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Vale's outlook aligns to Fitch Scenario, credit still intact – Fitch Ratings

Mining News - Published on Wed, 24 Apr 2019

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Fitch Ratings said that Vale's lower sales and production outlook for 2019 is consistent with our previously published scenario analysis and should not adversely affect the company's investment-grade credit profile. Robust cash flow, enhanced by higher iron ore prices and a strong balance sheet, should enable Vale to absorb substantial potential fines and reparation costs without breaching Fitch's negative financial triggers. However, identifying and quantifying all unknown contingent liabilities remains difficult due to continued elevated legal and regulatory risks.

Vale outlined financial and operational implications resulting from the accident in late March. The company lowered iron ore sales guidance to between 307 million tons to 332Mt in 2019, compared to 366Mt in 2018, following production stoppages across several of its operations, with volumes totaling around 93Mt per year. Vale was later denied stability certifications for 18 dams and dikes after licenses expired but indicated it would not alter these forecasts. The company has faced the judicial freezing of BRL17.60 billion of funds to cover environmental and socioeconomic costs, evacuations and fines, and suspended its shareholder remuneration policy in response to the disaster.

However, we published three scenarios to illustrate the effect of potential lost volumes, increased capex, and high fines and reparation costs on Vales credit metrics in February. The complete loss of the company's southern system, as outlined in scenario two, approximates Vale's March guidance. This scenario assumed a net reduction of 80Mt in 2019 and 70Mt in 2020. Based on this assumption and an $80/ton average iron ore price, this scenario estimated FCF, before fines, reparation costs and additional capex, would be around $10 billion in both 2019 and 2020.

Under scenario two, net debt/EBITDA for 2020 would increase by as much as 1.0x to 1.7x, if as much as USD 10 billion and USD 15 billion of additional capex and cumulative fines and repatriation payments, respectively, is incurred. Current iron ore prices above $90/ton further cement Fitch's expectations of Vale's ability to deliver strong cash flow generation and credit metrics, despite the legal headwinds and subsequent potentially significant cash outflows the company could face. Vale has ample headroom under Fitch's negative rating actions triggers of net debt/EBITDA above 3.0x and total debt/EBITDA above 3.5x on a sustained basis to support its investment-grade rating.

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Posted By : Rabi Wangkhem on Wed, 24 Apr 2019
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