Financial review
Capital resources and contractual obligations
The Group's total capital is defined as Rio Tinto's shareholders' funds plus amounts attributable to outside equity shareholders plus net debt and amounted to US$61 billion at 31 December 2008 (2007: US$71 billion). The Group's overriding objectives when managing capital are to safeguard the business as a going concern; to maximise returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure in order to provide a high degree of financial flexibility at the lowest cost of capital.
The unified credit status of the Group is maintained through cross guarantees whereby contractual obligations of Rio Tinto plc and Rio Tinto Limited are automatically guaranteed by the other. In December 2008, Moody's downgraded the long-term ratings of the Group from A3 to Baa1 and S&P downgraded its long-term ratings from BBB+ to BBB and its short-term corporate credit ratings from A-2 to A-3. Ratings agencies have retained a negative outlook in respect of their ratings. In the medium term the Group aims to restore its long term credit rating to a single A credit rating in order to enhance its ability to access the credit markets on more favourable terms.
The Alcan acquisition was financed under syndicated bank facilities of up to US$40 billion at floating interest rates, of which US$38 billion was drawn down in connection with the acquisition. At 31 December 2008, US$28 billion was drawn down under the syndicated bank facilities. The syndicated bank facilities are split into two term facilities (Facilities A and D), which are fully drawn and two revolving facilities (Facilities B and C), which are available for utilisation until shortly before their respective maturity dates. Facility C may also be used as a swingline facility. Term Facility A was originally for an amount of US$15 billion, of which US$8.9 billion remained outstanding at 31 December 2008.
The maturity date for Facility A was originally October 2008, but with an extension option to October 2009, which has been exercised. Revolving Facility B is for an amount of up to US$10 billion, of which US$9.1 billion was drawn at 31 December 2008. The maturity date for Facility B is October 2010. Revolving Facility C is for an amount of up to US$5 billion, all of which is undrawn. The maturity date for Facility C is October 2012. Term Facility D was originally for an amount of US$10 billion, the full amount of which remains outstanding at 31 December 2008. The maturity date for Facility D is December 2012. Advances under each Facility generally bear interest at rates per annum equal to the margin for that Facility plus LIBOR and any mandatory costs. Facilities A and B are subject to mandatory prepayment and cancellation to the extent of net proceeds received from disposals of assets and from the raising of funds through capital markets, subject to specified thresholds and conditions. Any such net proceeds must first be applied in prepayment of the amounts outstanding under Facility A. Further net proceeds would then be retained by the Group up to a corresponding and cancelled amount of any undrawn commitments under Facility B, and net proceeds beyond this cancellation would finally be applied in prepayment of any amounts outstanding under Facility B. The Group's committed bank standby facilities contain no financial undertakings relating to interest cover and are not affected to any material extent by a reduction in the Group's credit rating. The syndicated bank facilities also contain a financial covenant requiring the maintenance of a ratio of net borrowings to EBITDA no greater than 4.5 times. A compliance certificate must be produced for this ratio on a semi annual basis. In addition the facility agreement contains restrictions on the Group, including that it be required to observe certain customary covenants including but not limited to (i) maintenance of authorisations; (ii) compliance with laws; (iii) change of business; (iv) negative pledge (subject to certain carve outs); (v) environmental laws and licences; and (vi) subsidiaries incurring financial indebtedness.
The Group maintains backup liquidity for its commercial paper programme and other short term debt by way of committed bilateral bank facilities and syndicated credit facilities related to the US$40 billion Alcan acquisition facility. At 31 December 2008, the Group has available committed financing of US$5.0 billion under Alcan Facility C, US$0.9 billion under Facility B and US$2.2 billion unused committed bilateral banking facilities.
The Group's net debt as a percentage of total capital was 63 per cent at 31 December 2008, unchanged from 31 December 2007.
* Includes minority interest share of net debt
** Calculated as borrowings divided by total capital.
Total capital is the sum of net debt and equity,
including minority interests.
Rio Tinto does not have a target debt to equity ratio, but has a policy of maintaining a flexible financing structure so as to be able to take advantage of new investment opportunities that may arise. Following the acquisition of Alcan, the Group has publicly stated an objective to reduce its debt to equity ratio from current levels through a targeted asset divestment programme, capital restructurings and through operating cash flows to a level consistent with a solid investment grade credit rating. This policy is balanced against the desire to ensure efficiency in the debt/equity structure of the Group balance sheet in the longer term through proactive capital management programmes. On 10 December 2008, Rio Tinto announced certain key initiatives and commitments to reduce net debt by US$10 billion in 2009, including US$8.9 billion due in October 2009.
