(The following statement was released by the rating agency) Fitch Ratings-London-May 05: Fitch Ratings has affirmed Rio Tinto (LON:RIO) Plc's Long-Term Issuer Default Ratings (IDR) at 'A' with a Stable Outlook. The affirmation and Stable Outlook reflect the company's strong financial profile and financial flexibility at the start of the coronavirus pandemic, with funds from operations (FFO) net leverage of 0.3x at December 2019 and at or slightly above 0.5x for the forecast period. To address the uncertainties linked to the severity and length of the current economic crisis, Rio Tinto deferred some of its investment projects and lowered its 2020 capex guidance by USD1 billion-USD2 billion from original USD7 billion, part of which relates to favourable currency impact. In our view, Rio Tinto is well positioned to face the economic downturn and weaker demand in commodities markets, not only because of its strong financial position but also as the majority of its earnings are derived from the iron ore business segment. Rio Tinto's large scale, first and second quartile business cost positions across the iron ore mine portfolio and still undersupplied iron ore market in 2020 support Fitch's expectations of continued strong cash flow generation. The group's low debt position underpins Rio Tinto's financial flexibility. Fitch expects the group to maintain a conservative balance sheet with FFO net leverage comfortably below 1.0x over 2020-23 and broadly neutral free cash flow (FCF) after dividends once disruptions from coronavirus fade over the medium term. Rio Tinto is one of the world's top-three mining companies, with diversification of assets mostly across OECD countries and products across a number of bulk and base commodities. It also benefits from meaningful economies of scale and proximity of operations to important end-markets, particularly China and North America. Key Rating Drivers Resilient Financial Profile: Fitch expects mainly the weaker price environment and to a lesser extent operational disruptions (both) linked to coronavirus to lower the group's earnings to around USD13 billion EBITDA in 2020 (-34% yoy) and to USD11.5 billion in 2021. However, the group's low net debt position would allow FFO net leverage to remain broadly flat, increasing from 0.3x in 2019 to 0.5x in 2020 and stay comfortably below 1.0x over the medium term. The forecast takes into account our assumption of a 60% dividend payout ratio, USD200 million of remaining share buyback by February 2020 and the announcement of lower capital expenditure of USD1.0 billion-2.0 billion in 2020, part of which relates to favourable FX impact. We forecast FCF generation to be negative in 2020 and 2021 as growth projects such as Oyu Tolgoi require funding despite the construction delays. Weaker Commodity Markets: Considerably lower economic activity is reducing commodity consumption. We now expect global GDP to contract by 3.9% in 2020 and revised downwards most of our commodity price assumptions, except iron ore, gold and coking coal. We expect a fall in global copper demand of 6% yoy, reflecting our new assumptions of USD5,300/t in 2020 and USD5,800/t in 2021. The aluminium market will also be oversupplied due to weaker automotive production and construction and additional low-cost Chinese primary aluminium capacity coming onstream. Low energy costs and the depreciation of local currencies will enable aluminium producers to compete more aggressively, putting pressure on short-term prices, which we have cut to USD1,560/t in 2020 and USD1,600/t in 2021. Iron Ore Segment Underpins Cash Flow: Prices have been resilient so far as supply disruptions in Brazil and Australia during 2019 lowered inventory levels and Chinese steel production has remained relatively high despite the coronavirus. Market prices will move lower in 2H20 as a result of (seasonally) increasing output in Brazil and Australia and slower economic activity. Our commodity price assumptions see prices decline to USD75/t in 2020 (CFR China) and USD60/t in 2021-2023. We expect Rio Tinto iron ore assets to generate stable USD10 billion per year or a large majority of company's EBITDA over the rating horizon (at the USD60/t price assumption for 2021-2023), which contribute to the group's financial stability. Market-Leading Iron Ore Franchise: Rio Tinto markets a range of iron ore products that address specific end markets, fines and lump with consistent specifications (iron content, alumina, silica and phosphorus). The business has very competitive cash costs and sustaining capital expenditure. Rio Tinto's assets have moving business cost positions within the first and second quartile, depending on the value-in-use adjustment linked to higher- or lower-grade products as well as transport costs (for all assets across the cost curve). Production Guidance Mostly Confirmed: Rio Tinto is implementing various controls to protect employees, including travel restrictions, social distancing and hygiene protocols, changing foodservices at some operations and providing assistance to employees with health problems through an on-call service or medical teams with temporary clinics. The group to date has only marginally adjusted production guidance for 2020; in its titanium dioxide business production is now expected to be at the lower end of previous guidance linked to Covid-19 restrictions instructed by the governments of Quebec and South Africa; production at Escondida could potentially be incrementally lower in 2H2020, but no details of the nature of COVID-19 measures were disclosed. Pandemic Impact on Capex: Rio Tinto is investigating ways to mitigate COVID-19 impacts including those associated with roster changes, travel restrictions and the design and fabrication of long lead items in China and Europe. While it is too early to draw firm conclusions, relevant restrictions are likely to have some impact on progress of various major projects, including Oyu Tolgoi. Rio Tinto announced that prolonged restrictions linked to the pandemic may affect the project schedule within the previously announced range of 16 to 30 month delay and increase of USD1.2 billion to USD1.9 billion in development capital costs. In July 2019, Rio Tinto announced that enhanced geotechnical information and data modelling suggests the approved mine design could entail stability risks and it is exploring alternative mine design options. The company is working on the mine design improvement to be