PBR Petroleo Brasileiro ADR

By Paul Kiernan 

RIO DE JANEIRO--Brazilian mining giant Vale said Tuesday it will draw $3 billion from revolving credit lines to help pay off bonds due this month in what analysts described as a possible last-ditch move to shore up its finances.

Like other resource companies, Vale has been punished by a year of deeply depressed prices for iron ore and other commodities. But it faces the additional stigma of being Brazilian at a time when international capital markets have largely shunned the South American country's assets amid a wide-reaching corruption scandal at state-run oil company Petróleo Brasileiro SA and an economic crisis. A major accident at Samarco Mineração SA, Vale's local joint mining venture with Australian miner BHP Billiton Ltd., on Nov. 5 has further rattled investors.

Faced with so many headwinds, Vale has become a pariah in global debt markets. Its 4.38% notes due in 2022 have fallen as low as 72.55 cents on the dollar in recent weeks, following a steep selloff in the wake of the Samarco disaster.

The situation marks a stunning turnaround from just a couple of years ago, when Vale was viewed as perhaps Brazil's most creditworthy company. It boasted an A- credit rating from Standard & Poor's and was the world's second-largest mining firm by market capitalization. Though Vale has yet to lose investment-grade status, all three major ratings firms have negative outlooks on the company.

But investors aren't waiting around. Klaus Spielkamp, a bond analyst in Miami at Latin America-focused brokerage Bulltick Capital Markets, says all but his most aggressive clients have stopped trading Vale, along with other Brazilian companies.

"Nobody knows for sure if [Samarco] is going to be high-cost for Vale or not, and they don't get the benefit of the doubt because of Brazil," Mr. Spielkamp said. "It doesn't bode well for them to be using this line."

Vale and BHP Billiton have denied any responsibility for the Samarco accident, which killed 19 people and polluted more than 400 miles of rivers when a tailings dam burst. But Brazilian authorities included the parent companies in a $5 billion lawsuit against Samarco in response to the disaster, saying they will be on the hook if Samarco can't pay the cleanup costs.

Vale said its use of the credit line will "increase liquidity and bridge potential cash flow needs" as it aims to finish a number of costly projects. Chief among them is S11D, a $16 billion supermine in the Brazilian Amazon that will allow Vale, already the world's largest iron-ore producer, to increase its output of the commodity by more than 25%.

The iron-ore market, however, has plumbed depths that were unthinkable to most big mining companies 18 months ago. Benchmark iron-ore prices, which approached $200 per metric ton in 2011 and remained above $100 a ton during much of 2014, have recently fallen below $40.

Vale said delays in its divestment program, which has dragged out as the commodity downturn reduced the market value of mining assets, also motivated its use of the revolving credit line. Specifically, Vale mentioned the sale of a stake in its Mozambique coal operations to Japan's Mitsui & Co. that it has been trying to close since late 2014.

"Some of the amount raised will cover the funds used to amortize bonds due in January 2016," Vale added.

Write to Paul Kiernan at paul.kiernan@wsj.com

(END) Dow Jones Newswires

January 12, 2016 14:02 ET (19:02 GMT)

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