(The following statement was released by the rating agency)
LONDON, March 01 (Fitch) Fitch Ratings, London, 01 March 2016: Fitch Ratings has
affirmed Rio Tinto (L:RIO) Plc/Ltd's (RT) Issuer Default Rating (IDR) at 'A-'. The
Outlook remains Negative. A full list of ratings actions is included at the
bottom of this release.
The rating affirmation reflects the capital preservation measures announced with
RT's annual results, including the decision to move away from its progressive
dividends policy and further capital expenditure and operating cost cuts. These
measures will improve RT's financial flexibility and result in cash savings
(excluding operating cost savings) of USD2bn in 2016 and USD4bn in 2017.
The Negative Outlook reflects leverage metrics that are at the upper end for the
rating category, and the weakness in commodity markets driven by weak Chinese
demand and negative investor sentiment. We expect 2016 to be another challenging
year for mining companies and we do not believe that the measures taken by the
company are enough to stabilise the Outlook. RT has indicated that it will
consider acquisitions, which we believe is appropriate given the range of assets
available at attractive multiples in the market. However, mid-to large-debt
funded acquisitions would delay the expected recovery in credit metrics.
KEY RATING DRIVERS
Move to Flexible Dividend Policy
We see RT's move to a more flexible dividend policy as positive and supportive
to the 'A-' rating. RT's dividend will fall from USD2.15 a share in 2015 to a
minimum of USD1.10 a share in 2016 (total USD2bn); the company's intention is to
pay out between 40% and 60% of its underlying earnings to shareholders in future
years. As a result, we would expect dividends for 2017 to be just below USD2bn.
The new policy suggests management's intent to strengthen the balance sheet and
provide the group with greater financial flexibility in difficult markets.
Further Cash Preservation Measures
RT announced a further capital expenditure reduction of USD3bn over 2016-2017,
which is expected to total USD4bn in 2016 and USD5bn in 2017. The reduction is
also partly due to favourable currency movements and lower prices. The company's
near-term capital spending focuses on three investment projects; Silvergass
(iron ore), Amrun (bauxite project) and Oyu Tolgoi underground (copper). The
board has not yet approved Silvergrass and Oyu Tolgoi but we believe that
Silvergrass is an important project for maintaining the specification for
Pilbara blend. We believe that Oyu Tolgoi is likely to proceed now that a
development agreement has been reached with the Mongolian government.
The company announced further operating cost reductions of USD1bn a year in 2016
and 2017. This includes improvement plans for assets that are close to break
even and decreases in service and support staff. The company has a good track
record of achieving cost savings as shown by the USD6.2bn cost savings between
2012-2015.
Leverage to Peak in 2016;
We expect FFO adjusted gross leverage to peak in 2016 at 3.5x (2015E: 3.0x) due
to a projected 19% decline in EBITDA. After 2016, we expect the capital
preservation measures implemented by management to strengthen the balance sheet
and help the company reach sustainable leverage within the 'A-'rating of 2x by
2018, under the Fitch price deck. Although the recent cuts provide RT with
greater financial flexibility, we still believe that the company has limited
headroom under the 'A-' rating given the weakness in the commodity markets. As a
result, any large debt-funded acquisition would pressure the ratings. RT has
indicated that acquisitions will focus on production rather than development
assets. The current market for acquisitions is attractive with low EBITDA
multiples and would likely be positive for RTs business profile.
Scale and Diversification Support Ratings
A key support to RT's ratings is its size as one of the world's top-three mining
companies by revenue. The group has significant geographical and commodity
diversification, and is the largest global producer of bauxite and
second-largest of aluminium and seaborne iron ore. However, profitability is
heavily exposed to iron ore, which represents a considerable portion of EBITDA
(63% of underlying EBITDA in 2015).
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuers include:
- Price assumptions for selected commodities: iron ore (USD45/t in 2016, USD45/t
in 2017, USD50/t in 2018), aluminium (USD1,600/t in 2016, USD1,700/t in
2017-2018), copper (USD4,800/t in 2016, USD5,200/t in 2017 and USD6,000
thereafter), coking coal (USD85/t in 2016, USD90/t in 2017 and USD95/t in 2018)
and gradual price recovery in diamonds post 2016.
- USD110 cents per share dividends for FY16 with dividend pay-out of 50% of
underlying earnings afterwards.
RATING SENSITIVITIES
Positive: Future developments that could lead to a revision of the Outlook to
Stable include:
- A more conservative financial profile including FFO adjusted gross leverage
trending towards 2.0x could lead to a stabilisation of outlook.
- Sustained positive FCF supported by lower shareholder distributions or capex
payments
Negative: Future developments that could lead to negative rating action include:
- Weaker operating performance, large debt-funded acquisition or increased
shareholder returns above the current pay-out ratio resulting in FFO adjusted
gross leverage remaining above 2x in 2018
-Further weakness in operating performance resulting in sustained negative FCF
LIQUIDITY
RT's liquidity remains strong with USD9.4bn of cash at end-2015 and only
USD2.5bn of short-term debt.
FULL LIST OF RATING ACTIONS
Rio Tinto Plc/Ltd:
Long-term IDR: affirmed at 'A-'; Outlook remains Negative
Senior unsecured debt: affirmed at 'A-'
Short-term IDR: affirmed at 'F2'
Rio Tinto Finance (USA) Ltd:
Senior unsecured debt guaranteed by RT: affirmed at 'A-'
Rio Tinto Finance (USA) Plc:
Senior unsecured debt guaranteed by RT: affirmed at 'A-'
Rio Tinto Finance Plc:
Senior unsecured debt guaranteed by RT: affirmed at 'A-'
Rio Tinto Alcan Inc:
Senior unsecured debt: affirmed at 'A-'
Contact:
Principal Analyst
Roma Patel, CFA
Associate Director
+44 20 3530 1465
Supervisory Analyst
Ilya Makarov
Director
+7 495 956 6904
Fitch Ratings Moscow
Valovaya Str, 26
Moscow
Committee Chair
Alex Griffiths
Managing Director
+44 20 3530 1709
Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email:
peter.fitzpatrick@fitchratings.com.
Additional information is available on www.fitchratings.com. For regulatory
purposes in various jurisdictions, the supervisory analyst named above is deemed
to be the primary analyst for this issuer; the principal analyst is deemed to be
the secondary
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and
Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
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