Rio under pressure as S&P downgrades its outlook rating

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Rio Tinto's mounting debt levels have prompted ratings agency Standard &amp; Poor's to downgrade the mining juggernaut&rsquo;s credit rating outlook from stable to negative.</p>
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Earlier this month <em>Australian Mining </em>reported <a href=”http://www.miningaustralia.com.au/features/rio-posts-$3-billion-loss”>Rio announced an aggressive cost cutting regime after posting its first ever full year loss, announcing almost $3 billion in losses.</a></p>
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Prompting the mining house&rsquo;s <a href=”http://www.miningaustralia.com.au/features/albanese-steps-down-as-head-of-rio-tinto”>new CEO Sam Walsh to take drastic cost cutting measures across the business.</a></p>
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&ldquo;To do this we need to run the business as owners not managers and my immediate priority is to build more focus, discipline and accountability throughout the organisation.</p>
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&ldquo;Demonstrating this commitment, we will deliver our capital reduction and cost savings targets and improve performance across our business,&rdquo; Walsh stated.</p>
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S&amp;P&rsquo;s announcement combined with a <a href=”http://www.miningaustralia.com.au/news/iron-ore-prices-to-crash-soon-ubs”>predicted collapse of iron ore prices</a> is expected to increase the pressure on Walsh to deliver on his promise of vast operating cost cuts, asset sales and reduced capital expenditure commitments.</p>
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It has been reported that the negative outlook means if the company doesn&rsquo;t drastically improve its balance sheet there is about a one-in-three chance Rio could lose its converted single-A credit rating in the next twelve to eighteen months.</p>
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Currently iron ore is sitting above $150 a tonne, but according to UBS analysts it may slump 54 per cent to around $US70 a tonne due to a big lift in supply from mining companies.</p>
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Despite pledges to reduce the company&rsquo;s spending to $13bn this year, S&amp;P added Rio would not be able to cut debts because of its commitment to a &ldquo;progressive&rdquo; dividend policy.</p>
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&ldquo;We see a risk that Rio Tinto&rsquo;s debt may rise further in 2013-14 unless the company makes large disposals or iron ore prices stay well above US$120 a tonne,&rdquo; the agency said.</p>
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However, Deutsche Bank analyst Paul Young told <a href=”http://www.smh.com.au/business/sampp-downgrades-rio-outlook-20130226-2f42r.html”>SMH </a>that S&amp;P took a conservative approach when analysing Rio's future cash flows.</p>
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&quot;It's not as though they don't have (funding) options,&quot; Young said.</p>
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He added that even if S&amp;P was to downgrade Rio's credit rating, for instance, from A to BBB+, it would be temporary and would not have a material impact on the miner's funding costs.</p>

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