Moody’s Cuts Rio’s Rating Outlook on Low Metal Prices

Nov. 7 (Bloomberg) -- Rio Tinto Group, the world’s third- largest mining company, had its rating outlook cut by Moody’s Investors Service because of global market turmoil, falling metal prices and slow progress in asset sales. “Rio Tinto’s 2009 performance will be adversely impacted by the negative market conditions in, and the outlook for, key metal markets,” the New York-based agency said in a statement. It reduced its rating to “developing” from “positive.” Commodity prices have declined 44 percent since the end of June as the financial crisis deters lending. Rio, which has $8.9 billion of its $42 billion in debt maturing in October, has said the credit crisis may delay $10 billion in asset sales. “Any downgrade to ratings is going to make the pursuit of debt or funding more expensive and it’s a blow to investor sentiment,” said Dean Fergie, who helps manage A$100 million ($67 million) at Opis Capital Ltd. in Melbourne. “It’s not good for Rio and it is not good for the industry.” The cost of five-year default protection on Rio, which had planned to sell the assets this year to help pay for the $38.1 billion purchase of Alcan Inc., has risen 13 times in the past year to 600 basis points, according to National Australia Bank Ltd. prices yesterday. The price is equivalent to $600,000 annually to protect a $10 million debt investment from default. ‘No Doubt’ Concern that London-based Rio may not being able to repay debt were not “valid,” Chief Financial Officer Guy Elliot said Oct. 15. There was “no doubt” the company could service its current debt, he said. Rio Tinto spokeswoman Amanda Buckley declined to comment when contacted at her Melbourne office today. The slower-than-anticipated progress in asset sales and the chance that proceeds could be lower, contributed to the change to Moody’s outlook, it said. Still, Rio, the subject of a $73 billion hostile takeover from BHP Billiton Ltd., will be able to meet its debt requirements unless metal prices decline “materially farther” from current levels, Moody’s said. “The company’s ability to execute on its divestiture program and reduce debt over the next 12 months will be a key factor in its rating,” Moody’s said. “The lower cash generation, in combination with continued high debt levels, is pressuring the company’s ratings.” Rio slumped 6.5 percent to A$73.94 at 3:33 p.m. Sydney time on the Australian stock exchange, giving it a market value of about A$92 billion. It has declined 47 percent this year compared with a 37 percent fall in the benchmark index. Cooling Output Australia’s mining and materials companies may face a cooling credit outlook because of the tightening availability of debt finance and the prospect of weakening economics, Standard & Poor’s Ratings Services said Oct. 2. It also cut its rating on Rio to “developing” from “positive” on Oct. 28, citing Rio’s debt, the limited asset sales and weaker commodity prices. “We therefore expect Rio Tinto to carry a higher debt burden than either the company or we had anticipated,” Standard & Poor’s said. “Although it’s likely that Rio Tinto will undertake some measures to limit spending, such as reducing capital expenditures and working capital, in our view this may or may not be sufficient to fully offset the negative effects.” Rio’s debt to capital ratio at June 30 was 55 percent, according to Moody’s standard measurements, compared with 16 percent at the end of 2006, the ratings company said. Rio Tinto has also joined United Co. Rusal and Cia. Vale do Rio Doce in reining in spending and cutting output to match the drop in demand for metals.