Samarco downgrade impacting Vale shares 'marginally'

Brazilian pellet maker Samarco's recent rating downgrade by S&P is 'marginally' affecting the shares of miner Vale, one of the firm's two controllers.

That's according to São Paulo-based investment consultancy Empiricus Research, which added that the fallout from the Samarco dam burst disaster in November has already been priced into the mining giant's shares.

Samarco is a 50:50 JV between Australia's BHP Billiton and Vale.

"Vale has competent management, solid fundamentals and is accredited as an excellent company..." Empiricus Research analyst Roberto Altenhofen said in a note to clients on Wednesday. "However, the cloudy outlook regarding Samarco will continue to bring a lot of volatility to Vale's shares in the short-term."

S&P lowered Samarco's global scale ratings to 'CCC' from 'B' this week and maintained the company's outlook as negative.

"The downgrade reflects the company's weakening liquidity, given the depletion of the cash position following cash contributions to the [dam burst] recovery fund, scheduled interest and amortization payments, and operating cash­flow needs to maintain the remaining assets and operations over the next few months," S&P said in a report.

The increasing liquidity pressures will test Samarco's capacity to service its financial obligations in the next six months, S&P added.

"Therefore, we expect the company to rely on its shareholders, especially to cover the cash contributions for the recovery fund of the affected areas, because the company still has about 1.4bn reais in contributions to deposit in 2016," it said.

According to S&P, Samarco has breached covenants on its export prepayment loans, exposing it to debt payment acceleration not only on those loans, but also on the bonds, given cross-acceleration clauses.

S&P said: "We now view Samarco as a moderately strategic subsidiary of Vale. We believe that the uncertainties over the timing of Samarco's resumption of operations considerably affect shareholders' willingness to provide financial support, other than the agreed recovery fund contributions."

S&P believes that Samarco is still part of Vale's long-term strategy and could receive some financial support from the latter. However, the timing and amount of such support will depend on Samarco's ability to generate cash in the near term, the agency said.

"Therefore, we believe the potential for Vale's support will be limited while Samarco's licenses remain suspended. We continue to view Samarco as non-strategic to BHP Billiton," it added.