Fitch Affirms Rio Tinto at 'A-'; Outlook Remains Negative

(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 DRIVERSMove to Flexible Dividend PolicyWe 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 RatingsA 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 ASSUMPTIONSFitch'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 SENSITIVITIESPositive: 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 paymentsNegative: 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 FCFLIQUIDITYRT's liquidity remains strong with USD9.4bn of cash at end-2015 and only USD2.5bn of short-term debt.FULL LIST OF RATING ACTIONSRio 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, CFAAssociate Director+44 20 3530 1465Supervisory Analyst Ilya MakarovDirector+7 495 956 6904Fitch Ratings MoscowValovaya Str, 26MoscowCommittee ChairAlex GriffithsManaging Director+44 20 3530 1709Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com.Additional information is available on www.fitchratings.com. 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