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Rating Action:

Moody's upgrades all Rio Tinto Group ratings to A2; outlook stable

06 Feb 2019

New York, February 06, 2019 -- Moody's Investors Service ("Moody's") upgraded the senior unsecured ratings of all rated entities within the Rio Tinto Group ("Rio Tinto or Group") to A2 from A3. At the same time, Moody's has upgraded the short-term ratings for the relevant subsidiaries to P-1 from P-2. The outlook is stable. A full list of the ratings affected can be found at the end of this press release.

This concludes the review for upgrade initiated on November 1st, 2018.

The outlook is stable for the ratings on the following entities:

Rio Tinto plc

Rio Tinto Limited

Rio Tinto Finance plc

Rio Tinto America Inc.

Rio Tinto Finance (USA) Limited

Rio Tinto Finance (USA) plc

"The upgrade of the rated entities within the Rio Tinto group to A2 reflects actions taken by the company in recent years to reduce debt, strengthen its balance sheet, exhibit discipline in capital expenditures and shareholder returns and drive to improve operating performance through cost reductions and productivity gains. These actions have positioned Rio Tinto to evidence better performance through and greater resilience to downturns in the commodity markets than seen in the 2015/2016 time frame" said Carol Cowan, Senior Vice President and lead analyst for the Rio Tinto group. Given our view that volatility in these markets will be higher than in the past based upon changed dynamics in the metal/mining commodity markets the improved cushion to absorb such volatility is an important consideration in the rating action.

RATINGS RATIONALE

Rio Tinto's A2 senior unsecured ratings consider the Group's large scale and low cost operations across its major segments, particularly its iron ore operations in Australia, the diversity of its minerals and metals exposure, although iron ore remains the dominant EBITDA contributor, and its geographical diversity with a majority of the production profile in Australia, Canada and the US. The group also exhibits a conservative profile and seeks to have a balanced capital allocation process in decisions regarding capital expenditures, shareholder returns and debt reduction.

The Group has also continued to refine its asset portfolio focusing on its key positions in iron ore, copper and aluminum while exiting coal and reducing its uranium holdings among others. Over the 2017/2018 time frame, Rio Tinto generated approximately $11.2 billion in asset sales proceeds, including $3.5 billion received in late December 2018 for the sale of its interest in the Grasberg copper mine in Indonesia. Proceeds have been used for liability management as well as augmenting shareholder returns. While iron ore will continue to be the dominant EBITDA and cash flow contributor over the next several years, copper is expected to become a more meaningful contributor once the Oyu Tolgoi (OT - Mongolia) underground development is completed and this mine begins to ramp up starting in 2020.

The group's liability management program, put in place following the commodity price collapse in the early 2015/2016 time frame has resulted in debt reducing to $12.5 billion (unadjusted - $16.9 billion adjusted) at June 30, 2018 from $28.5 billion (unadjusted - $32.8 billion adjusted) at December 31, 2013. The more material reductions were in 2016 onward and were achieved through free cash generation and the deployment of its substantive cash position. Reduced capital expenditures, a change in the prior progressive dividend program and increased cost savings and productivity achievements also contributed to the stronger cash generation capacity. Disciplined focus in these areas is expected to continue and is seen as resulting in better sustainability of operating performance through downside price periods.

The group exhibits a disciplined capital allocation profile and cash focus with the key considerations being sustaining capital, growth capital, balance sheet management and cash returned to shareholders. The return policy targets a 40% - 60% payout on underlying earnings through the cycle although such can exceed the upper end of the range on strong performance and solid balance sheet, as seen in 2018.

The reduction in debt levels and improved operating performance on price recovery as well as cost reduction has resulted in stronger debt protection measures as evidenced by the adjusted EBIT/interest ratio of 14.8x at June 30, 2018 versus 6.8x at December 31, 2016 and a less levered position as evidenced by the adjusted debt/EBITDA ratio of 0.9x from a high of roughly 3x at June 30, 2016. With the reduced debt levels and improved cost/productivity position, leverage would be just under 2x if the EBITDA level of roughly $8.8 billion experienced in the twelve months to June 30, 2016 were to occur.

The rating anticipates that 2019 performance will not see the level of improvement seen in 2018 and with lower price realizations and cost creep will evidence a year-on-year reduction. However, given the improved capital structure, continued capital allocation discipline as it relates to capital expenditures and shareholder returns, Rio Tinto's performance will evidence solid metrics for the A2 rating under Moody's base sensitivities with gross debt/EBITDA no more than 1.2x, EBIT/interest of at least 11x and continued free cash flow. Additionally, the Group will continue to maintain a solid cash position. Considering the low end of Moody's price sensitivities as a stress basis, gross leverage would peak around 1.7x with the cash position remaining substantive. If such a price scenario were to develop and be sustained, we would expect Rio Tinto to take actions to mitigate the impact.

The Prime-1 short-term rating is supported by the Group's excellent liquidity. Liquidity support comes from a strong cash and liquid investments balance of $8 billion at June 30, 2018, its unused $1.9 billion revolving credit facility expiring in November 2021 and its unused $5.6 billion revolving credit facility expiring in November 2022. The Group's strong cash generating capacity and ability to cover capital expenditures and shareholder returns also exemplifies the solid liquidity profile. The Euro 402 million bond maturing in 2020 can comfortably be covered within the Group's cash flow generating capacity and liquidity profile.

