DBRS Places Rio Tinto Under Review with Negative Implications Following Withdrawal of BHP Offer

DBRS has today placed the A (low) and R-1 (low) ratings of Rio Tinto Plc and Rio Tinto Ltd. (collectively Rio or the Company) Under Review but with Negative Implications despite the announcement November 25 by BHP Billiton Plc and BHP Billiton Limited (collectively BHP Billiton) that BHP Billiton “no longer believes that completion of the offers for Rio Tinto would be in the best interests of BHP Billiton shareholders.”

DBRS has changed Rio’s ratings to Under Review with Negative Implications because of the significant change that has occurred in the outlook for commodity producers and Rio’s modest success in generating asset sales to help alleviate the significant debt taken on to finance its $38 billion all-cash acquisition of Alcan Inc. in November, 2007. Our original assessment of the Alcan acquisition was that it would strengthen Rio’s business profile and we expected strong cash flows and significant asset sales would reduce high leverage levels, thereby maintaining its A (low) and R-1 (low) ratings. While cash flows since the Alcan acquisition have been strong, debt levels have remained above expectation to date.

BHP announced its unsolicited bid for Rio in February 2008. DBRS put both Rio and BHP Billiton Under Review with Developing Implications at that time due to the uncertainty caused by the mergers of such large and complex mining groups.

Within a year, Rio is facing $8.9 billion in debt maturities including those drawn under its $15 billion, 364-day unsecured term loan (with a one-year extension option to October 22, 2009) arranged as part of the Alcan financing. We expect Rio will be able to refinance this debt, albeit at higher costs.

During the first half of 2008, Rio reported very strong cash flows due to robust commodity prices. It also announced the sale of $3 billion in assets following the Alcan purchase as part of its targeted $10 billion in asset sales. Despite these efforts, Rio’s $46.8 billion in total debt as at December 31, 2007 has been reduced to only $43.9 billion at June 30, 2008, partially due to high capital expenditure levels ($3.7 billion) and dividend payments ($1.2 billion).

The tone of commodity markets has been very negative since September 2008, with copper, aluminum and zinc spot prices now substantially below first-half 2008 levels. In addition, global economic conditions are expected to continue to soften over the near term. Although Rio’s iron ore, coal and other contract-priced commodities are somewhat sheltered from the immediate impacts of the collapse in commodity prices, they will face a distinctly negative negotiating environment when pricing for 2009 is determined, likely in the first quarter. The poor commodity market sentiment will also negatively impact the proceeds Rio can expect from divestments.

The Company notes that it believes its divestment program is on track, and that it is focused on maintaining its credit quality. Rio acknowledges that the current downturn has affected product shipments. As well, Rio indicated in its third-quarter review that it is reviewing its near-term spending timelines and project costs of its capital expenditure program, while preserving the optionality of its growth pipeline overall.

DBRS will maintain Rio’s ratings Under Review with Negative Implications until it becomes more clear if contract-priced commodity settlements for 2009 will help preserve the strong cash flows experienced in the first half of 2008 and if Rio can manage to reduce its debt levels with operating cash flows and asset sales. A significant drop in contract-base commodity prices or a failure to successfully reduce high debt levels with the aid of asset sales and capital expenditure reductions, would likely lead to a negative rating action.

For more information on Rio, please see the DBRS press releases published February 6, 2008, November 1, 2007 and July 12, 2007 and Rio’s ratings report dated November 19, 2007.

Note:
All figures are in U.S. dollars unless otherwise noted.