DBRS Confirms Rio Tinto plc & Rio Tinto Limited 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 Tinto, the Group or the Companies) at A (low) and R-1 (low) with Stable trends (see table below for details of the entities and ratings involved). The confirmation reflects the Group’s solid business profile as a large, cost-competitive and diversified mining company with strong credit metrics.

The expansion of the Group’s iron ore production capacity and record iron ore prices drove Rio Tinto’s earnings before items considered to be non-recurring by DBRS to a record $15.0 billion in 2011 from the $4.9 billion earned during the 2009 recession. Performance by business unit has been mixed. Net earnings after evaluation and other costs of the Group’s Iron Ore unit in 2011 have increased by $8.7 billion since 2009, providing almost 80% of product group net earnings. As well, earnings of the Group’s Aluminium unit were up $702 million in 2011 from a loss in 2009, although profits at Energy and Diamonds & Minerals remained below 2009 levels in 2011. Earnings before items considered to be non-recurring by DBRS have decreased in the first half of 2012 compared to the first half of 2011for all units except Diamonds & Minerals.

The significant increase in the Group’s operating earnings and cash flow since 2009 reduced debt levels and improved coverage metrics to the end of 2011 to levels considered cyclically strong for the Group’s ratings. That solid operating performance has also encouraged Rio Tinto to increase its cash outflows, including a high level of spending on expansion projects, share repurchases, dividends and acquisitions. With a slump in commodity prices beginning in the latter half of 2011, Rio Tinto’s debt has risen in the first half of 2012 and the Group’s financial metrics have softened, although they remain solid for its ratings.

DBRS expects Rio Tinto’s earnings for 2013 to be lower than 2012 on the basis of flat-to-lower average commodity prices, the negative impact of cost inflation, higher resource tax levels and despite the Group’s recently announced cost reduction program. Uncertainty from the European debt crisis and troubled growth prospects in the United States and China cloud the outlook for commodity prices and the Group’s near-term earnings. Completion and ramp-up of a number of new projects, including iron ore, alumina and copper operations, can be expected to increase the Group’s earning power in the near and longer term providing the potential for positive rating action.

Nonetheless, DBRS expects Rio Tinto’s financial metrics to soften further in 2013 as high capital expenditures and low and uncertain operating cash flows indicate a further increase in debt levels. DBRS views the current softness in commodity prices as cyclical and over the longer term, with new cost-competitive productive capacity coming on stream, Rio Tinto will be well positioned in the upturn to reverse the expected near-term weakening in its financial metrics.

Rio Tinto will have to be judicious in its spending to manage the expected deterioration of its financial metrics in 2013 given the significant uncertainty in the economic outlook and an expected ongoing high level of expansion expenditures. If the economic downturn deepens further than currently expected, the Group’s prospects for positive rating action might be delayed.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Companies in the Mining Industry (June 2011), which can be found on our website under Methodologies.