DBRS Places Anglo American Under Review with Negative Implications

DBRS has today placed the long- and short-term ratings of Anglo American plc (Anglo or the Company) Under Review with Negative Implications. The rating action reflects the worse-than-expected operating results and cash flow generation in the second half of 2008 and a lack of progress in reducing the high debt level. The Company’s financial risk profile is aggressive for the current ratings. Moreover, with a weak outlook for the Company’s key commodities in the next 12 to 18 months, it is uncertain whether the Company will be able to reduce its high debt leverage and maintain its financial risk profile at a level commensurate with the current ratings.

DBRS had expected the Company’s net debt leverage to rise to over 35% immediately following the acquisition of MMX and that the Company would reduce debt gradually with free cash flow and proceeds from asset sales (notwithstanding the temporary suspension of selling Tarmac). Additionally, DBRS had expected the Company’s operating results and cash flow generation to remain above-average, despite the fact that most of its commodities were showing signs of softness from peak levels in the first half of 2008, resulting in all debt coverage metrics remaining at levels acceptable for the current ratings.

However, the commodity markets experienced a sharp decline in the fourth quarter of 2008, which has materially impaired the Company’s operating results and, consequently, its financial risk profile. Net debt leverage remained at a high level, 35.7% at the end of 2008, and the key debt coverage metrics (debt-to-EBITDA at 1.47 and cash flow-to-total debt at 0.58) were weak for the current ratings. With weak market conditions continuing into 2009, operating results are expected to remain depressed and coverage ratios are expected to weaken further.

The Company has taken a number of remedial actions to try to stabilize its financial profile: (1) Reduced capital expenditures in 2009, by more than 50% to $4.5 billion. (2) Cut production to adjust to lower market demand outlook. (3) Reduced cost base with headcount reductions and aggressive supply chain management. (4) Increased asset optimization and procurement and shared services savings benefits by $1 billion (totaling $2 billion over three years). (5) Suspended dividend payments (US$2.3 billion in 2008). Anglo has also suspended its share repurchase program. Although beneficial, it is uncertain whether these actions will be sufficient to offset the sharp deterioration in the commodity markets and stabilize the Company’s financial profile. DBRS believes that the Company might actually experience a deficit in free cash flow in 2009, depending on the depth of the downturn in the commodity markets.

In its September 29, 2008, rating report on Anglo, DBRS expressed concern that the weakness in the commodity markets could be worse than expected, leading to poorer operating results and impeding the Company’s efforts to reduce debt. DBRS also stated that a lack of progress in debt reduction and/or a sharp deterioration in the debt coverage ratios could lead to negative rating actions. The results in the second half of 2008 have demonstrated the impact of a sharp deterioration in the commodity markets. Even though there is a lack of consensus on the duration or depth of this current downturn, DBRS believes that the commodity markets are likely to stay weak in 2009 and that a subsequent recovery will not be rapid, and we will incorporate this expectation into our analysis. DBRS expects to complete the review within the next few weeks.

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

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

This is a Corporate rating.