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Instant Analysis: S&P Places Rio Tinto on Credit Watch Negative

By Eric Volkman – Feb 8, 2016 at 4:25PM

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The ratings agency effectively serves notice that the miner's credit rating is at risk of being cut.

What happened?
Like crude oil, the prices for many other commodities have been falling conspicuously. And like oil companies, miners of those goods have been feeling the pinch. It's the same story with global mining concern Rio Tinto (RIO -1.80%), which, in the latest of a series of headaches, has been placed on CreditWatch Negative by Standard & Poor's.

CreditWatch Negative is a designation that a company is on "special surveillance" by the rating agency, with the "negative" qualifier meaning its current rating is at risk of being lowered.

In the press release announcing its move, Standard & Poor's said that, "[u]nder various scenarios, we now forecast Rio Tinto's funds from operations (FFO) to debt could fall to 30%-35% over 2016-2017, slightly below the 35% threshold commensurate with the existing rating." At the moment, Rio Tinto's long- and short-term debt is rated A- and A-2, respectively.

Does it matter?
Like the oil business, the general commodities space is just not the place to be just now. Miners like Rio Tinto are trying to cope with serious price declines in the goods they extract from the earth, and sell. At least Rio Tinto's in good company; the world's largest miner, BHP Billiton (BHP -2.87%), just had its credit rating cut by S&P -- to A from A+.

Rio Tinto hasn't yet gotten the chop, but being placed in the awful-sounding CreditWatch Negative category is a new headache the company just doesn't need. Its share price is down by nearly 45% during the past year, compared to the 9% drop of the S&P 500. In January, it froze salaries at all levels of the company for the remainder of the year; and in the first six months of 2015, it saw a year-over-year revenue drop of 26%, and a scary 81% decline in net profit.

The prices of the metals that Rio Tinto, BHP Billiton, and their ilk, specialize in have been pounded mercilessly, and it doesn't seem as if relief is in sight. So we can consider S&P's notification of Rio Tinto's new "special" status to be a harbinger of an actual ratings cut.

Rio Tinto will likely join BHP Billiton soon as a miner with a shaved rating. This will negatively affect the company's finances, which will likely knock more value off its stock.

Eric Volkman has no position in any stocks mentioned. Nor does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Rio Tinto plc Stock Quote
Rio Tinto plc
RIO
$51.22 (-1.80%) $0.94
BHP Group Stock Quote
BHP Group
BHP
$47.47 (-2.87%) $-1.40

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