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Ratings agency Standard & Poor’s said late Monday Rio Tinto plc’s (LSE:RIO) debt may further rise in the current year and the next unless the diversified global miner sells off large assets or iron ore price stabilises at a certain price, pushing the London-listed firm’s shares down on Tuesday.
S&P revised its outlook from stable to negative and affirmed its A-/A-2 rating for Rio Tinto’s long- and short-term corporate credit, warning that a downgrade may happen in the next 12 to 18 months if debt is not reduced.
The negative outlook came nearly two weeks after the company posted a loss for the first time in years for the year ended 31st December 2012, at US$3 billion, as the firm wrote-off the value of some of its assets by US$14.4 billion.
Higher Debt
Rio Tinto’s gross debt increased by 24% from US$21.5 billion at the start of 2012 to US$26.7 billion by the end of that year, largely due to record high capital expenditure and weak cash flow, S&P said.
According to the ratings agency’s estimates, Rio Tinto’s adjusted debt, which takes into account asset-retirement obligations, pensions, and operating leasing less surplus cash, is at US$33 billion, US$3 billion more than the agency’s threshold to retain the stable rating.
Rio Tinto’s fund from operations (FFO) to debt ratio, S&P said, went from 40% to 30% in 2012 due to lower cash flow. The Anglo-Australian firm’s FFO to debt ratio was 85% in 2011.
The company was hit weaker commodity prices, particularly iron ore, coupled with declining performance of its copper, aluminum, and energy businesses in 2012.
S&P suggested the company may either sell off assets to raise funds to pay off debts or secure a US$120 per tonne benchmark price for iron ore in 2013 to return the outlook back to stable.
Newly-appointed Chief Executive, Sam Walsh, stated on 14th February the company will reduce its capital expenditure and will target US$5 billion worth of savings by 2014.
Despite ending the year at a loss, Rio Tinto increased dividend by 15% compared to that in 2011, a move S&P does not encourage as it risk further deleveraging of the firm’s capacity to manage its debt.
Shares of Rio Tinto dropped to as low as £34.72 in early morning trading and partially recovered to £35.11, losing 15.5 pence or 0.5% by 12:30 GMT.
