DBRS Confirms Xstrata at BBB (high), Assigns New Rating

Dominion Bond Rating Service (DBRS) has today assigned a rating of BBB (high), with a Stable trend, to the Senior Unsecured Debt issued by Xstrata Finance (Canada) Limited. DBRS has also confirmed the ratings of Xstrata Plc, Xstrata (Schweiz) AG, and Xstrata Capital Corporation A.V.V. (collectively Xstrata or the Company) at BBB (high). The ratings were recently (October 30, 2006) removed from a Negative trend on the Company’s completion of a $5.5 billion rights issuance. The proceeds of the equity issuance went towards reducing the Company’s high debt level. The high debt level was due to Xstrata’s recently completed cash and debt-financed acquisition of Falconbridge Limited (Falconbridge), for which the Company took on over $17 billion of new debt. With this equity issuance, the credit metrics for the Company have now strengthened to within an acceptable (upper) range for the rating.

With this equity issuance, Xstrata has strengthened its financial profile by increasing common equity on its balance sheet by $5.5 billion and reducing its debt level by approximately $5.5 billion (net of deferred interest and agent fees). Prof-forma financials for Xstrata at June 30, 2006 (adjusted for Falconbridge acquisition and equity issue), are as follows: (1) Total net debt of $16.1 billion, up from $2.6 billion for stand-alone Xstrata. (2) Percent gross debt-to-capital is 49%, up from 14% for stand-alone Xstrata. (3) Cash flow-to-total debt of over 0.35 times, down from 0.99 times for stand-alone Xstrata. High commodity prices (driven by strong market demand/ fundamentals) are allowing the Company to continue generating strong internal cash flows. Going forward, DBRS expects the Company to use part of its cash flows to continue reducing its debt levels.

DBRS notes that the Company’s business profile has strengthened with the Falconbridge acquisition, as Xstrata has consolidated its position as a world-class diversified mining group with world ranking positions in copper, nickel, thermal and metallurgical coal, zinc and alloys. Additionally, Xstrata has an extensive pipeline of potential projects (including the world class Koniambo nickel project in New Caledonia). Xstrata is now one of the top five largest diversified mining companies in the world (with an enterprise value over $50 billion), along with BHP Billiton Plc, Rio Tinto Plc, Companhia Vale do Rio Doce and Anglo American plc.

Xstrata management has made a number of large, successful acquisitions in the past five years and thus, DBRS feels that integration risk regarding the Falconbridge acquisition will not be an issue. However, risks to the ratings include a down-turn in the global economy (e.g. an easing off from current high commodity prices) preventing the Company from making further debt reduction, and the Company making additional, large, mostly debt-finance acquisitions (e.g. acquisition risk).

Going forward, DBRS expects Xstrata to use its strong cash flow from operations to pay down its debt levels and to bring the Company’s leverage in line with the current rating (e.g. leverage in the low-40% range).

Note:
All figures are in U.S. dollars unless otherwise noted.