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

DBRS Limited (DBRS) changed the trend assigned to Rio Tinto Plc & Rio Tinto Ltd. (collectively, Rio Tinto or the Company) to Positive from Stable and confirmed the Issuer Rating at A (low). DBRS notes that the recovery in commodity prices since the end of 2015 has provided the Company with strong net free cash flow that, in conjunction with the proceeds from non-core asset sales, has been used to significantly reduce total borrowings and other financial liabilities from $23.6 billion at the beginning of 2016 to $16.1 billion at the end of 2017. On April 20, 2018, Rio Tinto announced the results of its most recent debt reduction program, pursuant to which it redeemed its 2021 and 2022 Notes and repurchased approximately $409 million and $89 million of its 2020 Notes and 2024 Notes, respectively. The cost of the debt reduction program, including repayment of the Notes, repurchase premiums and other costs, was about $1.9 billion. DBRS expects, all things being equal, that Rio Tinto should exit 2018 with between $9.5 billion and $10 billion in cash before the receipt of the $5.0 billion in proceeds from the sales of its remaining coal assets and the Dunkerque and ISAL aluminium smelters, which are expected to close in 2018. The significantly lower debt, as well as strong adjusted operating cash flow and EBITDA, have resulted in the Company’s credit metrics improving dramatically, and they are now strong for the rating. The change to a Positive trend is driven by DBRS’s expectations for further improvement in these metrics in 2018, based on lower debt and interest expenses, combined with improved cash flow and EBITDA (based on Bloomberg consensus commodity price forecasts as at April 12, 2018).

As such, management is now faced with decisions as to how to re-deploy this cash. Since 2016, the Company has been focused on low-risk, high-return organic growth while at the same time reducing its outstanding total borrowings and other financial liabilities by approximately $7.5 billion. This debt reduction strategy may no longer represent the optimal use of cash, as the premiums necessary to repurchase outstanding debt become more expensive for maturities being beyond 2024. As a result, the potential for the Company to acquire new assets has likely increased, but so has the potential for management to accelerate some development projects, such as the Jadar borate-lithium project in Serbia. Additionally, management may decide to significantly increase shareholder returns by a special dividend or more aggressive share repurchases.

If the Company re-deploys its cash in a manner that improves its business risk profile or continues to retire meaningful amounts of its remaining debt, then a positive rating action could occur. However, if the global economy suffers a trade war based on unfolding geopolitical events or other economic upheaval that reduces the demand for and price of Rio Tinto’s principal commodities, and this results in a significant deterioration of its financial risk profile, then a negative rating action could occur.

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

The principal methodology is Rating Companies in the Mining Industry (August 2017), which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

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 for this rating action. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is an unsolicited credit rating.