DBRS Confirms Rio Tinto plc & Rio Tinto Limited & 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 and its ability to face expected growing volatility in mineral markets. DBRS’s rating of Rio Tinto Alcan’s preferred shares has been discontinued as these shares have been called and repaid.

Rio Tinto’s business profile is within the “A” range, supported by its size and critical mass as one of the largest mining enterprises in the world, which provides opportunities and efficiencies not available to smaller companies within the mining sector and robust EBITDA generation throughout the business cycle. In addition, the Group’s core operations are high-quality, long-lived operations with competitive production costs and operating lives generally in excess of 15 years. Its operations are diversified across commodities and geographies, with multiple locations and varied pricing formats, which adds stability to income and cash flow and lowers the economic, political and technological risks of investing in a narrower set of operations. In addition, over the last number of years, Rio Tinto has benefited from the rapid expansion of its very profitable iron ore division. The Group’s financial profile and the heightened volatility in the mineral markets preclude an upgrade of the Group’s ratings.

With a broad range of productive assets and large earnings and cash flow generation capabilities, the Group’s financial profile is generally within the “A” range except for its debt-to-capitalization ratio, which reached 34.5% at June 30, 2013 (BBB range). A significant decline in most mineral prices in 2012 from high (often record) levels in 2011 and continued weakness in H1 2013 (except for iron ore), combined with inflationary cost pressures (particularly in Australia), led to a one-third drop in Rio Tinto’s net income before non-recurring items in 2012 and a further 25% drop in H1 2013 (on an annualized basis). Combined with record capital expenditures in 2012 and increasing shareholder payments, the Group’s net debt rose sharply in 2012 and continued to increase in H1 2013.

Rio Tinto has indicated it will continue to invest in a major increase in its iron ore production capacity, as well as in a broad range of other major projects while continuing its cost-reduction and asset-sales efforts. As fewer new projects are initiated, capital spending is expected to decline and debt growth to be reined in in 2014, with debt reduced in 2015, barring a further significant downturn in commodity prices. In the expected uncertain operating environment, the Group will have to carefully manage its cash outflows in order to reverse the recent deterioration to its balance sheet and financial metrics and to avoid any potential downgrade of its ratings.

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

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.