completed in 1H20 and the definitive estimates of costs and work schedule in 2H20. Rio Tinto owns 33.5% of the project (but fully consolidates it due to having control). Derivation Summary Rio Tinto is one of the top-three global mining companies. Close peers include BHP Group Ltd (A/Stable) and Vale S.A. (BBB-/Stable). Rio Tinto derives more than two-thirds of its EBITDA from iron ore (including the Canadian pellets business) with the remainder primarily coming from aluminium and copper. BHP exhibits incrementally more balanced diversification with a higher proportion of earnings coming from iron ore and copper and lower proportion coming from coal and conventional petroleum assets. Most of the iron ore for BHP and Rio Tinto comes from Australia, with Rio Tinto producing more lump. A large proportion of copper for both players comes from the Escondida mine in Chile (BHP: 57.5% ownership; Rio Tinto: 30%). Rio Tinto and BHP have similar financial profile characteristics, with FFO gross leverage at or below 1.5x and FFO net leverage below 1.0x over the medium term. In the current environment we expect both companies to scale back shareholder returns (in absolute terms) and preserve a conservative balance sheet. BHP and Rio Tinto derive a large majority of earnings from assets in OECD countries. In comparison, Vale has historically derived more than 85% of EBITDA from iron ore (including pellets) with the remainder coming from nickel, copper and other minerals. Even until the tailings dam failure at Brumadinho its rating was lower than its peers at 'BBB+' due to i) concentrated exposure to one commodity - iron ore; ii) the majority of operations being located in Brazil, which has a less developed economic environment and systemic governance; and iii) higher transportation costs to important markets like China, which may be offset by the premium achieved for its higher grade product. We downgraded the company in 2019 to 'BBB-' linked to the tailings dam failure at Brumadinho due to uncertainties from unquantifiable contingent liabilities related to fines, remediation and reparations as well as scrutiny from regulators and government that may influence future output and increase capex requirements. Key Assumptions - Price assumptions for selected commodities: iron ore at USD75/t in 2020 (CFR China) and USD60/t across 2021-2023; aluminium at USD1,560/t in 2020 (LME spot), USD1,600 in 2021, USD1,800/t in 2022 and USD1,900/t in 2023; copper at USD5,300/t in 2020 (LME spot), USD5,800/t in 2021, USD6,200/t in 2022 and USD6,400/t in 2023 - Dividend payout ratio of 60% (Fitch assumption) - Capex: USD5.5 billion in 2020, USD6.5 billion for 2021 and 2022 - Net debt to remain at mid-single digit billion dollar levels (as calculated by Fitch, applying adjustments referenced in Summary Financial Adjustments below) - No large debt-funded acquisitions RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: An upgrade is unlikely unless Rio Tinto diversifies into other sectors with lower business risk and correlation to its mining operations. Factors that could, individually or collectively, lead to negative rating action/downgrade: - FFO gross leverage remaining above 1.5x for a sustained period (2019: 0.9x) - FFO net leverage remaining above 1.0x for a sustained period (2019: 0.3x) - Net debt / (cash flow from operations minus capex) above 2.0x for more than two consecutive years (2019: 0.46x) - Debt-funded dividends or share buybacks - Iron ore proven and probable reserves falling below 2,000mt on a sustained basis Best/Worst Case Rating Scenario International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579. Liquidity and Debt Structure Solid Liquidity: At December 2019, Rio Tinto held around USD8.8 billion in unrestricted cash (as calculated by Fitch; cash and cash equivalents less restricted cash plus 40% of a separately managed portfolio of fixed income instruments), had available USD7.5 billion under its revolving credit facilities (maturing in November 2022) and continues to generate strong operating cash flow around the USD9 billion-USD10 billion mark (on a forecast basis). Rio Tinto is funded beyond 2022. Summary of Financial Adjustments - USD1,309 million of leases were excluded from the total debt amount. - USD282 million of depreciation and USD53 million of interest for leasing contracts were treated as operating expenditure, reducing EBITDA. - Fitch has adjusted available cash to reflect USD272 million restricted cash as these funds are not available to apply against debt repayment or are held in jurisdictions that do not allow foreign currency remittances. - 40% of USD2,584 million of a separately managed portfolio of fixed income instruments were moved to cash equivalents; this is a conservative approach, given that Rio Tinto does not disclose more detail on the risk parameters established for administration of this portfolio. - USD147 million of debt-related derivatives were added to the debt in line with disclosure in note 24 of the financial accounts. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. ESG Considerations The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. Rio Tinto Finance Plc ----senior unsecured; Long Term Rating; Affirmed; A Rio Tinto Alcan Inc. ----senior unsecured; Long Term Rating; Affirmed; A Rio Tinto Ltd; Long Term Issuer Default Rating; Affirmed; A; RO:Sta ; Short Term Issuer Default Rating; Affirmed; F1 ----senior unsecured; Long Term Rating; Affirmed; A Rio Tinto Plc; Long Term Issuer Default Rating; Affirmed; A; RO:Sta ; Short Term Issuer Default Rating; Affirmed; F1 Rio Tinto Finance (USA) Ltd ----senior unsecured; Long Term Rating; Affirmed; A Contacts: Primary Rating Analyst Oliver Schuh, CFA, CAIA, FRM Senior Director +44 20 3530 1263 Fitch Ratings Ltd 30 North Colonnade, Canary Wharf London E14 5GN Secondary Rating Analyst Maria Yakushina, Director +44 20 3530 1315 Committee Chairperson Angelina Valavina, Senior Director +44 20 3530 1314
Media Relations: Adrian Simpson, London, Tel: +44 20 3530 1010, Email: adrian.simpson@thefitchgroup.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 01 May 2020) (including rating assumption sensitivity) https://www.fitchratings.com/site/re/10120170 Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019) (including rating assumption sensitivity) https://www.fitchratings.com/site/re/10090792 Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). 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