In a note to clients last week, Macquarie Private Wealth warned that Rio’s funds from operations to debt ratio was slightly in breach of Rio’s A rating with S&P, noting that it had fallen from 85% to about 35% over the course of 2012.
S&P said today that Rio’s leverage at the end of December had increased beyond its expectations.
“We see a risk that Rio Tinto’s debt may rise further in 2013-2014, unless the company makes large disposals or iron ore prices stay well above $US120/tonne CFR China,” S&P said.
S&P said that Rio’s capital expenditure requirements and dividends would prevent the company from deleveraging unless it makes large asset disposals this year and next.
Gross debt at the end of 2012 was $26.7 billion, up from $21.5 billion, but S&P estimates that it translates into adjusted debt of around $33 billion, above the $30 billion level it sees commensurate with its rating.
Assuming capex of $13 billion this year and iron ore prices of $120/t in 2013 and $110/t in 2014, S&P expects free operating cashflow to be neutral.
When accounting for around $3 billion in dividend payments, the credit ratings agency expects Rio’s discretionary cash flow to be negative, leading to further debt increases, though funds from operations are expected to be higher this year.
S&P said funds from operations to debt ratio of around 35-40% should be achieved if the company makes some asset sales.
Earlier this month, new Rio chief executive Sam Walsh said he was looking hard at divestments.
“There are a number of assets for us that are not core or they are underperforming and you have got to say that any asset that falls into that category is going to fall within the radar screen,” he said.
“Now I am not confirming or denying any particular asset but we are going to take a very rational, a very logical, approach and quite frankly if there are people out there who value these assets more than we do then certainly we will move forward and negotiate that opportunity.”
He stressed that Rio would not be selling assets below their value.
“This is certainly not a case of fire sales. I need to ensure that they are not knee-jerk reactions; that we physically move forward with this, expediting things where we can but being very sensible and rational in terms of how we take it forward,” Walsh said.
“And there are people that value things differently than us. There are people that can see opportunities of synergies or linking businesses, or whatever, and certainly we will take that into account in terms of how we look at these projects.”
Pacific Aluminium has been one asset on the chopping block for quite some time and an advisory board has been appointed for the process.
Rio chief financial officer Guy Elliott said this month that the readiness of the business for sale was well advanced, but didn’t rule out breaking it up or even floating it as a separate entity.
Diamonds are another area under review for Rio, though the company first flagged potential asset sales 11 months ago but is yet to make progress in that area.
It has also been suggested that the Canadian iron ore assets could be offloaded.
S&P said there was a one-in-three chance of Rio’s rating being lowered in the next 12-18 months if leverage was not reduced, but it could revise the outlook back to stable if the company is able to reduce debt.
The credit agency reaffirmed its A-/A-2 rating for Rio.
Rio shares were last trading 1.5% down to $A65.17.
