Rio Tinto Outlook Revised To Negative OnUncertain Deleveraging Prospects; 'A-/A-2'Ratings Affirmed
Global diversified mining group Rio Tinto's leverage has increased beyondour previous expectations.
We see a risk that Rio Tinto's debt may rise further in 2013-2014, unlessthe company makes large disposals or iron ore prices stay well above$120/tonne CFR China.
We are revising our outlook on Rio Tinto to negative from stable andaffirming the 'A-/A-2' corporate credit ratings.
The negative outlook reflects the risk of a downgrade in the next 12 to18 months, if debt increases further and adjusted FFO to debt does notimprove to 40% from a relatively low 30% in 2012.
On Feb. 25, 2013, Standard & Poor's Ratings Services revised its outlook onRio Tinto PLC and its guaranteed subsidiaries to negative from stable. At thesame time, the 'A-/A-2' long- and short-term corporate credit ratings on RioTinto were affirmed.
The outlook revision reflects leverage, on Dec. 31, 2012, that was higher thanwe forecast. In our view, continued, albeit reduced capital expenditure(capex) and dividend payments will prevent Rio Tinto from deleveraging, unlessit makes large disposals in 2013 and 2014. The negative outlook indicates aone-in-three chance of a downgrade, and may be mitigated by management'scommitment to the current rating level, its substantial cost reductionprogram, and its commitment to reduce leverage, through disposals.Rio Tinto's reported gross debt increased heavily to $26.7 billion as of Dec.31, 2012, from $21.5 billion at the beginning of the year, on the back ofrecord high capex outlays of $17 billion and relatively weak cash flowgeneration. We estimate that this translates into adjusted debt of about $33billion (as we add asset-retirement obligations, pensions, and operatingleasing, and deduct surplus cash). This is above the level of $30 billion thatwe see as commensurate with the current rating. At the same time, 2012 cashflow generation weakened due to a combination of lower, although stillhealthy, prices for iron ore, and declining performance in copper, energy, and
WWW.STANDARDANDPOORS.COM/RATINGSDIRECTFEBRUARY 25, 2013 2
1083508 | 300510290