DBRS Confirms Rio Tinto plc & Rio Tinto Limited & Affiliates at A (low) and R-1 (low), Stable Trends

DBRS Limited (DBRS) has today confirmed the ratings of Rio Tinto plc, Rio Tinto Limited and related subsidiaries (collectively, Rio Tinto, the Group or the Company), all with Stable trends. The confirmation takes into account the Company’s scale as one of the world’s biggest mining companies, its diversification, the cost competitiveness of its key products and its financial metrics, which are largely consistent with its current ratings. Despite these strengths, Rio Tinto’s ratings are challenged by its exposure to volatile commodity prices, many of which are currently trending downward and its reliance on iron ore, which is in oversupply. Furthermore, the Company can be exposed to substantial project execution risk, evidenced by its Kitimat and Oyu Tolgoi projects.

The Stable trend reflects DBRS’s expectation that the Company will maintain its solid liquidity and prudently manage its financial risk during the current downturn in commodity prices. Over the last couple of years, Rio Tinto has strengthened its business profile and competitiveness by: (1) increasing production volumes and lowering unit costs in many commodities, including a major iron ore expansion in the Pilbara and the build of the Oyu Tolgoi copper mine in Mongolia; (2) non-core asset divestures; (3) significant operating cost reductions; and (4) a substantial reduction in capex as major projects have been completed. This plan is expected to result in free cash flow break-even or a modest surplus over the medium term.

The Group’s net free cash flow has been negative since 2011, largely due to heavy expansion investment in a period of softening commodity prices. As a result, its financial metrics have weakened, which DBRS considers cyclical in nature. However, net debt was reduced meaningfully in 2013 and the first half (H1) of 2014, financed largely by non-core asset sales, and credit metrics improved modestly. As a result, Rio Tinto has been able to maintain key ratios at levels that are consistent for its current rating profile.

The weakness in commodity prices continues in 2014, due to oversupply in many commodities, including iron ore, the largest contributor to the Company’s earnings (approximately 70% of H1 2014 EBITDA). Should the current commodity price weakness persist, DBRS’s expectation is that Rio Tinto’s financial metrics may weaken in H2 2014 and in 2015. As such, the Group will have to be prudent in its efficiency programs and cash outflows, including major project expenditures, in order to maintain key metrics consistent with its current 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 (September 2014), which can be found on our website under Methodologies.