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Rio Tinto to Reduce Net Debt by $10 Billion Through 2009
12/11/2008 - Rio Tinto announces a detailed package of initiatives aimed at preserving value for shareholders by conserving cash flow and reducing levels of debt.
Rio Tinto has announced a detailed package of measures in response to the unprecedented speed and severity of the current global economic downturn, which has caused sharp falls in commodity prices and a significantly weaker outlook. The company’s initiatives are aimed at preserving value for shareholders by conserving cash flow and reducing levels of debt.
In its third quarter operations review (October 15, 2008), the Group acknowledged that the economic outlook had substantially deteriorated, that demand conditions had weakened sharply, and that capital expenditure would be reviewed. Since that time, demand conditions have continued to worsen, and as a result the Group's priorities have reoriented around conserving cash flow and reducing near-term borrowings.
The Group's net debt has decreased to $38.9 billion, a $3.2-billion reduction over the period from June 30 to October 31, 2008. The Group is committed to further reducing net debt by $10 billion by the end of 2009.
To this end, the Group is expanding its scope of assets targeted for divestment to include significant assets not previously highlighted for sale. The Group is also working actively on measures to generate cash from joint ventures on its existing assets and projects.
Rio Tinto said that it remains committed to its strategy of finding, developing and operating large, long-life, low-cost mining assets, that generate cash at all points of the economic cycle. The company's existing portfolio of world-class, tier-one assets continues to deliver strong cash flows in the current environment and provides the Group with a range of options in terms of alliances and divestments.
The Group maintains its belief that the industrialization of developing economies with large populations will support much higher levels of metals and minerals demand worldwide in future years. The purpose of the measures the company is announcing is to ensure that the Group is well positioned to exploit this underlying trend when the global economy recovers. With its superior suite of assets, and a stronger balance sheet, Rio Tinto will be able to resume its growth programs with renewed momentum.
"Given the difficult and uncertain economic conditions, and the unprecedented rate of deterioration of our markets, our imperative is to maximize cash generation and pay down debt,” said Tom Albanese, Chief Executive, Rio Tinto. “We have undertaken a thorough review of all our operations and are executing a range of actions.
"We will minimize our operating and capital costs to appropriately low levels until we see credible and meaningful signs of a recovery in our markets, but will retain our strategic growth options. We will expand further the scope of assets we are targeting for divestment,” continued Albanese. “By taking these tough decisions now we will be well positioned when the recovery comes.
"Notwithstanding the current financial turmoil, we continue to enjoy a suite of key assets which operate in the lower half of the cost curve in their industries, and our suite of growth assets remains capable of re-activation as soon as market conditions justify," added Albanese.
Refinancing / Debt Repayment Plans—The Group has established a hierarchy of options for the repayment of the amounts drawn under facilities A and B of the Alcan financing facility. Its primary intention is to utilize the generation of additional free cash flow following reduced capital and operational expenditure.
The Group also is proceeding with an expanded divestment program. It is in discussions with third parties related to further divestments or investment at the asset level, including but not restricted to joint ventures. The Group said it also intends to pursue refinancing of the Alcan facilities in the term market, and will take advantage of credit market conditions as and when they improve.
In addition to these sources, the Group has available committed financing of $4.2 billion under Alcan Facility C (unused at October 31, 2008) and $2.3 billion unused committed bilateral banking facilities.
Reducing debt levels and managing debt maturities are a key priority of Rio Tinto's Board and management. The Group's policy continues to be to target a single A credit rating.
Capital and Operating Expenditure Review and Guidance—The Group has been reviewing its capital
expenditure commitments in the light of current market conditions, and has concluded that it can make significant reductions in 2009 capital expenditure and significantly reduce project costs, while retaining growth options and realigning projects with revised expectations for market demand.
The Group is forecasting a decrease in total capital expenditure to $4 billion (from over $9 billion), of which $2 billion will be sustaining capital expenditure. This will impact projects across the board, with some projects to be cancelled and others deferred until markets recover. The Group also said it would take the opportunity of project deferments to optimize project design, revisit costs and further reduce capex requirements.
