Welcome to Scribd. Sign in or start your free trial to enjoy unlimited e-books, audiobooks & documents.Find out more
Standard view
Full view
of .
Look up keyword
Like this
0 of .
Results for:
No results containing your search query
P. 1


Ratings: (0)|Views: 1,126|Likes:
Published by Belinda Winkelman

More info:

Published by: Belinda Winkelman on Feb 26, 2013
Copyright:Attribution Non-commercial


Read on Scribd mobile: iPhone, iPad and Android.
download as PDF, TXT or read online from Scribd
See more
See less





Research Update:
Rio Tinto Outlook Revised ToNegative On Uncertain DeleveragingProspects; 'A-/A-2' Ratings Affirmed
Primary Credit Analyst:
Andrey Nikolaev, CFA, Paris (33) 1-4420-7329; andrey_nikolaev@standardandpoors.com
Secondary Contact:
Karl Nietvelt, Paris (33) 1-4420-6751; karl_nietvelt@standardandpoors.com
Table Of Contents
1083508 | 300510290
Research Update:
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.
Rating Action
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
1083508 | 300510290
aluminum business units. In addition, the company's funds from operations(FFO) were weakened by high income tax payments in the first half of the yearthat were related to 2011 profits. The adjusted FFO to debt ratio declined toabout 30% according to our estimates, versus the 40% level that we see ascommensurate with the rating and compared with 85% in 2011.Our base-case scenario factors in an iron ore price of $120/tonne CFR China in2013 and $110/tonne in 2014, and capital expenditures of about $13 billion peryear. Under such assumptions, we expect that free operating cash flow will beneutral. Given significant dividend payments of more than $3 billion, weexpect discretionary cash flow to be negative, leading to further modestincreases in debt. However, we expect higher FFO in 2013, on the back of lowertax payments and cost reduction efforts, which should result in an improvedFFO-to-debt ratio of about 35%-40%. For 2014, the ratio could vary within a30%-40% range under our scenario, depending on the impact of cost reductionsand production growth. We believe the upper end of this range is achievable,in case of disposals, such as those planned in the Aluminium and Diamondsbusiness units, but we have not explicitly factored in any potential disposalsat this stage.The ratings continue to reflect our view of the group's "strong" business riskprofile and "intermediate" financial risk profile as our criteria define theterms. Supportive factors for the business risk profile include Rio Tinto'sportfolio of low-cost assets, healthy margins, and low country risk with themajority of assets located in OECD (Organization for Economic Cooperation andDevelopment) countries, notably Australia. Offsetting these strengths to someextent are exposure to the volatile mining industry and high concentration oniron ore, which in 2012 generated about 90% of the company's adjusted EBITDA(80% of EBITDA taking into account financial results of joint ventures, whichare reported using the equity method). Iron ore prices are currently atsupportive levels, but are likely to fall in view of capacity additions infuture years. The financial risk profile is supported by our assessment ofmoderate financial policy, a favorable debt maturity profile, and strongliquidity. Key constraints are Rio Tinto's substantial capex and increasedalbeit still moderate debt at year-end 2012.
We consider Rio Tinto's liquidity to be "strong," under our criteria. Weestimate the ratio of liquidity sources to uses to be about 1.5x.The key sources of liquidity as of Dec. 31, 2012, included:
Cash and short-term investments of $6.3 billion (excluding $0.7 billionthat we consider to be tied to operations and $0.1 billion of restrictedcash);
About $8 billion available under committed credit lines, out of which $6billion is maturing in 2015 and $2 billion in 2014, assuming thecompany's one year extension option is exercised;
Cash flow from operations of about $13 billion projected for 2013 underour scenario.
1083508 | 300510290
Research Update: Rio Tinto Outlook Revised To Negative On Uncertain Deleveraging Prospects; 'A-/A-2' RatingsAffirmed 

You're Reading a Free Preview

/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->