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Rating Action:

Moody's upgrades all Rio Tinto Group's sr. unsec. ratings to A3; outlook stable

27 Feb 2017

New York, February 27, 2017 -- 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 A3 from Baa1. The P-2 short-term rating was affirmed for all subsidiaries with short term ratings. The outlook is stable.

"The rating upgrade reflects Moody's view that actions undertaken by Rio Tinto over the course of 2016, including its cost reduction achievements, debt reduction through its liability management program, divestitures of non-core assets, and focus on cash generation, which included a change in its dividend policy, have better positioned Rio Tinto to withstand the increased volatility in the markets in which it participates" said Carol Cowan, Moody's Senior Vice President. Given our view on the changed dynamics in the metal/mining commodity markets, particularly the increased dominance of the Chinese markets and increased trading activity, we expect volatility to be higher than in the past.

The upgrade acknowledges that the increasing favorable impact of cost cutting measures, reduced energy costs and favorable currency rates, together with a strengthening price environment, particularly in the second half of 2016, has enabled the company to improve its debt protection and leverage metrics. This has contributed to a stronger cushion to accommodate potential downward movement in prices going forward. The combination of actions taken and more favorable market conditions has resulted in Rio Tinto improving its leverage profile, as measured by the debt/EBITDA (including Moody's standard adjustments) ratio to an estimated 1.8x at December 31, 2016 from 2.3x at the prior year end and 2.9x for the twelve months ended June 30, 2016.

Additionally, reduced capital expenditures and a more flexible dividend payout policy have contributed to stronger cash flow coverage metrics in 2016, which are expected to continue in 2017. At current prices for iron ore prices and other key commodities in which it participates, Rio Tinto will continue to generate substantive cash flow and is likely to reassess its shareholder return policy, as evidenced by the share repurchase program announced in February 2017 ($500MM). We expect the company will continue to be more disciplined in its capital expenditures and dividend payout levels and focus on maintaining a more solid balance sheet than might have been exhibited in the past.

Upgrades:

..Issuer: Rio Tinto plc

.... Issuer Rating, Upgraded to A3 from Baa1

..Issuer: Rio Tinto America Inc.

.... Backed Issuer Rating, Upgraded to A3 from Baa1

..Issuer: Rio Tinto Finance (USA) Limited

....Backed Senior Unsecured Medium-Term Note Program, Upgraded to (P)A3 from (P)Baa1

....Backed Senior Unsecured Regular Bond/Debenture, Upgraded to A3 from Baa1

....Backed Senior Unsecured Shelf, Upgraded to (P)A3 from (P)Baa1

..Issuer: Rio Tinto Finance (USA) plc

....Backed Senior Unsecured Medium-Term Note Program, Upgraded to (P)A3 from (P)Baa1

....Backed Senior Unsecured Regular Bond/Debenture, Upgraded to A3 from Baa1

....Backed Senior Unsecured Shelf, Upgraded to (P)A3 from (P)Baa1

..Issuer: Rio Tinto Finance plc

.... Backed Issuer Rating, Upgraded to A3 from Baa1

....Backed Senior Unsecured Regular Bond/Debenture, Upgraded to A3 from Baa1

..Issuer: Rio Tinto Limited

.... Issuer Rating , Upgraded to A3 from Baa1

Affirmations:

..Issuer: Rio Tinto (Commercial Paper) Limited

....Backed Senior Unsecured Commercial Paper, Affirmed P-2

..Issuer: Rio Tinto (Commercial Paper) plc

....Backed Senior Unsecured Commercial Paper, Affirmed P-2

..Issuer: Rio Tinto America Inc.

....Backed Senior Unsecured Commercial Paper, Affirmed P-2

..Issuer: Rio Tinto Finance Canada Inc

....Backed Senior Unsecured Commercial Paper, Affirmed P-2

..Issuer: Rio Tinto Finance Limited

....Backed Senior Unsecured Commercial Paper, Affirmed P-2

..Issuer: Rio Tinto Finance plc

....Backed Senior Unsecured Commercial Paper, Affirmed P-2

Outlook Actions:

..Issuer: Rio Tinto America Inc.

