New York, August 16, 2012 -- Moody's Investors Service assigned an A3 rating to the senior unsecured notes being issued by Rio Tinto Finance (USA) Plc under its well-known, seasoned issuer shelf registration (senior unsecured rating (P)A3). The notes are guaranteed by Rio Tinto plc and Rio Tinto Limited (Rio Tinto). Proceeds will be used for general corporate purposes, including but not limited to the repayment of $500 million of debt maturing in September 2012 and to fund the previously announced acquisition of BHP Billiton's interest in Richards Bay Minerals. At the same time, Moody's affirmed the A3 senior unsecured ratings, the (P)A3 Euro note program and senior unsecured shelf ratings, and the short-term Prime-2 ratings of all rated companies within the Rio Tinto Group. The A3 issuer ratings of Rio Tinto plc and Rio Tinto Limited were also affirmed. The outlook is stable.
..Issuer: Rio Tinto Finance (USA) plc
....Senior Unsecured Regular Bond/Debenture, Assigned A3
Rio Tinto's A3 senior unsecured rating considers a number of key elements including a) the company's broad asset base, b) diversity of mineral and metals exposures, c) diversity of geographical exposures, and d) focus on long-lived, low cost producing operations. In addition, the group's strong position in the Asian iron ore markets, where it holds a leading market share, and the Asian metallurgical coal markets provides the group substantial opportunities to benefit from Chinese and Indian industrialization development over the medium to longer term notwithstanding the current slowing in Chinese steel production and weak iron ore price environment. In addition, the group's moderate absolute debt levels relative to its asset base and earnings capacity, and strong cash generation capabilities are further considerations in the rating.
While Rio Tinto has leading global positions in a number of minerals and metals such as bauxite, alumina, aluminum, copper, and coal, the key earnings driver remains its substantive, low cost, iron ore production capabilities. Although prices for the minerals and metals produced by Rio Tinto have weakened since May 2012 and risk to the downside remains given the sovereign debt crisis in Europe and slowing Chinese economic growth, we expect the company to continue to generate solid earnings given its focus on low cost producing assets.
However, the rating also considers the group's capital expenditure plans, which include projects in more challenging countries from an infrastructure, regulatory, political, and legal system structure perspective as well as industry-wide operating and development cost pressures. Should the weak global economic environment persist, we would expect Rio Tinto to reassess its capital spending ($16 billion indicated for 2012) in light of the ensuing weak end markets and price pressure in its key segment areas, particularly iron ore, which accounts for a significant proportion of EBITDA (74% in 2011). A further factor in the rating is the increasing royalty and tax pressures from both developed and emerging countries as they seek to realize greater income from their natural resources.
The stable outlook reflects our expectations that prices for Rio Tinto's products, particularly iron ore, coking coal, and copper, will remain at levels sufficient to generate strong cash flows to support its investment and other requirements despite volume variations due to normal mining sequencing, and weather related events. The outlook also anticipates that Rio will continue to manage its capital structure and cash outflows in a disciplined fashion, particularly as some major project developments are in lesser developed areas such as Mongolia (the Oyu Tolgoi project - copper), Guinea (Simandou -- iron ore) and Mozambique (Riversdale -- coking coal). The group's liquidity position ($7.3 billion in cash at June 30, 2012 and $6 billion revolving credit facility) are also considerations in the rating and stable outlook.
The rating or outlook could be favorably affected should the company evidence the ability to sustain an EBIT/interest ratio of at least 8x, debt/EBITDA of no more than 2x, and a free cash flow/debt ratio of at least 14% through a broad global contraction in industry conditions and a more moderate iron ore price environment. In addition, a continued strong liquidity profile, manageable maturity profile as well as clarity as to financial policies would be important considerations. Downward pressure on the rating is unlikely given Rio's improved capital structure and earnings and cash flow generation levels, which we expect to remain acceptable over the next 12-18 months.
The principal methodology used in rating Rio Tinto was the Global Mining Industry Methodology published in May 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Headquartered in London, England, Rio Tinto is one of the world's largest diversified mining groups with substantial interests in iron ore, copper, and coal and important holdings in uranium, diamonds and industrial minerals as well as bauxite, alumina and aluminum. The aluminum segment has been separated into several units with certain of the assets having been deemed non-core and the company is exploring various options with respect to these assets. Revenues for the twelve months to June 30, 2012 were $56.8 billion.
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Carol Cowan VP - Senior Credit Officer Corporate Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Brian Oak MD - Corporate Finance Corporate Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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