Rio Tinto plc (RIO) Placed on CreditWatch Negative by S&P

Standard & Poor's Ratings Services placed its 'A-/A-2' long- and short-term corporate credit ratings on global diversified mining company Rio Tinto PLC (NYSE: RIO) on CreditWatch with negative implications.

We also placed on CreditWatch negative the long-term issue ratings on the debt instruments issued or guaranteed by Rio Tinto.

The CreditWatch placement reflects the possibility that we could lower the rating by one notch over the coming weeks if the company does not take supportive measures amid the currently weak commodity prices pressuring its cash flows.

We recently lowered our price assumption for most commodities, including some of the key commodities in Rio Tinto's portfolio (iron ore, copper, and aluminum; see "Standard & Poor's Revises Its Price Assumptions For Metals On Continuing Price Weakness," published Jan. 22, 2016). This was after metal prices came under pressure because of fears of lower demand from China, combined with excess supply. Our price deck assumes that steel production in China will not recover in 2016, after having contracted in 2015 for the first time in many years. We believe that commodity prices will remain very volatile while the impact of China's slowdown plays out.

Subsequently, if we apply our new assumptions--using the latest production forecast, capital expenditure (capex) guidance, and existing financial policy--we forecast a drop in Rio Tinto's key credit metrics would be closer to 30% in both 2016 and 2017, compared to the 35%-45% that we regard as commensurate with our 'A-' long-term rating. Previously, we anticipated that Rio Tinto's funds from operations (FFO) to debt would slide below 35% in 2016, with some recovery in 2017. At this stage, we have limited visibility as to how the company might respond to the current challenging environment.

That said, we understand that Rio Tinto has material financial flexibility to restore its credit metrics in 2017, if it chose to do so. For instance, it may decide to further reduce operating costs, capex, or working capital; continue to divest assets; or review its financial policy. In our view, measures such as these could support the current rating. The company is going to release its annual results in early February.

The ratings continue to reflect our view of Rio Tinto's robust operating performance to date, reflecting cost-cutting initiatives as well as steeply depreciating currencies in some of its countries of operation. We also note that Rio Tinto's credit metrics for the rolling 12 months to June 2015 show more rating headroom compared with most peers whose ratings have a negative outlook. In addition, the company's liquidity remains strong, with $11.2 billion cash on the balance sheet as of June 30, 2015, and it recently extended its revolving credit facilities.

We aim to resolve the CreditWatch placement in the coming weeks, after reviewing the results for 2015 and the company's supportive measures amid the expected weaker cash flows in the currently weak price environment. A rating action is limited to one notch. At the same time, given Rio Tinto's conservative balance sheet, we may decide to affirm the rating if future cash flow performance remains sufficiently robust and covers capex and dividends.

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