DBRS Confirms Rio Tinto plc & Rio Tinto Limited at A (low), Stable Trends

DBRS Limited (DBRS) has today confirmed the Issuer rating of Rio Tinto plc & Rio Tinto Limited (collectively Rio Tinto, the Group or the Company) with a Stable trend. The confirmation reflects DBRS’s view that the Company is one of the world’s largest, most diversified miners, with a strong portfolio of competitive operations, and has maintained strong liquidity. Nonetheless, DBRS recognizes that Rio Tinto is facing difficult market conditions, and although DBRS views the current commodity price environment as cyclical, recovery may be protracted because of the oversupply of many commodities and uncertain economic growth conditions. Accordingly, if Rio Tinto is unable to restrict the growth of its net indebtedness, and its credit metrics deteriorate further from current levels, DBRS will take a negative rating action.

DBRS has also concurrently withdrawn certain Company ratings as listed at the end of this press release. The withdrawal of these ratings is at DBRS’s discretion and is not an expression of its view of the credit quality of these entities.

Overall, Rio Tinto continues to cope with the weak commodity price environment better than most of its competitors because of its large size and scale of operations, cost competitiveness and product diversification (albeit increasingly weighted toward iron ores). The Company’s competitive profile has been improved by (1) decreasing unit costs in many of the Company’s key commodities; (2) dispositions of low-margin, non-core assets; (3) significant operating cost reductions; and (4) a substantial reduction in capex as major projects have been completed. The Group’s expanded productive capacity, including the Pilbara iron ore and infrastructure expansion, the expanded Kitimat aluminum project, and the ramp-up of the Oyu
Tolgoi copper project and other areas, has enhanced its business profile.

In addition, Rio Tinto’s liquidity remains strong, and is sufficient to fund any near-term debt maturities and cash flow deficits. Because of significantly lower capex in 2015 ($5.5 billion, of which $2.5 billion is sustaining compared with $8.2 billion in 2014), even if commodity prices remain at current levels, the Company is likely to generate only a modest free cash flow deficit, which could easily be financed with cash on hand of over $11.0 billion and sizable availability under the Company’s credit facilities at June 30, 2015.

Nonetheless, DBRS notes that Rio Tinto’s key credit metrics for the first half of 2015 (H1 2015) have weakened to a level below DBRS’s “A” rating category, largely because of lower earnings and cash generation due to a cyclical weakening of commodity price (particularly iron ore) in 2015. The decline in profitability has happened despite the Company’s substantial cost savings ($600 million in H1 2015) and positive currency movements ($847 million in H1 2015). DBRS also notes that in February 2015, the Company announced a 12% increase in full-year dividends and a $2 billion share buyback for 2015 ($1 billion was executed in H1 2015), which was aggressive given the $1.14 billion increase in Rio Tinto’s net debt in H1 2015.

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

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 (October 2015), which can be found on our website under Methodologies.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.