Rio Tinto Dividend Cut Plan Fails to Stop Moody's Downgrade

  • Miner has rating reduced to the third-lowest investment grade
  • Downgrade comes following a plunge in global commodity prices

Rio Tinto Group had its credit rating cut by Moody’s Investors Service even after the miner announced plans to slash its dividend in response to plunging commodity prices.

The world’s second biggest metal producer had its credit score lowered one level to Baa1, Moody’s third-lowest investment-grade rating, with a negative outlook.

The downgrade follows a slide in energy and metals prices that’s put pressure on producers around the world and seen some, including Anglo American Plc, lose their investment-grade status. With profits falling, Rio Tinto has sought to shore up its balance sheet and announced earlier this month that it would lower its payment to shareholders by as much as half.

“There has been a fundamental downward shift in the mining sector with the downturn being deeper and prospects for a recovery extended,” Moody’s said in a statement. “Ratings need to be re-calibrated to reflect expected performance over a more protracted challenging operating environment.”

The cost of protecting Rio Tinto debt with credit default swaps has climbed 140 basis points over the past year to 233 basis points on Wednesday, having risen to as much as 290 on Jan. 14, CMA prices show.

The company’s stock price fell 1.7 percent to A$41.32 a share on Thursday in Sydney, extending its decline this year to 7.6 percent. Rio Tinto declined to comment on the Moody’s decision.

Concern over the slowdown in China’s economic expansion has combined with an overabundance of supply to drive down resource prices across the world. The benchmark China price of iron ore, Rio Tinto’s biggest product, has fallen about 19 percent over the past year to $51.64 a ton on Wednesday, compared with its 2011 peak of $191.70.

Rio Tinto is not alone in seeking to conserve cash with dividend cuts. BHP Billiton Ltd., the world’s biggest miner, also opted to abandon its progressive dividend policy earlier this week, while Anglo American and Glencore Plc have also curtailed shareholder payments.

The move by Moody’s contrasts with a decision by fellow credit assessor Standard & Poor’s to affirm Rio Tinto’s ratings in light of its newly announced dividend policy. S&P on Feb. 12 removed the company from negative watch and affirmed it at A-, the equivalent of one level higher than Moody’s. It did, however, maintain a negative outlook on the credit and said a downgrade is possible in the next 18 months should commodity prices or Chinese demand weaken further.

“The slowing economic growth rates in China materially impact the demand for base metals while the reducing steel production rates impact demand for iron ore and metallurgical coal - leading to lower prices,” Moody’s said. “Supply imbalances, particularly in iron ore, the major earnings and cash flow driver for Rio Tinto, will maintain pressure on prices for several years.”

Before it's here, it's on the Bloomberg Terminal.