OREANDA-NEWS. Fitch Ratings has assigned a 'BBB(exp)' rating to Vale Overseas Limited's proposed benchmark-size senior unsecured notes due to 2021, which will be unconditionally guaranteed by Vale S. A (Vale).

Proceeds from the issuance will be used for general corporate purposes, including liability management.

Fitch currently rates Vale's Long-Term Foreign-Currency Issuer Default Ratings (IDRs) at 'BBB' and Long-Term Local-Currency IDR at 'BBB+'. The Rating Outlook is Negative. The Outlook reflects the Negative Outlook on the sovereign rating. A complete list of the company's current ratings follows at the end of this release.

KEY RATING DRIVERS

Leading Seaborne Iron Ore Producer

Vale's investment grade ratings are supported by its position as the leading producer of low-cost iron ore. Vale's 2015 market share in the seaborne iron ore trade was approximately 22%. Reinforcing the company's position, is its ongoing production expansion of high grade and low cost iron ore, which should allow it to increase output to more than 430 million tons of annual output by 2018 from approximately 345 million tonnes in 2015. The main driver of the increase in volumes is the company's S11D project -- a $14.3 billion project that will increase the company's annual output by 90 million tons.

Net Leverage to Remain High Until 2018

Fitch projects Vale's net leverage to remain high for the rating category. Based on Fitch's mid-cycle price assumption of $45 per ton for 2016, Vale will generate approximately USD7 billion of EBITDA and USD5.1 billion of CFFO for the year. As a result, net leverage is projected to be around 4.1x for 2016, inclusive of asset sales around USD2.0 billion. For 2017, using $45 per tonne as the iron ore price, Fitch's base case projects that Vale will generate about $8.5 billion of EBITDA and its net leverage will be 3.2x.

Additional Asset Sales Would Accelerate Improvement in Capital Structure

Vale's ambitions to reduce net debt to around USD15 billion over the next 18 months could be realized through the sale of non-core and core assets. While gradual deleveraging is projected following the completion of S11D, more aggressive actions could materially improve the company's capital structure over the mid-term. Fitch conservatively estimates Vale will sell approximately USD2.0 billion in assets over the next six months. Should Vale sell USD5.0 billion over the next six months, net leverage would likely fall to below 3.7x in 2016. Additional asset sales over the next 12 - 18 months would further accelerate improvement in the company's capital structure.

Low Cost Position to be Reinforced

Vale's strong and diversified business position continues to be a key consideration for its investment grade ratings despite deterioration in its credit metrics and a decreased outlook for long-term iron ore prices. Vale's production cost is the lowest in the world and 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 $7/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).

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 83% of its EBITDA in 2015. China was the key market for Vale's iron ore, accounting for 35% of sales. Prices are expected to weaken in the future due to extensive increases in production capacity by Vale, BHPB and Rio Tinto, which will erase a decade long scarcity premium.

Against a backdrop of rising supply, demand from China for iron ore continues to grow, but 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.

Samarco Developments

Samarco, Vale and BHP Billiton have entered into an agreement with the Federal Attorney General of Brazil, the States of Espirito Santo and Minas Gerais and certain other public authorities (Brazilian Authorities) for the restoration of the environment and communities affected by the Samarco dam failure. The agreement provides a long-term remedial and compensation framework for responding to the impact of the Samarco incident. Fitch's cash flow assumptions indicate limited impact on Vale and BHPB. In the event Samarco is unable to comply with its payment commitments to the foundation, the amount payable each year is very manageable to the company's shareholders and the shortfall required would be divided between them equally.

The agreement was ratified by the Federal Regional Court, 1st Region on May 5th, 2016, but the ratification is under appeal by a federal prosecutor, who also filed a separate civil suit against Samarco and its two shareholders. Fitch anticipates that the subsequent legal proceedings will take place over a number of years.

KEY ASSUMPTIONS

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

--Sales volumes of iron ore fines and pellets increasing to 354 million tonnes in 2016, and over 400 million tonnes in 2017.

--Nickel sales volumes at 300 thousand tonnes in 2016;

--Copper sales volumes around 450 thousand tonnes 2016;

--Coal continues to produce negative EBITDA in 2016;

--Fertilizer sales volumes grow between 3%-5% annually during 2016 to 2019;

--Prices for iron ore, copper and nickel follow Fitch's mid-cycle commodity price assumptions;

--Total capex of around $5.6 billion in 2016, $5 billion in 2017 and below $5 billion in 2018 and 2019;

--Asset sales of $2.0 billion in 2016.

RATING SENSITIVITIES

Vale's international ratings are two notches higher than Brazil's 'BB+' country ceiling. This reflects Fitch's view that Vale has significant offshore assets e. g. Vale Canada Limited, substantial and recurring foreign exchange earnings relative to the company's foreign currency and overall debt burden, and committed undrawn credit lines available from highly rated international banks, especially credit lines without a MAC clause, versus its semi-annual debt service obligations. Significant weakening of these factors may lead to the company's ratings being capped at the country ceiling level.

A downgrade of Brazil's sovereign rating and country ceiling could potentially lead to a negative rating action for Vale's foreign currency IDRs and its international bonds. While the company has characteristics that allow it to be rated higher than the country ceiling, the heart of the company's profitability remains its iron ore business, which is Brazil based.

Vale's Local Currency IDR could 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 also be viewed negatively.

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.

LIQUIDITY

Vale held readily available cash and marketable securities of approximately USD3.8 billion as of March 31, 2016 compared to USD3.6 billion as of December 31, 2015. Liquidity is further enhanced by Vale's remaining undrawn USD2 billion revolving credit facilities with maturities of two to four years and by its strong capital markets access. Interest coverage improved to 5.2x in 1Q16 compared to 4.8x in 4Q15.

FULL LIST OF RATING ACTIONS

Fitch currently rates Vale S. A. as follows:

Vale S. A.

--Long-Term Foreign-Currency IDR 'BBB';

--Long-Term Local-Currency IDR at 'BBB+';

--Senior unsecured debt rating at 'BBB';

The Rating Outlook is Negative.

Vale S. A.

--National Long-Term Rating 'AAA (bra)';

--National Long-Term unsecured debt rating at 'AAA (bra)'.

The Rating Outlook is Stable.

Vale Overseas Limited:

--Senior unsecured debt guaranteed by Vale 'BBB'.

Vale Canada Limited:

--Senior unsecured debt guaranteed by Vale 'BBB'.

SUMMARY OF FINANCIAL STATEMENT ADJUSTMENTS

--Leases: Fitch has adjusted the debt by adding 5x of yearly operating lease expense of $56 million for 2015.