ore has a higher grade - above 66% iron ore content - and lower impurities than its average ore bodies.

Due to low freight prices, Vale's delivered cost to China is relatively close to that of the second and third largest producers of iron ore globally, Rio Tinto (RT; rated
'A-'/Negative Outlook by Fitch) and BHP Billiton Plc/Ltd (BHPB; rated 'A+'/Negative Outlook). The company's transportation fleet includes a fleet of 32 vessels including 19 Valemax ships with a capacity of 400 thousand tonnes each and 13 capesize ships. During 2015, a portion of Vale's fuel costs were hedged at a higher price. The impact of lower bunker oil will be felt in its entirety in 2016 should prices remain low.

High Exposure to China

Like most commodity producers, Vale is highly exposed to China both directly and indirectly. The company's ferrous minerals business accounted for 85% of its EBITDA in 2014. China was the key market for Vale's iron ore, accounting for 50% of sales. Prices are expected to weaken in the future due to extensive increases in production capacity by Vale, BHPB and Rio Tinto that will erase a scarcity premium that has existed for much of the past decade. Against a backdrop of rising supply, demand from China for iron ore continues to grow at a declining pace, further exacerbating pricing pressure. Vale's considerable investments in nickel, coal, fertilizers and copper will only partially mitigate the impact of the increase in iron ore mining capacity globally.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for the issuer include:

--Sales volumes of iron ore fines and pellets increasing to 347 million tonnes in 2015, 374 million tonnes in 2016, 411 million tonnes in 2017, 466 million tonnes in 2018 and 477 million tonnes in 2019.
--Nickel sales volumes at 295 thousand tonnes in 2015 and 314 thousand tonnes in 2016.
--Copper sales volumes increasing to 448 thousand tonnes in 2015 and 2016.
--Coal continues to produce negative EBITDA in 2015 and 2016, turning positive in 2017 once the Nacala Corridor is completed and increasing thereafter.
--Fertilizer sales volumes grow between 3%-5% annually during 2015 to 2019.
--Prices for iron ore, copper and nickel follow Fitch's mid-cycle commodity price assumptions.
--Exchange rate BRL to \$ of 3.2 in 2015, 3.3 in 2016, and 3.2 from 2017 to 2019.
--Total capex of approximately \$8 billion in 2015, around \$7 billion in 2016, \$6 billion in 2017 and below \$5 billion in 2018 and 2019.
--Dividends at \$1 billion (already paid) in 2015, same amount in 2016 under \$50/tonne price scenario, increasing to \$5 billion in 2017 and higher thereafter in accordance with Vale's shareholder agreement.
--Net acquisitions and divestitures of approximately \$7 billion in 2015 and \$3 billion in 2016.
--Adjusted debt balance excluding REFIS of around \$29 billion, remaining relatively stable.

RATING SENSITIVITIES

Positive rating actions are highly unlikely in the medium term as Vale concentrates on completing its large investments while preserving its liquidity positon and safeguarding its capital structure at a time of lower commodity prices.

A downgrade of Brazil's sovereign rating could lead to a negative rating action for Vale. The company has substantial export earnings, but its iron ore assets that generate most of its EBITDA are located within Brazil. The company's ability to export its iron ore at planned volumes could be jeopardized if Brazil's operating environment significantly worsens, making it more difficult for Vale to execute its expansion plans.

Vale's ratings could also be downgraded if it fails to bring online volumes as currently projected. These volumes, which are expected to be a lower cost than current operations, are key to FCF generation and leverage reduction in 2017 and beyond.

A change in the approach by Vale's management philosophy regarding its conservative through-the-cycle capital structure that would lead to net leverage remaining above 2.5x on a sustained basis would be viewed negatively and could lead to negative rating actions.

LIQUIDITY AND DEBT STRUCTURE

Vale had \$32 billion of total adjusted debt and \$3.7 billion of cash and marketable securities as of March 31, 2015. Short-term adjusted debt totaled \$4.4 billion. Liquidity is further enhanced by Vale's undrawn \$5 billion revolving credit facilities partially recently renewed for 5 years, \$2.2 billion undrawn lines of credit with maturities of 8 to 10 years, and strong capital markets access. During May 2015, the company also announced a MOU with the Commercial bank of China (ICBC) for a possible \$4 billion in additional credit lines.

FULL LIST OF RATING ACTIONS

Fitch affirms the following ratings:
Vale S.A. (Vale):
--Long term foreign currency and local currency IDRs at 'BBB+';
--Unsecured debt rating at 'BBB+';
--National scale rating at 'AAA (bra)';
--Unsecured Brazilian real denominated debentures rating at 'AAA (bra)';

Vale Overseas Limited:
--Senior Unsecured debt guaranteed by Vale rating at 'BBB+'.

Vale Canada Limited:
--Senior Unsecured debt guaranteed by Vale rating at 'BBB+'.

The Rating Outlook is Stable.

In addition, Fitch has also affirmed and withdrawn the following ratings:

--Vale Overseas Limited long term foreign currency IDR at 'BBB+';
--Vale Canada Limited long term foreign currency IDR at 'BBB+'.

These ratings were withdrawn as these entities are no longer considered analytically meaningful for the credit quality of the notes that have been issued out of them. All of the aforementioned notes that have been issued by these special purpose entities were fully guaranteed by Vale and the ratings of those issuances remain outstanding.