DBRS Changes Rio Tinto to Under Review - Developing from Under Review - Negative

DBRS has today changed the ratings of Rio Tinto Plc and Rio Tinto Ltd. (collectively Rio Tinto or the Company) to Under Review with Developing Implications from Under Review with Negative Implications following the announcement that the Company plans to raise $15 billion through a rights issue. The rights issue is fully underwritten and not subject to shareholder approval. DBRS views this deal as a positive development. The proceeds of the equity issue will be used to partially repay the US$7.2 billion due October 2009 and US$8.1 billion due October 2010 and will restore the Company’s credit metrics to levels that are more in line for an A (low)-rated resource company at a low point in the economic cycle. The rights issue also provides the Company with more time and the financial flexibility to continue its asset divestment programs in order to obtain appropriate value. The rights issue is expected to close no later than the end of July 2009. If the deal is executed as described, DBRS expects to confirm the Company at A (low), with a Stable trend.

Prior to this announcement, Rio Tinto had made significant headway in alleviating much of the near-term pressure of the large, Alcan acquisition-related debt repayments through the issuance of $3.5 billion in long-term notes in April 2009 and the sale of approximately $2.0 billion of assets. The Company currently has strong liquidity with cash on hand and approximately $7.0 billion in available credit lines.

DBRS views the rights issue as superior to the Chinalco deal announced on February 13, 2009. (See DBRS press release dated February 13, 2009, for details). From a debtholders’ perspective, the equity injection will not only meet near-term maturity needs and reduce debt levels, it will also have a positive impact on credit metrics. EBITDA from the asset interests that were to be sold under the Chinalco transaction will be retained and equity will be increased. DBRS considers the loss of the formal strategic partnership between Chinalco and Rio Tinto to be a mild negative.

The outlook for Rio Tinto’s operations is generally improving with the expectation that the worst of the current downturn was seen in the fourth quarter of 2008 and first quarter of 2009. China appears to be leading the world out of the economic downturn through an active stimulus program and heavy buying (bargain hunting) of basic commodities. This has led to a significant rebound in the prices of copper, lead and zinc. However, aluminum prices continue to be depressed. Initial indications are that iron ore, thermal coal and steel-making coal prices in the 2009-2010 contract year will be down significantly from the prior year, but still high compared to historical trends. DBRS expects Rio Tinto to generate net free cash flow in 2009, which will add to the Company’s ability to reduce debt.

The Company also today announced a 50/50 joint venture with BHP Billiton Plc and BHP Billiton Limited (collectively BHP Billiton) to pool its Pilbara iron assets, a move that could result in substantial synergies for Rio Tinto. While DBRS views this as positive from a credit profile perspective, this announcement will not have a material near-term impact on Rio Tinto’s credit metrics since completion is not expected until mid-2010 and the venture is subject to regulatory and shareholder approvals.

For more information on Rio Tinto, please see the DBRS rating report dated March 18, 2009 and press releases dated February 13, 2009, January 30, 2009 and November 26, 2008.

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

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

This is a Corporate rating.