DBRS Confirms Rio Tinto Plc & Rio Tinto Ltd. and Affiliates at A (low) and R-1 (low), Stable Trends

DBRS has today confirmed the ratings of Rio Tinto Plc, Rio Tinto Limited and related subsidiaries (collectively, Rio or the Company) at A (low) and R-1 (low) as listed above and on page 14. All trends remain Stable. The confirmation reflects Rio’s strong credit metrics, de-leveraged balance sheet and solid business profile.

Following a substantial reduction of debt in 2009, Rio’s financial profile continued to improve in 2010 and remained strong in the first half of 2011, benefiting from record-high EBITDA over the last 18 months. Strong earnings were boosted largely by higher prices for Rio’s core products (iron ore, copper, aluminum and coal). Cash flow for the 12 months ended June 30, 2011 (LTM), was more than double 2009 figures and was significantly higher than pre-crisis levels, resulting in substantial net free cash flow and stronger liquidity. In 2010, Rio used its free cash flow and cash proceeds from non-core asset divestitures to reduce debt by $9.3 billion, further de-leveraging its balance sheet. The debt-to-capital ratio was reduced to less than 20% during 2010. Although recently increased to 24.2% (on a pro forma basis, see below), the debt level in the capital structure is viewed as modest for a mining company. EBITDA-interest coverage and cash flow-to-debt ratios were very strong at 23.7 times (x) and 131%, respectively, at year-end 2010, and continued to remain strong and in line with the current rating category in H1 2011.

Rio started its expansion program benefiting from the recovery of commodity prices and a strong balance sheet. To date, Rio has increased its interest in Ivanhoe Mines Ltd. (Ivanhoe) to 49% from 19.7% in 2009 for a total of $3.1 billion, and gained control of Oyu Tolgoi copper project in Mongolia, which is 66% owned by Ivanhoe. Rio also acquired Riversdale Mining Limited (Riversdale) for a net investment of $3.7 billion in 2011. Although these two investments strengthen Rio’s position in coking coal (Riversdale’s projects) and copper (in Oyu Tolgoi, the world’s largest undeveloped copper project), it also increases Rio’s political and project risk, as these projects will require substantial capex before they can produce cash flow, and they are located in countries that are viewed as higher risk than Organization for Economic Cooperation and Development countries. The Oyu Tolgoi project is expected to be in service in 2013; Riversdale’s Benga project, in late 2011; and a second mine, in late 2014. In addition to these acquisitions, Rio purchased $4.6 billion of its common shares in the last ten months ended October 31, 2011, as it began its $7.0 billion share buyback program to be completed by the end of Q1 2012. Rio issued $2.0 billion in debt in May 2011 and another $2.0 billion in September 2011 to partially finance its expansion and share buybacks. As a result of these debt issuances, the debt-to-capital ratio (on a pro forma basis) increased to 24.2% (as of June 2011, 20.8%). Although DBRS views the current debt leverage as modest, DBRS expects the balance sheet to come under pressure, given Rio’s large capex expansion program.

Rio’s 2012 capex, based on DBRS estimates, is expected to be approximately $14.0 billion, a modest increase compared with 2011 but a substantial increase relative to historical levels, and is expected be used largely to advance its iron ore, copper and coal projects. This expenditure, combined with the Company’s expected dividends and share buyback program, would mean that a cash outflow in the range of $18.0 billion to $19.0 billion is expected in 2012 based on DBRS estimates, excluding potential future acquisitions. In October 2011, Rio made a CAD$578 million offer to acquire uranium explorer Hathor Exploration Limited (Hathor). The proposed acquisition, if successfully completed in 2012, would add to the total cash outflow for the next 12 months.

As of June 30, 2011, Rio had approximately $7.5 billion in cash. Operating cash flow for 2012 should remain strong but is expected to decrease slightly relative to 2011 levels, as commodity prices have softened. However, DBRS expects Rio’s operating cash flow and cash on hand to be sufficient to finance the Company’s 2012 capex, dividends and share buybacks. In addition, a sizable amount of cash is also expected from potential asset sales, as Rio continues to streamline its Aluminium product group. In the event that Rio’s cash flow declines materially from 2011, DBRS expects Rio would remain flexible with its capex program and able to maintain its credit metrics within target levels for its A (low) rating category.

Rio’s current ratings are supported by its solid business profile, as it is one of the most cost competitive and diversified organizations in the mining sector. Rio is the world’s second largest aluminium producer and the second largest iron ore producer (behind Vale S.A.). In addition, Rio has sizable copper and coal assets that provide the Company with good product diversification. Rio also benefits from being a low-cost producer in several commodities (first quartile in iron ore and copper), which puts the Company at a competitive advantage in many markets, particularly in a volatile commodity environment.

The long-term outlook for Rio remains strong, with the urbanization and industrialization of emerging economies expected to support ongoing growth demand for Rio’s commodities.

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

The ratings of Rio Tinto Finance plc, Rio Tinto Finance Limited, Rio Tinto Finance (USA) Limited, Rio Tinto (Commercial Paper) Ltd., Rio Tinto (Commercial Paper) plc, Rio Tinto America Inc. and Rio Tinto Canada Inc. are cross-guaranteed by Rio Tinto plc and/or Rio Tinto Ltd.

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