The stable outlook reflects Moody's expectation that although prices for the principal commodities comprising Rio Tinto's business will exhibit volatility, Rio Tinto will continue to generate meaningful earnings even at our base price sensitivities, continue to be free cash flow generative and remain committed to its capital allocation discipline, value over volume considerations and cash focus.

Given the volatility in the commodities in which Rio Tinto participates and potential for wide swings in performance, potential for upward rating movement is limited. A higher rating would require a prolonged period of proven resilience and sustainably stronger performance through the industry cycle.

Over time, positive rating momentum could occur if 1) Rio Tinto's operating profile further improves, specifically, if additional volume growth and cost reduction result in an improved stress scenario performance; 2) there is strong production growth and increasing earnings contribution from the Group's copper and aluminum segments and there is reduced reliance on sales to China as a material revenue generator; 3) debt levels are further and sustainably reduced supported stronger credit metrics, such that adjusted debt/EBITDA is sustained below 1.0x, (CFO minus dividends)/debt is sustained over 50%, and the company generates more material free cash flow under the low end of our price sensitivity ranges.

Other considerations include continued maintenance of a solid liquidity profile, a manageable debt maturity profile and an explicit commitment to a high single-A financial policy with staunch discipline in capital investments and M&A activity.

Negative action on the ratings and/or outlook could materialize if Rio Tinto substantially under-performs our current expectations. This could be caused by a material weakening in its operational performance, sustained increases in the cost positions across its assets, issuing additional gross debt to fund shareholder or growth initiatives, and/or a sustained downturn in commodity prices below the lower end of Moody's current sensitivity ranges without offsetting measures to mitigate such a price downturn.

Specifically, the ratings could be downgraded if: 1) Rio Tinto's adjusted debt/EBITDA is sustained above 1.5x and/or (CFO minus dividends)/debt is sustained below 40% (not accounting for special dividends or one-off capital returns to shareholders); 2) EBIT margins are sustained below 25% for a protracted period; 3) free cash flow turns substantially negative or liquidity contracts meaningfully; and/or, 4) Rio Tinto pursues large acquisitions or debt-funded shareholder returns, or materially reduces cash balances.

The Rio Tinto Group ranks as one of the world's largest diversified mining groups from both a geographic and product perspective with substantial interests in iron ore, ranking among the top three in the seaborne markets, bauxite, alumina and aluminum, and copper, and important holdings in uranium, diamonds, and industrial minerals (borax, titanium dioxide feedstock, salt). Rio Tinto operates under a dual listed company structure, allowing both shareholders of Rio Tinto plc (UK) and Rio Tinto Limited (Australia) an interest in a single economic entity. For the twelve months ended June 30, 2018 the Rio Tinto group generated revenues of roughly $40.6 billion.

Upgrades:

..Issuer: Rio Tinto (Commercial Paper) Limited

....Senior Unsecured Commercial Paper, Upgraded to P-1 from P-2

..Issuer: Rio Tinto (Commercial Paper) plc

....Senior Unsecured Commercial Paper, Upgraded to P-1 from P-2

..Issuer: Rio Tinto America Inc.

.... Issuer Rating, Upgraded to A2 from A3

....Senior Unsecured Commercial Paper, Upgraded to P-1 from P-2

..Issuer: Rio Tinto Finance (USA) Limited

....Senior Unsecured Medium-Term Note Program, Upgraded to (P)A2 from (P)A3

....Senior Unsecured Notes due 2025, Upgraded to A2 from A3

....Senior Unsecured Global Bonds due 2028, Upgraded to A2 from A3

....Senior Unsecured Notes due 2040, Upgraded to A2 from A3

....Senior Unsecured Shelf due 2020, Upgraded to (P)A2 from (P)A3

..Issuer: Rio Tinto Finance (USA) plc

....Senior Unsecured Medium-Term Note Program, Upgraded to (P)A2 from (P)A3

....Senior Unsecured Notes due 2042, Upgraded to A2 from A3

....Senior Unsecured Shelf due 2020, Upgraded to (P)A2 from (P)A3

..Issuer: Rio Tinto Finance Canada Inc

....Senior Unsecured Commercial Paper, Upgraded to P-1 from P-2

..Issuer: Rio Tinto Finance Limited

....Senior Unsecured Commercial Paper, Upgraded to P-1 from P-2

..Issuer: Rio Tinto Finance plc

.... Issuer Rating, Upgraded to A2 from A3

....Senior Unsecured Commercial Paper, Upgraded to P-1 from P-2

....Senior Unsecured Notes due 2029, Upgraded to A2 from A3

....Senior Unsecured Notes due 2020, Upgraded to A2 from A3

....Senior Unsecured Notes due 2024, Upgraded to A2 from A3

..Issuer: Rio Tinto Limited

.... Issuer Rating, Upgraded to A2 from A3

..Issuer: Rio Tinto plc

.... Issuer Rating, Upgraded to A2 from A3

The principal methodology used in these ratings was Mining published in September 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Carol Cowan
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Brian Oak
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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