Australia's miners are feeling the pinch after global ratings agency Moody's Investor Service downgrades Rio Tinto's credit rating despite the heavyweight taking an axe to its dividend policy.
Moody's spared Rio a downgrade to junk status, instead lowing one level to Baa1, the third lowest investment grade rating, from A3 while maintaining a negative outlook in response to plunging commodity prices putting pressure on the world's major producers.
Rio, along with rival BHP Billiton, have been in a drive to shore up their balance sheets by slashing dividend policies, capital expenditure and operational costs. "There has been a fundamental downward shift in the mining sector with the downturn being deeper and prospects for a recovery extended, resulting in increased credit risk and waker metrics for Rio Tinto, as well as the global mining sector," Moody's said in a statement on Thursday.
"Ratings need to be re-calibrated to reflect expected performance over a more protracted challenging operating environment."
Moody's downgrade contrasts fellow global ratings agency Standard & Poor's move to re-affirm Rio's A- rating on Feb. 12 when it was taken off credit-watch negative in light of its new dividend policy. S&P's rating is one notch higher than Moody's.
"The slowing economic growth rates in China materially impact the demand for base metals while the reducing steel production rates impact demand for iron ore and metallurgical coal - leading to lower prices," Moody's said.
"Supply imbalances, particularly in iron ore, the major earnings and cash flow driver for Rio Tinto, will maintain pressure on prices for several years."
Rio, like the world's largest miners, is continuing to leverage its market position and drive more low-cost production to force out high cost producers.
In January, Rio indicated it would step up output to meet 2016 guidance of 350 million tons of iron ore and an already oversupplied seaborne market that's seen iron ore prices and companies' share prices tumble.
At 1520 local time, Rio's shares were 66 Australian cents, or 1. 57 percent down to 41.36 Australian dollars. Eyes are now heavily fixed on ratings moves for BHP Billiton by both Moody's and S&P after the world's largest miner scraped it's progressive dividend policy on Tuesday and undertook structural measures to sure up its balance sheet and protect its A rating.
S&P placed BHP on credit-watch negative on Feb. 2 after downgrading the company from its prized A+ credit rating, reflecting lower price forecasts and "very challenging market conditions and increase demand uncertainty over the coming years."
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