DBRS Morningstar Upgrades Rio Tinto plc & Rio Tinto Limited to “A,” Maintains Stable Trend

DBRS Limited (DBRS Morningstar) upgraded the Issuer Rating on Rio Tinto plc & Rio Tinto Ltd. (Rio or the Company) to “A” from A (low) and maintained the trend at Stable. The upgrade is supported by the Company’s robust credit metrics because of strong commodity prices (particularly iron ore prices), the repayment of EUR 401.7 million in debt that matured in May 2020, and the strength of the Company’s business risk profile, based on Rio’s size and long-life, low-cost operations.

The Stable trend reflects the Company’s (1) ability to produce significant free cash flow (i.e., cash flow after dividends and capital expenditures) and (2) strong liquidity position that is backed by cash, cash equivalents, current liquid investments, and undrawn credit facilities of approximately $20.4 billion at the end of 2020. This liquidity provides a backstop to counter events such as the negative impact of the Coronavirus Disease (COVID-19) pandemic on the global economy, which has yet to be completely resolved and could re-accelerate with the emergence of the new viral variants.

The demand for Rio Tinto’s principal commodities—iron ore, aluminum, and copper—recovered from the effects of the pandemic more rapidly than generally expected after China lifted its economic lockdowns and other economies began ramping up their economic stimulus programs. The result was the record steel production in China last year that drove robust iron ore demand. Also, iron ore demand was supported by a dearth of scrap steel feedstock because of the ban on imports that was rescinded at the beginning of 2021. Iron ore demand has remained robust in 2021 as has demand for non-ferrous metals such as copper. Iron ore prices have continued to rise in 2021 as 62% Fe iron ore (CFR Qingdao China) year-to-date prices have averaged $166 per tonne or 54% higher than the 2020 average. As well, prices have recently approached a 10-year high that, if maintained, would provide windfall operating cashflow and EBITDA above DBRS Morningstar’s current estimates, which are based on the Bloomberg consensus forecast (as of March 2, 2021) of $131 per tonne. However, this outlook should be tempered by the Chinese government’s ongoing efforts to reduce pollution and rationalize its steel industry, a potential material increase in the availability of high-grade steel scrap to displace iron ore demand, and the potential for economic reversals because of the pandemic. Although they are less material to Rio’s overall financial performance, copper prices are expected to increase by 26% this year compared with 2020 and year-to-date prices are approximately 7% higher than the Bloomberg consensus estimates, providing additional potential upside.

That said, the Company’s unfortunate destruction of the Juukan Gorge rock shelters at its Pilbara operations in Western Australia resulted a global public outcry that led to, among other outcomes, the chief executive officer stepping down and the chairman not seeking re-election as a non-executive director. While DBRS Morningstar believes that the impact on Rio’s credit profile isn’t material, the Juukan Gorge fallout has raised the bar for Rio Tinto in terms of its social licence and earning back the trust of its Indigenous partners in the region.
DBRS Morningstar notes that a negative rating action is unlikely but could occur if Bloomberg benchmark 62% Fe iron ore prices decline to the $50 to $60 per tonne range, or about 55% from forecast levels, for at least a year. Even with the Company’s credit metrics mainly in the AA category, it would require a material improvement in Rio’s business risk profile before a positive rating action could occur.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodologies are Rating Companies in the Mining Industry (August 17, 2020; https://www.dbrsmorningstar.com/research/365807) and DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].]

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 Morningstar 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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577