Rio Tinto Looks To Lower Debt Amid Uncertainty In Iron Ore Prices

by Trefis Team
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Rio Tinto
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Rio Tinto has announced plans to further lower its debt burden, as it looks to strengthen its balance sheet amid an uncertain iron ore pricing environment. The company announced plans to buy back $2.5 billion of outstanding debt earlier this week. [1] The company has been trying to lower its debt burden over the past couple of years due to a business environment characterized by weakness in iron ore prices. Under the simplifying assumption that the company is able to meet its business expenses from its operating cash flows and existing cash balances, the following table indicates the extent to which the company will have lowered its debt by year end. (The debt figures indicate year-end or projected year end gross debt balances.)

RIO Debt Reduction 2015-17

The following chart illustrates the trajectory of iron ore prices over the past year.

Iron Ore Prices Jun 16 - May 17

(Source: Iron ore price drops to 7-month low, Mining.com )

Iron ore prices rose sharply in the fourth quarter of last year and the first quarter of this year driven by a favorable demand outlook from China and the U.S.  A fiscal stimulus instituted by the central government in China targeting the infrastructure sector raised the demand outlook from China whereas Donald Trump’s electoral victory raised the prospects of higher demand from the U.S. driven by his business-friendly legislative agenda. However, prices of iron ore have fallen sharply in recent months as demand growth in China, the world’s largest market for iron ore, has shown signs of faltering. Though Chinese imports of iron ore have continued to remain at elevated levels, the country’s stockpiles of the commodity have reached record levels indicating that the underlying demand growth is perhaps not keeping pace with the expansion in supply. [2] Moreover, there are concerns over the sustainability of China’s debt-fueled (mainly domestic debt) economic growth, with Moody’s downgrading the country’s sovereign debt rating for the first time in nearly thirty years. [3] Given the concerns over the sustainability of demand from the world’s largest consumer of iron ore, Rio Tinto’s move to shore up its balance sheet would stand the company in good stead in case of a further decline in prices.

Have more questions about Rio Tinto? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Rio Tinto
Notes:
  1. Rio Tinto launches new debt reduction program for up to $2.5 billion, Rio Tinto News Release []
  2. Iron ore stockpiles reach record in China, Financial Review []
  3. China’s Downgrade Could Lead to a Mountain of Debt, Bloomberg []
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