Fitch Upgrades Vale's Ratings to 'BBB' & 'AAA (bra)'; Outlook Stable

--Foreign currency and local currency Issuer Default Rating (IDR) to 'BBB' from 'BBB-';

--Unsecured debt of Vale and its subsidiary Vale Inco to 'BBB' from 'BBB-';

--National scale rating to 'AAA (bra)' from 'AA+ (bra)';

--Unsecured Brazilian real denominated debentures of Vale to 'AAA (bra)' from 'AA+ (bra)';

--Ratings of PT Inco to 'BB+' from 'BB'

The Rating Outlook for Vale is Stable. The rating of PT Inco, which is 60% owned by Vale's subsidiary Vale Inco, has been capped at the 'BB+' Indonesian country ceiling. PT Inco has no financial debt and its rating is being withdrawn.

The credit rating upgrades are due to Vale's solid business profile and extremely strong financial profile. The former factor allows the company to generate healthy cash flow from operations (CFO) in the midst of the severe downturn in commodity prices and demand; the latter factor enables the company to make selective acquisitions and to continue to develop its mining reserves during a time period in which many of its competitors will be preserving cash in an effort to build liquidity.

Vale ended 2008 with $17.7 billion of total adjusted debt, as calculated by Fitch, and $12.6 billion of cash and marketable securities. The company generated $17.6 billion of EBITDA and $17.1 billion of CFO, as calculated by Fitch. With capital expenditures of $9.0 billion and dividends of $2.9 billion, the company had a free cash flow (FCF) before debt service of $5.3 billion in 2008. Vale's high cash balance is a result of the $12.2 billion equity issue it completed during 2008.

Due to the negative market for many of Vale's products, particularly nickel, Fitch expects Vale to generate EBITDA and CFO during 2009 at levels substantially below 2008, and possibly lower than half of last year's figures. With capital expenditures, dividends, and acquisitions expected to total more than $13 billion, Fitch believes the company's net debt position could increase to about $11 billion from $5.1 billion at the end of 2008. As a result, Vale's net debt/EBITDA ratio could be in a range of 1.2 times (x) to 1.4x, and its CFO / net debt ratio could be around 70%. These ratios remain comfortable within the rating categories given the very difficult market the company faces.

Vale has a very manageable debt amortization schedule. The company faces debt amortizations of $328 million in 2009, $2.304 billion in 2010, $2.618 billion in 2011 and $1.137 billion in 2012. The majority of the 2010 - 2012 debt amortizations are trade finance lines with BNDES, Japan Bank for International Cooperation (JBIC) and Nippon Export and Investment Insurance (NEXI). The company also has Brazilian real denominated non-convertible debentures that mature during this time period. In addition to having a substantial cash position, Vale has $1.9 billion of undrawn revolving credit lines that it could use to enhance its liquidity. They consist of $1.150 billion at Vale International and a $750 million credit facility at Vale Inco.

The company has some of the largest iron ore, nickel and bauxite reserves in the world. Vale recently adjusted its 2009 capital expenditure program to $9 billion from $14.2 billion to reflect market conditions. The projects being pursued by the company will dramatically increase its presence in nickel, iron ore, aluminum and copper within the next five years. Vale is augmenting these projects with acquisitions. Key acquisitions made during 2009 include some potash and iron ore assets owned by Rio Tinto, some coal assets in Colombia, and a copper joint venture in Africa.

Vale released its first quarter 2009 results on May 6, 2009. During the quarter, the company generated $5.4 billion of sales revenues, a 27% decline from the last quarter of 2008. The decline in revenues was due to lower volumes ($843 million) and prices ($1.178 billion). Fitch calculated EBITDA was $2.244 billion for the quarter, a decline from $2.581 billion during the fourth quarter of 2008 and $3.671 billion during the first quarter of 2008. Iron ore sales for the first quarter were made at a discount of 20%. If Vale settles its agreements for 2009 at lower levels, these sales will be adjusted downward in the future.

The company's has made major significant efforts to reduce its overhead costs. Sales, general and administrative expenses declined to $233 million from $708 million during the last quarter of 2008, while research and development, and other expenses fell to $506 million from $1.014 billion. Vale's debt and cash positions were relatively unchanged from Dec. 31, 2008. As of March 31, 2009, the company had $12.214 billion of cash and $19.237 billion of debt. These figures compare with $12.639 billion of cash and $17.734 billion of debt at the end of 2008. The change in net debt that did occur was due to a payment by Vale of $850 million to Rio Tinto for its potash assets.

A copy of Fitch's Credit Analysis report of Vale will be available in this week on the Fitch Ratings web site at www.fitchratings.com.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

SOURCE: Fitch Ratings

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