DBRS Comments on Rio Tinto-Chinalco Proposed Transactions; Rio Ratings Remain Under Review-Negative

DBRS has today maintained the A (low) and R-1 (low) ratings of Rio Tinto Plc and Rio Tinto Ltd. (collectively, Rio or the Company) Under Review with Negative Implications following the Company’s announcement that it has reached an agreement with Aluminum Corporation of China (Chinalco) on the sale of interests in certain Rio assets for $12.3 billion and that Chinalco will undertake an investment in Rio subordinated convertible bonds totaling $7.2 billon. DBRS views the transactions as a positive development for Rio. However, they are subject to a wide range of approvals from government and regulatory authorities as well as from Rio and relevant Chinalco shareholders; hence, the final form of the transactions, if carried out, remains uncertain.

The key components of the announced transaction include: Chinalco’s $12.3 billion cash purchase from Rio of interests in specific aluminum, copper and iron ore joint ventures; Chinalco’s $7.2 billion cash investment in Rio subordinated convertible bonds; and a formal strategic alliance between Rio and Chinalco intended to benefit from their combined resources and expertise in the advancement of joint venture operations, project development and exploration, particularly in emerging economies and to better supply fast-growing commodity markets such as China. Following completion of the transactions, Rio will retain day-to-day management and operation control of the underlying assets it currently manages. Chinalco’s investment in Rio’s convertible debentures, if converted, would increase Chinalco’s current shareholding to 19.0% in Rio Tinto Plc and 14.9% in Rio Tinto Limited, equivalent to an 18.0% interest in the Rio Tinto Group. Chinalco will also have the right to nominate two members to the Rio board, as long as its effective interest in Rio is maintained at specified levels.

The transactions contemplated would involve five wholly-owned Rio operations and four partially-owned operations, plus the establishment of a $500 million development fund for the acquisition of project developments, including those acquired from Rio. Rio estimates that the pro forma 2008 EBITDA generated from the interests to be sold would have been $2.2 billion, making the purchase value of $12.3 billion approximately 5.5 times pro forma EBITDA in a year that Rio experienced record EBITDA generation on a group basis. Given current commodity market conditions and subject to full details on the transactions, DBRS believes that the sale of interests under consideration would not significantly change Rio’s solid business profile and that the Company would receive adequate value for the interests being sold.

The transactions contemplated will require relevant governmental and regulatory clearances before closing, including governmental or regulatory clearances in China, the United Kingdom, Australia and the United States, as well as regulatory and anti-trust approvals in Australia and Germany. The proposed transactions are also subject to the approval of Rio shareholders and the relevant Chinalco shareholders.

DBRS considers the closing requirements for these transactions to be subject to significant uncertainty due to their somewhat complicated nature; the existence of external players in some of the assets being transacted; the need for various government and regulatory approvals; and the need for shareholder approvals. Accordingly, DBRS has maintained Rio’s ratings Under Review with Negative Implications until we can better assess the transaction details and the likelihood of the transaction being completed under the terms outlined above.

Rio and Chinalco have indicated that initial completion of most elements of the transaction will occur prior to the end of July 2009.

DBRS believes that this is a positive transaction that will resolve Rio’s near-term financing needs. The Chinalco transactions, if completed as indicated, will more than meet Rio’s stated asset sale objectives of $10 billion and will provide $7.2 billion in long-term financing. The Company has stated that the proceeds of the transactions ($19.5 billion) will be used in part for the prepayment of $8.9 billion of the Alcan Inc. (Alcan) credit facilities due in October 2009 and $10.0 billion due in October 2010.

The Company’s ratings were placed Under Review with Negative Implications on November 25, 2008, in view of Rio’s only modest success in generating asset sales throughout 2008 to help alleviate the significant debt burden taken on to finance its $38 billion, all-cash acquisition of Alcan and the significant deterioration that had occurred in the outlook for commodity producers late in the year. In the two months since November, Rio has sold approximately $1.7 billion in assets and has announced aggressive cost-cutting and expenditure-reduction initiatives.

These contemplated transactions, if completed as announced, will substantially resolve the Company’s need to seek funding to meet 2009 and 2010 debt maturities and will reduce leverage, which is currently high for the rating category.

In addition, Rio announced strong operating results for 2008. Record underlying earnings of $10.3 billion for the year (an increase of 38% over 2007) were partially offset by a $7.9 billion write-down of Rio’s Alcan investment. Strong pricing for the Group’s major traded products for the first nine months of the year contributed to record EBITDA of $22 billion for 2008 and record cash flow from operations of $21 billion. Rio has indicated that the impact of the collapse in metal prices in the last quarter of 2008 was somewhat lessened by its annually priced commodities, iron ore and coal, which were set a significantly higher prices for 2008-2009. Rio was able to reduce net debt by $6.5 billion through asset sales and operating cash flow ($38.7 billion as at December 31, 2008, versus $45.1 billion as at December 31, 2007).

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

The ratings of Rio are based on public information.

The applicable methodology is Rating Mining, which can be found on our website under Methodologies.

This is a Corporate rating.