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

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 Stable from Negative. DBRS believes that the improvement in commodity markets since 2015, combined with certain actions taken by the Company, including cost-cutting measures and debt reduction, merits confirming Rio Tinto’s rating as the Company’s business risk profile remains consistent with DBRS’s “A” rating range and its liquidity remains strong. The change to a Stable trend is driven by Rio Tinto’s significantly improved credit metrics in 2016 and DBRS expects further improvement in a number of metrics in 2017, based on lower debt and interest expenses, combined with improved cash flow and EBITDA (based on Bloomberg consensus commodity price forecasts as of April 24, 2017).

During 2016, the Company repurchased, refinanced or repaid approximately $9.4 billion of borrowings ($9.0 billion nominal debt) by issuing $4.4 billion of mainly project finance debt, utilizing $1.1 billion in proceeds from asset sales, $2.6 billion in net free cash flow, $0.1 billion in new equity and $1.2 billion of cash on hand to fund the difference. As a result, the next scheduled bond repayment of $1.2 billion is in 2019, and at the end of 2016, DBRS-adjusted gross debt had declined to $20.2 billion compared to $25.5 billion at the end of 2015. DBRS-adjusted cash flow and EBITDA increased in 2016, to $9.3 billion and $13.3 billion, respectively, from $8.5 billion and $11.6 billion in 2015, respectively. The impact on the credit metrics in 2016 was that the adjusted cash flow-to-debt metric moved back to the A (low) level while the debt-to-EBITDA metric moved up to the BBB (high) level. The EBITDA-to-interest and EBIT-to-interest metrics each moved up one notch but remained in the BBB range, with further improvement expected in 2017, as a result of lower interest expense. Therefore, DBRS expects all four metrics to return to the “A” range in 2017.

The expected recovery in Rio Tinto’s credit metrics is largely based on the 2017 outlook for commodity prices, particularly iron ore and aluminium. While China’s economy has improved to start 2017, there are also ample new supplies of iron ore to market. Spot 62% Fe CFR benchmark iron ore prices averaged $85.63 per dry metric tonne (dmt) in Q1 2017, but have since corrected downward to the $60 to $70 per dmt range, while the H2 2017 consensus estimate is $59.35 per dmt. If benchmark iron ore prices were to decline by 10% to 15% below this level on a sustained basis, DBRS estimates that the Company’s 2017 adjusted EBITDA and operating cash flow could decline by approximately $1.5 billion to $2.7 billion and $1.0 billion to $2.0 billion, resprectively, and a negative rating action could be merited. Given the volatility of the mining sector, DBRS does not anticipate a positive rating action in the near to medium term.

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 principal methodology is Rating Companies in the Mining Industry (September 2016), which can be found on dbrs.com under Methodologies.

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

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the rating process. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities.

This is an unsolicited credit rating.