DBRS Rates Xstrata Group at BBB (high)

Dominion Bond Rating Service (“DBRS”) has assigned a rating of BBB (high) to Xstrata Plc, Xstrata (Schweiz) AG and Xstrata Capital Corporation A.V.V. (collectively “Xstrata” or the “Company”). The trend is Stable. DBRS notes that many non-diversified mining companies are usually rated in the BBB range as they operate in a commodity business with volatile prices and earnings.

The higher ratings assigned to Xstrata reflect: (1) its strong presence in its chosen mineral sectors (the world’s largest producer of both export thermal coal and ferrochrome); (2) its strong cash generating fundamentals; (3) its strong financial discipline as demonstrated by the Company maintaining a moderately leveraged balance sheet and good credit metrics throughout the cycle; (4) management’s expertise and track record in turning around underperforming assets; and, (5) Xstrata’s growth since its initial public offering (IPO) in 2002, making it one of the largest mining companies in the world (in terms of sales and market capitalization). Xstrata generated record 2004 revenues, operating income, and net income on the back of high commodity prices. These record results have continued into the first half of 2005.

DBRS notes that the rating incorporates the risks associated with an acquisitive, albeit disciplined company. Since its IPO, Xstrata has transformed itself via two large strategic acquisitions (it paid US$4.2 billion for these two acquisitions and assumed US$1.8 billion of the acquired companies’ debt). To offset new debt of US$1.4 billion for these acquisitions, Xstrata issued new shares totalling US$3.7 billion. In March 2005, Xstrata demonstrated its discipline by walking away from a bidding war for WMC Resources Limited (“WMC”) of Australia. Xstrata chose not to compete with BHP Billiton Group’s (”BHP”) aggressive US$7.3 billion bid.

In August 2005, Xstrata made a US$1.7 billion debt-funded acquisition of a 20% interest in Falconbridge Limited (“Falconbridge”). With this acquisition, Xstrata’s pro forma gross debt-to-total capital rose to approximately 32% (from 19% at June 30, 2005) – an acceptable gearing level for the rating. Pro forma cash flow-to-total debt is strong at 0.58 times (1.2 times for last 12 months ending June 30, 2005; five-year average of 0.9 times).

It should be noted that Xstrata’s rating is constrained as the Company lacks the overall commodity and currency diversification of the major diversified miners (i.e. Anglo American plc, BHP, and Rio Tinto Group).

Were Xstrata to make a large, debt-financed acquisition that would substantially alter its balance sheet, DBRS would revisit the Company’s rating.

Note:
Issuer ratings apply to all general senior unsecured obligations of the issuer in question.