Capital expenditure plans for 2010 are to be reviewed throughout the year, with the Group continuing to assess current and future market conditions. If current demand and pricing weakness continues, capital expenditure levels are to be reduced toward sustaining capital levels.
In addition to undertaking a review of capital expenditure, the Group has reviewed its controllable operating expenditure, and has plans in place to reduce operating and functional costs by at least $2.5 billion per annum by the end of 2010, based on current production rates and unflexed for currency and oil.
The plans to pursue a number of measures to reduce costs, including:
- Reducing global headcount by 14,000—some 8500 contractor jobs and 5500 employee roles—for an annual operating cost saving of $1.2 billion, with upfront severance costs of $400 million.
- Consolidation of offices around the Group, including the London head office.
- Rapid acceleration in 2009 of outsourcing and off-shoring of IT and procurement
- Deferral of exploration and evaluation expenditure
The Group’s operating costs have been reduced by the decline of currencies (relative to the US dollar) of the countries in which the Group primarily operates, particularly the Australian and Canadian dollars and the South African rand. The effect of currency declines has offset approximately one half of the impact of the fall in quoted metal prices on earnings since July 1, 2008.
The Group said that the fall in the oil price has also been beneficial, with a $1 drop in the price of a barrel of oil improving the Group's annualized underlying earnings by $11 million.
Production and Cost Position—Rio Tinto recently revised its estimate of iron ore shipments from the Pilbara region of Western Australia to between 170 and 175 million tonnes (on a 100% basis) for 2008, while reducing the annualized production run rate by approximately 10%. The capacity of the Pilbara operations at the end of 2008 is expected to be 220 million tonnes per annum (on a 100% basis).
Depending on customer delivery requests and underlying demand conditions, the Group anticipates that global iron ore production and shipments for 2009 will be around 200 million tonnes on a 100% basis.
Based on 2007 full-year data, in iron ore, 93% of Rio Tinto production is positioned in the lower half of the cost curve.
Cash Flows and Net Debt— The Group reduced net debt by a further $3.2 billion during the four months ending October 31, 2008, bringing the total reduction in net debt for the ten months ending October 31, 2008 to $6.3 billion, despite high levels of capital expenditure throughout the period. The Group's net debt position at the end of October 2008 was US$ 38.9 billion, down from $42.1 billion at the end of the first half of the year.
Pensions—As of September 30, 2008, the Group had estimated pension liabilities measured on an IAS19 accounting basis of $14.9 billion and assets of $13.3 billion. Approximately 40% of the liabilities are in Canada, 20% are in the U.K. and 10% in the USA with the remainder being mainly in Switzerland, the Eurozone and Australia. Approximately 55% of the assets were invested in equities, 34% in bonds, 7% in property and 4% in other. After excluding those plans which are deliberately operated as unfunded arrangements, representing a liability of under $1billion, the global funding level on an IAS19 basis was approximately 94%. This figure will vary on a daily basis according to the change in asset values and also the change in liability values which are discounted using high quality corporate bond yields.
The expected charge to earnings in 2008 in relation to post-retirement benefit arrangements remains in line with the estimate in the 2007 Annual Report and is unaffected by the current level of equity markets. The Group said the lower level of equity markets is likely to result in an increase in next year's expense, although there is likely to be some offsetting benefit from higher corporate bond yields.
Divestment—The Group said that all previously announced divestment processes are underway, and that non core assets identified for disposal are unchanged. Sales processes are most advanced for Packaging, Energy America and Minerals. During the first half of 2008, the Group successfully announced $3 billion from asset sales.
The Group is actively considering opportunities for divestment of further assets where value can be realized, and is pursuing discussions with third parties.
Dividend—In light of current market conditions, the Board has determined that the level of the total dividend payment for 2008 will be maintained at the level of the total 2007 dividend. Accordingly, the total dividend for 2008 will be US 136 cents, of which US 68 cents was paid as the interim dividend in September 2008.
Rio Tinto is a leading international mining group headquartered in the U.K. combining Rio Tinto plc and Rio Tinto Limited. The company's business is finding, mining, and processing mineral resources. Activities span the world but are strongly represented in Australia and North America with significant businesses in South America, Asia, Europe and southern Africa.
