DBRS Confirms Rio Tinto Plc & Rio Tinto Ltd. at A (low), Changes Trend to Negative

DBRS Limited (DBRS) has today confirmed the Issuer Rating of Rio Tinto Plc & Rio Tinto Ltd. (collectively, Rio Tinto or the Company) at A (low) and changed the trend to Negative from Stable. Rio Tinto’s rating confirmation is based on DBRS’s view that, despite the current difficult market conditions, the Company’s business risk profile (albeit weaker) remains consistent with DBRS’s “A” rating range and that its liquidity remains strong. The Negative trend reflects DBRS’s concern about Rio’s weakening credit metrics based on the Company’s 2015 results and the persistently weak commodity price environment going into 2016.

During 2015, Rio Tinto’s key credit metrics weakened significantly as a result of much lower earnings and cash flow caused by the ongoing weakness in commodity prices, particularly iron ore. Cash flow in 2015 dropped significantly by approximately 37% compared with 2014 while total debt was reduced by $1.8 billion. Based on DBRS’s calculations, four of five key metrics (cash flow-to-debt, debt-to-EBITDA, EBITDA-to-interest and EBIT-to-interest) declined sharply to the BBB range from the “A” range one year earlier.

Capital expenditures (capex) were substantially reduced in 2015 to approximately $4.7 billion from approximately $8.2 billion in 2014. Although this reduction supported free cash flow in the year, the $2.0 billion share buybacks which were financed with cash on hand modestly weakened the Company’s balance sheet and reduced its liquidity. In light of Rio Tinto’s weakening financial profile, DBRS views its share buyback and higher dividends during the period as credit-negative.

Notwithstanding the challenging market conditions over the past 18 months, Rio Tinto remains one of the few mining companies that has maintained strong liquidity and sufficient financial flexibility to cope with the low price environment. The Company’s current rating is underpinned by its position as one of the world’s largest, most diversified and most cost competitive miners.

In coping with its weakening financial profile, the Company has announced a capex program of approximately $4.0 billion in 2016 and around $5.0 and $5.5 billion in 2017 and 2018, respectively. In addition, Rio Tinto’s progressive dividend policy has been replaced with a more flexible dividend policy going forward. The Company expects to pay a 2016 full-year dividend of not less than approximately $2.0 billion. Assuming no improvements of the current commodity prices in 2016, DBRS estimates that Rio Tinto could be free cash flow neutral if dividends in 2016 remain below $3.0 billion. Furthermore, the Company expects pre-tax cash cost improvements (including exploration and evaluation savings) of $1.0 billion in 2016 with an additional $1.0 billion in 2017, which should mitigate the negative impact of low commodity prices on future cash flow. Additionally, Rio Tinto continues to divest of non-core and low-margin assets. DBRS notes that the size of cash coming from the potential non-core asset sales remains uncertain at this time, but is not expected to be sizable. It is not clear how Rio Tinto will use the proceeds from such sales.

DBRS views the Company’s liquidity as strong, with approximately $9.4 billion in cash and undrawn credit facilities of $7.5 billion at the end of 2015. Refinancing risk remains modest as the long-term debt due in 2016 and 2017 is approximately $1.5 and $1.7 billion, respectively, which should be reasonably refinanced if no major adverse events occur at Rio Tinto.

DBRS expects to resolve the Negative trend within the next six months. Although the Company’s credit metrics are not expected to materially recover in 2016, if Rio Tinto is free cash flow neutral without increasing total debt and its metrics start to improve to or near DBRS’s “A” rating category, the trend could be changed to Stable. On the other hand, if Rio Tinto’s credit metrics do not show any improvement over the next six months, DBRS will take further negative rating action.

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.

This is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

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

The applicable methodology is Rating Companies in the Mining Industry (October 2015), which can be found on our website under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.