OREANDA-NEWS. Fitch Ratings says that Vale S.A.'s (Vale, 'BBB'/Rating Watch Negative) liquidity position remains adequate following its recent draw-down of USD3 billion from its USD5 billion revolving credit facility (RCF). The drawn amount is intended to be used as a cash bridge until the company completes asset sales and receives the upstream of funds from project finance debt at its new coal joint venture. Fitch's base case assumption is that Vale will begin to repay the RCF shortly upon receipt of the coal Joint Venture (JV) funds.

'Fitch considers Vale's liquidity position as sufficient with manageable debt amortizations over the next 24 months', said Jay Djemal, Director at Fitch. 'The purpose of utilizing 60% of their revolver is to temporarily cover cash requirements during the final stages of the company's transformative S11D project, while iron ore prices remain at current lows'. The company held USD4.5 billion of cash and equivalents as of Sept. 30, 2015. Following the drawdown of part of the RCF, Vale maintains USD2 billion of undrawn RCFs and USD1.5 billion of undrawn committed credit lines. These liquidity sources compare with debt amortizations of USD2.1 billion in 2016 and USD2.7 billion in 2017.

Vale's main transaction currently in progress is the creation of the coal JV with the Mitsui Group (Mitsui), expected to raise over USD3 billion once completed during second half 2016 (2H16). Vale's coal project in Mozambique, Moatize, is on track to almost double production to 22 million tonnes of coal per year following recent expansions, and the finalization of the Nacala Corridor - a 912 kilometer railroad to the Nacala Port - 96% complete as of 3Q15.

As part of the transaction, Mitsui is in the process of acquiring 15% of Vale Mozambique, Limitida (the legal entity that owns 100% of Vale's coal assets in Mozambique) and 50% of Vale's 70% stake in the Nacala Corridor entity for a total of approximately USD1 billion for the combined assets.

Following completion of the JV, Vale is expected to receive around USD2 billion-USD2.5 billion of proceeds from project finance debt to be placed in the newly formed coal JV to refinance the shareholder loans that Vale provided to its Mozambique coal-related projects to date. The project finance will be off-balance-sheet and no shareholder corporate guarantees are expected to be provided to the new JV debt. The newly created JV will be legally ring-fenced from Vale and Mitsui.

Vale is in the final stages of completing the S11D project that will increase iron ore output to around 420 million-450 million tonnes per year from around 340 currently. S11D's estimated C1 cash cost is around USD7/tonne FOB or USD10/tonne for Vale's consolidated production by 2018. The company reported a C1 cash cost of USD12.70/tonne for 3Q15, the lowest globally. Fitch's estimated growth capex in 2016 for Vale is around USD3 billion mostly relating to this project and a total of around USD6 billion including sustaining capex.

Fitch currently rates Vale's Foreign Currency Long-term Issuer Default Rating 'BBB'/Rating Watch Negative.