| SAO PAULO/RIO DE JANEIRO, April 11
SAO PAULO/RIO DE JANEIRO, April 11 Moody's
Investors Service on Friday raised the outlook on Vale SA's
debt rating to "positive," citing the success of the
world's largest iron ore producer to rein in costs in the face
of falling prices and uncertain sales volume trends.
The change in the Brazilian company's outlook from "stable"
acknowledges the company's "more focused and disciplined
approach to project development, capital allocation," and
efforts to trim costs, a team of analysts led by Carol Cowan
said in a statement. Moody's has a "Baa2" rating on Vale, the
second-lowest investment-grade ranking.
The decision signals how Chief Executive Officer Murilo
Ferreira's efforts to discipline capital spending is boosting
Vale's ability to cope with potential price declines for iron
ore and other minerals over the next twelve to eighteen months.
According to Cowen, further efforts to lower debt and avert cost
overruns in major new or ongoing projects could increase the
likelihood of a rating upgrade.
In addition, the outlook change also considers a settlement
with Brazil's tax authority over disputed tax issues between
2003 and 2012. While the deal represented a huge payment for the
company, "it can be accommodated within the company's liquidity
profile, and resolves a material event risk for the company,"
the statement said.
Usually, companies get their ratings upgraded between one
and 1-1/2 years after their outlook is raised. In stark contrast
to Vale's rising star, Standard and Poor's last month trimmed
the sovereign debt ratings of Brazil's government, citing the
impact of a deteriorating budget balance and a slowing economy.
Preferred shares of Vale gained 0.4 percent to 29.81 reais
on Friday. The stock is down 4.4 percent in the past 12 months.
Limiting a potential upgrade, Vale faces upward payroll and
royalty costs in Brazil, its main exploration market. Vale also
remains sensitive to exchange rates, particularly the U.S. and
Canadian dollars as well as the Brazilian real, Cowen said in
And while the company indicated relatively flat capital
expenditures in 2014 at around $13.8 billion relative to 2013
spending levels, and a more disciplined focus on capital
allocation, "these outflows, in combination with dividend
levels, remain high, in our view, relative to the potential
contraction in earnings and remain a consideration in the
rating," she said.
Vale plans to pay $4.2 billion in dividends for this year.
Late in February, Ferreira, who took over as CEO almost
three years ago, vowed to continue efforts to sell
underperforming units and control investments to sharpen Vale's
business focus on iron ore, responsible for about three-quarters
of revenue and nearly all of its profit.
The higher outlook came even after the Rio de Janeiro-based
company posted a $6.45 billion net loss in the fourth quarter,
its largest since Brazil's government sold control to investors
in 1997 and more than twice the shortfall of the year-earlier
period. The loss was due to non-recurring events such as a
one-time income tax settlement and the write-off of an abandoned
potash project in Argentina.
Yet, the performance of operating earnings was a proof of
the success of Ferreira's approach, analysts such as Grupo BTG
Pactual SA's Edmo Chagas said at the time.
Vale's adjusted earnings before interest, taxes,
depreciation and amortization, or EBITDA, a measure of the
company's ability to generate cash from operations, rose 50
percent in the quarter to $6.64 billion. The result beat the
average analyst estimate of $5.85 billion. The EBITDA result was
the third-highest in the company's history.
Despite the non-operational losses, Ferreira managed to cut
costs, write off bad investments and wring more cash from mines,
railways, processing plants, ports and ships while focusing more
on Vale's main iron-ore business.
(Reporting by Guillermo Parra-Bernal; Editing by Chris Reese)