....Outlook, Remains Stable

..Issuer: Rio Tinto Finance (USA) Limited

....Outlook, Remains Stable

..Issuer: Rio Tinto Finance (USA) plc

....Outlook, Remains Stable

..Issuer: Rio Tinto Finance plc

....Outlook, Remains Stable

..Issuer: Rio Tinto Limited

....Outlook, Remains Stable

..Issuer: Rio Tinto plc

....Outlook, Remains Stable

RATINGS RATIONALE

Rio Tinto's A3 senior unsecured rating reflects the group's large scale and low cost operations across its major segments, particularly its iron ore operations in Australia, a principal contributor to revenues and earnings, although earnings from its copper segment are expected to increase over time as the Oyu Tolgoi (OT) underground project continues to advance. The group's volume levels and low cost position in iron ore continue to generate good earnings and cash flow, albeit at lower levels than in recent years. Despite a dip in seaborne iron ore prices below $40/MT CFR in early 2016, prices recovered over the course of the year, largely driven by stimulus spending programs in China and increasing steel production. Average iron ore prices in 2016 were slightly up from 2015 levels. With continued cost cutting measures as well as price improvement, EBITDA at Rio Tinto's Australian iron ore operations increased roughly 11% to $8.5 billion in 2016. All operating segments were free cash flow generative in 2016.

The rating also considers the group's ability and intent to continue to reduce operating costs and maintain a disciplined perspective on capital expenditures and dividends. Given the debt reduction under the company's liability management program in 2016 and strong cash generating ability, we would expect Rio Tinto to increase exploration & evaluation expenditures as well as its dividend payout but remain balanced within its expected cash flow generation.

Rio Tinto continues to drive out costs achieving $1.6 billion in cash cost savings and lower exploration & evaluation expenditures in 2016. Since the 2012 base level, the group has achieved $7.8 billion in pre-tax cost improvements and continues to focus on productivity enhancements across its portfolio and further reduction in costs.

In February 2016, the group moved away from the prior progressive dividend payout policy and will evaluate dividends going forward in light of a number of factors, including but limited to earnings, cash generation and other competing cash requirements. In 2016, the group reduced its paid dividends to $1.525/share from the previous level of $2.265/share, resulting in an aproximate $1.4 billion cash savings, which benefitted cash flow principally in the second half of 2016.

The improvement in operating performance, particularly in the second half of 2016, reflects not only the company's actions to deal with a weak commodity price environment and slower growth in China, which accounted for roughly 43% of revenues in 2016 but also its leverage to iron ore prices. Given the current strength in iron ore prices, we anticipate that the company will have solid performance in the first half of 2017. While we expect iron ore prices (62% Fe) to moderate over the course of the year and our base sensitivity case for 2017 is $60/MT CFR, we expect Rio Tinto's performance in 2017 to comfortably exceed 2016 and that the group will continue to be free cash flow generative.

On an improving EBITDA and reduced debt profile, leverage has trended back to levels appropriate for an A3 rating, even absent further reductions in debt. We expect debt/EBITDA to improve to around 1.5x in 2017, mostly on growth in EBITDA. The rating also considers the groups solid liquidity position as evidenced by its cash and short-term liquid investments balance of $8.4 billion at December 31, 2016, and improvement in debt maturity profile, following the liability management program undertaken in 2016, which position remains comfortably above operating requirements for 2017 given expected operating cash flow generation and capital expenditure expectations of approximately$5 billion. Additionally, Rio Tinto has an unused $1.9 billion revolving credit facility expiring in November 2019 and an unused $5.6 billion facility expiring in November 2021.

The stable outlook reflects our view that while prices for principal commodities comprising the company's business will continue to exhibit volatility, Rio Tinto's improved capital structure, and ongoing focus on cost and investment discipline as well as capital structure management, will allow the company to evidence good metrics through a variety of price points. The outlook also anticipates that the company will be free cash flow generative, given actions taken to date and that the liquidity position will continue comfortably in excess of requirements. Assuming that roughly $3 billion of the company's cash position comfortably is excess liquidity, net leverage would be approximately 1.5x at year-end 2016.

Given the increased volatility in the commodities in which Rio Tinto participates and potential for wide swings in performance, further upward rating movement could be more limited. However, ratings could be upgraded should Rio Tinto be able to sustain an EBIT margin of at least 25%, EBIT/interest of at least 11x,and debt/EBITDA of no more than 1.5x. Continued maintenance of a solid liquidity profile and manageable debt maturity profile would be additional considerations. Ratings could be downgraded should the EBIT margin trend below 15%, EBIT/interest be less than 8x and debt/EBITDA exceed 2x.

The principal methodology used in these ratings was Global Mining Industry published in August 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The Rio Tinto Group (Rio Tinto) 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).The company recently announced that it had reached a binding agreement for the sale of a significant portion of its coal assets in Australia. 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 December 31, 2016, the Rio Tinto group generated revenues of roughly $34 billion.

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: 212-553-0376
SUBSCRIBERS: 212-553-1653

Brian Oak
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

No Related Data.
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