S&P Cuts Vale S.A. (VALE) to 'BBB+'; Sees Risk Profile Weakening Over Next Few Years

Standard & Poor's Rating Services lowered its ratings on Vale S.A. (NYSE: VALE to 'BBB+' from 'A-'. The outlook is stable. At the same time, we lowered our senior unsecured rating on Vale's subsidiary, PT Vale Indonesia Tbk, to 'BBB+' from 'A-'. Vale fully guarantees these notes.

The downgrade reflects our expectation that Vale's financial risk profile will weaken in the next two years to levels incompatible with our previous rating. The downgrade also follows our revision of iron ore price assumptions to $65 per ton in 2015 and 2016 and to $70 per ton in 2017 (Platts 62% iron content).

The new ratings on Vale are also aligned with our transfer and convertibility (T&C) assessment for Brazil, because we believe that Vale's ability to cover its foreign currency payments during a sovereign distress, which includes the exporters' limited access to foreign currency, will be restricted. This wasn't the case when iron ore price was $85 per ton or higher, which resulted in Vale's very robust cash generation in foreign currency. However, as prices dropped, Vale's exports lost steam.

We expect lower freight and production costs to compensate for the severe price drop because the cost of fuel, for vessels that transport the ore to final destination, dropped 40% and the Brazilian real depreciated 15% in the past six months.

We continue to assess Vale's business risk profile as "strong," based on its large share of the iron ore seaborne market, at 22%, its high-quality mineral reserves with an average iron content of 52%, and very low production costs (in the top 25% in global cost curve for iron ore producers). The offsetting factors are Vale's exposure to the inherent cyclicality of the metals commodities industry, its narrow product portfolio, and asset concentration in Brazil.

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