DBRS Places Xstrata Under Review with Developing Implications

DBRS has today placed the ratings for Xstrata plc and its related entities (Xstrata or the Company) Under Review with Developing Implications following the Company’s announcement that it intends to (1) acquire Glencore International AG’s (Glencore) Prodeco thermal coal operations in Colombia for approximately $2 billion and (2) execute a rights issue, which is expected to raise approximately $5.9 billion to fully finance the coal acquisition, with the remainder to be used to pay down debt. Glencore (the owner of approximately 34.5% of Xstrata) has provided irrevocable undertakings to take up its rights in full and Xstrata has arranged for the remainder of the rights issue to be fully underwritten.

The Under Review with Developing Implications status reflects the preliminary stages of the proposed acquisition and equity raising. DBRS expects that the successful completion of the Prodeco acquisition and the announced equity financing will strengthen the Company’s financial profile. DBRS expects to resolve its review upon the close of these transactions.

According to the Company’s preliminary 2008 financial results, Xstrata’s businesses have been weakened by the significant decline in metal prices, causing its financial metrics to be at the low end of the range for its A (low) rating. However, the expected net debt reduction as a result of the equity raising will improve the Company’s financial profile. On a pro-forma basis, gross debt-to-capital will decrease to 32% from approximately 43% at December 31, 2008; debt-to-EBITDA will improve to 1.5 times from 1.9 times; and cash flow-to-debt coverage will increase to 0.51 times from 0.40 times.

Xstrata has stated that the announced acquisition is subject to a number of conditions related to external parties, including approvals by Xstrata shareholders (excluding Glencore) and a number of international regulatory authorities. The transaction is also subject to a number of conditions in the Xstrata-Glencore acquisition agreement.

In addition, under the terms of the agreement, Glencore will have the right to repurchase the Prodeco coal assets for cash consideration of $2.25 billion at any point up until the first anniversary of the closing of the sale. This right is also subject to a number of conditions related to regulatory approvals, among other matters.

Shareholder approval for the coal acquisition and the rights issue will be sought in early March 2009.

The Prodeco export-quality thermal coal assets include two open pit coal mining operations, export port facilities and a 39.8% share in a railway. Xstrata has indicated that the purchase includes in excess of 250 million metric tonnes of saleable coal reserves. Prodeco is reported to currently be the third largest producer of export thermal coal in Colombia and in 2008 produced nine million tonnes of export thermal coal destined predominantly for European and U.S. electricity generators. The Company also indicates that Prodeco has plans in place to increase export thermal coal production to 17 million tonnes by 2013. For the last two years, the Prodeco assets are reported to have generated approximately $47 million in average annual operating profit during a period of robust international thermal coal prices.

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

Xstrata Canada Corporation was previously known as Falconbridge Limited. The Senior Debentures and Preferred Shares of Xstrata Canada Corporation, as well as the Commercial Paper of Xstrata Finance (Canada) Limited, are guaranteed by Xstrata. The Commercial Paper of Xstrata Finance (Canada) Limited is bank line supported.

The applicable methodology is Rating Mining, which can be found on our website under Methodologies.

This is a Corporate rating.