DBRS Downgrades Rio Tinto Group to A (low) and Confirms Alcan at A (low)

DBRS has downgraded the ratings of Rio Tinto Plc, Rio Tinto Limited and Rio Tinto Canada Inc. (collectively Rio or the Company) to A (low) from AA (low), following Rio’s successful acquisition of Alcan Inc. (Alcan) in a $38.1 billion all cash friendly takeover. This removes Rio’s ratings from Under Review with Negative Implications where they were placed on July 12, 2007. The trends are now Stable. Rio has acquired 89% of Alcan, gaining effective control.

Additionally, DBRS has confirmed the ratings of Alcan at A (low) and R-1 (low), and has also removing its ratings from Under Review with Developing Implications where they placed on May 7, 2007, when Alcoa Inc. (Alcoa) announced a $33 billion unsolicited bid for Alcan. The trends are now Stable. Thus, the ratings of Rio and Alcan are now equalized and reflect Rio’s practice of honouring debt at acquired companies and the strategic importance of Alcan in Rio’s asset portfolio. The A (low) ratings for Rio reflect the deterioration of the financial profile (due to substantially higher debt levels), which are only partially off-set by the Company’s stronger business profile.

Rio has funded the transaction with a fully committed bank credit facility (the Facility) in the amount of (up to) $40 billion. The Facility consists of a (1) a $15 billion 364-day unsecured term loan (with a one-year extension option), (2) a $10 billion three-year unsecured revolving credit facility, (3) a $5 billion five-year unsecured revolving credit facility, and (4) a $10 billion five-year and a day unsecured term loan. Borrowers under the Facility are Rio Tinto plc, Rio Tinto Finance plc and Rio Tinto Canada Holdings Inc., with guarantees from the parent entities Rio Tinto plc and Rio Tinto Limited. DBRS expects the Company to refinance a portion of the Facility over the near term. DBRS notes that liquidity is not an issue for the Company, as Rio has in place $3.8 billion (undrawn) lines of credit.

The acquisition substantially weakens the financial profile as total outstanding debt increases to $47.3 billion ($3.8 billion of Rio debt, $5.4 billion of Alcan debt (as at June 30, 2007), $38.1 billion of acquisition debt), substantially leveraging the Company. Pro forma combined Rio and Alcan financials, including the acquisition debt, for the last 12 months ending June 30, 2007, are: (1) total debt-to-EBITDA of approximately 3.7 times, up from 0.5 times for stand-alone Rio; (2) cash flow-to-total debt of over 0.2 times, down from over 2.0 times for stand-alone Rio; (3) gross debt-to-capital of approximately 68%, up from 15% for stand-alone Rio; and (4) EBITDA/interest coverage of approximately five times, down from over 35 times for stand-alone Rio.

Incorporated into the current ratings is the de-leveraging of the Company via both asset sales and strong free cash flows (over the next 12 months). Rio and Alcan have announced that they are in the process of selling Alcan’s Packaging division. Additionally, DBRS expects more non-core assets to be sold in 2008 (following a strategic review of Rio’s and Alcan’s asset portfolio) – together generating proceeds possibly over $10.0 billion. The combination of these asset sales and their proceeds being dedicated to debt reduction, would substantially reduce the Company’s total debt (e.g. by over $10 billion in 2008).

The acquisition strengthens the business profile of the combined companies by creating the world’s largest aluminum producer with approximately 4.4 million tonnes of aluminum production annually (ahead of Russia’s United Company RUSAL). The combination brings together Rio’s low-cost bauxite mines (high-quality bauxite reserves) with Alcan’s low-cost aluminum smelters (low-cost energy). DBRS notes Rio’s strong business profile pre-acquisition as the number two global iron ore producer and number four global copper producer (with long-life reserves, high quality, low costs mines). Additionally, Rio benefits from both geographic and product diversification.

With the Alcan acquisition, Rio’s geographic asset base would change as follows: assets located in Australia/New Zealand would decrease from 58% to 45%, assets located in Canada would increase from 13% to 30% and U.S. assets would decrease from 23% to 15% of the asset portfolio. With the Alcan acquisition, Rio’s pro forma 2006 EBITDA distribution would be copper at 32%, aluminum at 27%, iron ore at 25%, energy at 9%, and industrial minerals and diamonds at 7%. DBRS notes that: (1) bulk products (e.g. iron ore) and exchange-traded metals (e.g. aluminum, nickel and copper) have low historical price correlations, and (2) aluminum has had much lower price volatility than nickel or copper (over the past 20 years).

DBRS notes that with the Alcan acquisition, Rio has suspended its share buy-back program retaining approximately $1.6 billion of cash.

Note:
All figures are in U.S. dollars unless otherwise noted.