Moody’s: Rio Tinto(RTP) will be possibly downgraded

Moody’s investor service on November 25, placed the A3 senior unsecured ratings for Rio Tinto’s group companies, including Rio Tinto Alcan, under review for downgrade. The review reflects that Rio Tinto’s performance in the mid-term is likely to be hurt, in part, by negative market conditions for key metals such as copper and aluminum. Rio Tinto's high level of debt following its debt-financed purchase of Alcan last year will also be a factor in the review.

Rio Tinto may have the rating on $5 billion of its debt cut by Moody’s Investors Service after a slump in prices for metals and raw materials.

The mining giant is carrying US$42 billion in debt, rose to fund its US$38.1 billion acquisition of Alcan last year, but has said it is confident its strong cash flows will allow it to easily service the borrowings. The “high-level” debt of Rio, whose market value has fallen to $36 billion, was a factor in the ratings review, Moody’s said in a statement. “The fact that the debt is bigger than the market cap is a pretty nasty situation,” Evy Hambro, managing director of BlackRock Investment Management Ltd.’s $4.7 billion World Mining Fund, told reporters today in Melbourne. “Rio Tinto has got some world-class assets in its portfolio and they will obviously have to find a way of rebalancing the debt and equity mix.”

Moody's said on November 7, it expects Rio's earnings to remain at "relatively decent" levels but that lower cash generation and continuing high debt levels are pressuring the company's rating.

Rio Tinto has announced it plans to divest at least US$15 billion of assets to help pay down the Alcan debt, but has been forced by the global slowdown to abandon its target of selling US$10 billion worth of assets by the end of 2008, and Moody's said this was also affecting its view of the miner.

Rio has cut its iron ore production plan by 10 percent on November 11 as the company’s reaction to the rapid downturn in the global steel market. The benchmark of steel prices is expected could fall by 40 – 50 percent next year.

According to Rio's chief executive, Tom Albanese, steel demand from China, the world's biggest buyer of metals, had continued to decline during the past few weeks; but he believe this will be a short, sharp slowdown in China, with demand rebounding over the course of 2009 as the fundamentals of Chinese economic growth remain sound.

ETFs/Stocks :

SPDR S&P Metals and Mining (ETF)  XME  $23.94  +1.25 (5.51%)
Market Vectors Steel (ETF)        SLX  $25.95  -0.05 (-0.19%)

Related Posts :

Copper in Shanghai slumps daily

Sources :

1. Morning Star: Rio Tinto To Feel Impact Of Global Slowdown -Moody's, November 7, 2008 1:02 AM EST
2. The Sidney Morning Herald: Iron ore miners forced to slow, November 11, 2008
3. Fox Business: Moody's Reviewing Rio Tinto Ratings For Possible Downgrade, November 25, 2008
4. Bloomberg: Rio Tinto’s $5 Billion Debt May Be Cut by Moody’s (Update4), November 26, 2008 01:22 EST

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