DBRS Confirms Xstrata at A (low) and Removes from Under Review with Developing Implications

DBRS has today confirmed the ratings for Xstrata plc and its related entities (Xstrata or the Company) at A (low), R-1 (low) and Pfd-2 (low) with a Stable trend, following the Company’s announcement that its shareholders have approved a $5.9 billion equity offering and $2 billion purchase of coal assets. DBRS expects that the successful completion of the coal acquisition and the equity financing will strengthen the Company’s business and financial profiles. In addition, despite weak commodity markets, we expect Xstrata to generate positive net free cash flow in 2009; hence, Xstrata’s ratings have been removed from Under Review with Developing Implications, where they were placed on January 30, 2009, when the transactions were announced.

Xstrata announced today that its shareholders have approved all four resolutions proposed at its extraordinary general meeting (EGM) held in relation to the acquisition of the Prodeco thermal coal operations in Colombia from Glencore International AG (Glencore) for approximately $2 billion and a rights issue to raise GBP 4.1 billion (approximately $5.9 billion). Consequently, existing Xstrata ordinary shares will be marked “ex-rights” by the London Stock Exchange and SIX Swiss Exchange on March 3, 2009, and dealings in new shares, nil paid, will commence. The Company also announced that the acquisition of the Prodeco operations has received all necessary approvals and will be completed on March 3, 2009.

Xstrata has a solid business profile as one of the five largest diversified mining companies in the world, with operations in 18 countries. The Company has a significant market position in many commodities, including copper, thermal and coking coal, ferrochrome, zinc and nickel. The acquisition of Prodeco can be expected to strengthen Xstrata’s thermal coal market position. Despite a significant softening in the markets of a number of Xstrata’s commodities, the equity injection of the rights issue, less the cost of the Prodeco assets, will improve the Company’s credit metrics, bringing gross debt in its capital structure down from just over 40% to about 30%, which is more in line with the A (low) rating.

DBRS expects Xstrata’s 2009 results to weaken significantly from 2008 as a result of the collapse of many commodity prices and the number of troubled economies around the world, including some important metal consumers, such as China. We expect that Xstrata’s Copper and Coal units will be the primary contributors to cash flow in 2009 and that its Zinc, Alloys and Nickel units will be essentially cash neutral for the year. Xstrata has already announced a significant reduction in capital expenditures for 2009, which, combined with reduced operating cash flows, leads us to expect positive net free cash flow from the Company for 2009.

Our analysis, which allows for what we believe to be relatively conservative commodity price assumptions, indicates year-end 2009 gross leverage will be about 30%, debt-to-EBITDA approximately two times and cash flow-to-debt greater than 0.35 times.

These credit metrics would be in the acceptable range for the A (low) rating. Additionally, Xstrata’s debt covenants include measures related to EBITDA interest coverage (greater than four times) and debt-to-EBITDA (less than three times). Our current projections indicate that Xstrata remains in compliance with these covenants, but any significant deterioration of Xstrata’s 2009 EBITDA from expected levels may place a strain on these coverage metrics. If the downturn in the economy is more severe than DBRS currently expects or if Xstrata’s operating units fail to live up to our net cash flow expectations, this may lead to weaker credit metrics, which would no longer be commensurate with the rating and could lead to a negative rating action.

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

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.