In January 2009, Rio Tinto reached an agreement to sell its potash assets and Brazilian iron ore operation for US$1.6 billion. The sale of potash assets was completed on 5 February 2009 and the US$850 million cash proceeds have been used to pay down debt. The completion of the sale of the Brazilian iron ore assets, from which proceeds of US$750 million will be received, is subject to regulatory approvals which are expected during the second half of 2009.
During December 2008 the Group unwound interest rate swaps with a principal amount of US$5.9 billion to take advantage of market conditions and generated approximately US$800 million in cash of which US$90 million is included in the interest line in the cash flow statement. The funds were used to pay down debt. As a result of the unwinding of the swaps the ratio of fixed to floating rate debt moved to 73 per cent floating/27 per cent fixed. If the swaps had remained in place the ratio would have been 88 per cent floating/12 per cent fixed. The Group continues to maintain a preference for floating rate debt but will continue to actively manage its ratio of fixed to floating rate debt.
As at 31 December 2008, the Group had contractual cash obligations arising in the ordinary course of business as follows:
|
Contractual cash obligations |
Total US$m |
Less than 1 year US$m | Between 1 and 3 years US$m | Between 3 and 5 years US$m | After 5 years US$m |
|---|---|---|---|---|---|
| Expenditure commitments in relation to: | |||||
| Operating leases | 1,561 | 336 | 565 | 345 | 315 |
| Other (mainly capital Commitments) | 4,354 | 3,568 | 487 | 228 | 71 |
| Long term debt and other financial obligations | |||||
| Debt (a) | 39,378 | 10,079 | 9,902 | 13,637 | 5,760 |
| Interest payments (b) | 8,024 | 1,375 | 2,053 | 1,230 | 3,366 |
| Unconditional purchase obligations (c) | 10,345 | 1,245 | 1,643 | 1,153 | 6,304 |
| Other (mainly trade creditors) | 6,628 | 5,942 | 344 | 219 | 123 |
| Total | 70,290 | 22,545 | 14,994 | 16,812 | 15,939 |
| Notes | Expand |
|
|
Information regarding the Group's pension commitments and funding arrangements is provided in the Post retirement benefits section of this Financial review and in note 49 to the 2008 Full financial statements. The level of contributions to funded pension plans is determined according to the relevant legislation in each jurisdiction in which the Group operates. In some countries there are statutory minimum funding requirements while in others the Group has developed its own policies, sometimes in agreement with the local trustee bodies. The size and timing of contributions will usually depend upon the performance of investment markets. Depending on the country and plan in question the funding level will be monitored quarterly, bi-annually or annually and the contribution amount amended appropriately. Consequently it is not possible to predict with any certainty the amounts that might become payable in 2010 onwards. The impact on cash flow in 2008 of the Group's pension plans, being the employer contributions to defined benefit and defined contribution pension plans, was US$615 million. In addition there were contributions of US$53 million in respect of unfunded healthcare schemes. Contributions to pension plans for 2009 are estimated to be around US$150 million higher than for 2008. This is predominantly attributable to the decline in financial markets during 2008 which has resulted in a deterioration of the funding positions of most of the Group's plans. Healthcare plans are unfunded and contributions for future years will be equal to benefit payments and therefore cannot be predetermined.
Information regarding the Group's close down and restoration obligations is provided in the relevant section of this review and in note 27 to the 2008 Full financial statements. Close down and restoration costs are a normal consequence of mining, and the majority of close down and restoration expenditure is incurred at the end of the relevant operation. Generally, the Group's close down and restoration obligations to remediate in the long term are not fixed as to amount and timing and are not therefore included in the above table.
Favourable market conditions came to an abrupt halt during the fourth quarter of 2008. A very significant financial turbulence led to sharp declines in the rate of global economic growth, in global demand for commodities and in the price of most of the Group's principal products. These negative trends adversely impacted the Group's near term cash flows and financial outlook. Based on current forecasts and the available undrawn committed borrowing facilities of US$8.1 billion, the directors expect that the Group will be able to meet its debt and other obligations in the foreseeable future. Nevertheless owing to the continued volatility and uncertainty in the markets the directors have carried out a detailed review of actions available to them to address the risk of operational cash flows being insufficient to meet the Group's scheduled debt repayments.
On 12 February 2009 the Group announced that the board is recommending to shareholders a transaction with Aluminium Corporation of China ("Chinalco"). This transaction is subject to a number of conditions, including shareholder, government and regulatory approvals. The directors remain confident that the transaction will complete in the expected timeframe, although a number of the conditions are outside their control. If the transaction is not approved, the directors will consider alternative measures to address the Group's debt obligations in a timely and cost effective manner, which will depend primarily upon market conditions and continued progress with the Group's divestment programme.
