DBRS Correction: DBRS Downgrades Anglo American to “A”, Negative Trend

In today’s press release on Anglo American plc, DBRS inadvertently stated the rating for the Commercial Paper as R-2 (middle) in the ratings table. The correct rating for the Commercial Paper is R-1 (low). The ratings table has been corrected and the full text of the press release appears below.

DBRS has today downgraded the long- and short-term ratings of Anglo American plc (Anglo or the Company) to “A”, with a Negative trend and R-1 (low) with a Stable trend, respectively. Deteriorating commodity prices and higher leverage, due to acquisitions and a robust capital spending program, have contributed to a weakening of the Company’s financial risk profile to a point where the prior A (high) and R-1 (middle) ratings were no longer sustainable, despite Anglo’s strong business profile. The uncertainty with respect to the depth and breadth of the current economic downturn and its impact on Anglo, as well as the Company’s continuing intention to aggressively expand operations, contribute to the Negative trend designation. With these rating actions, Anglo is removed from Under Review with Negative Implications, where it was placed on February 26, 2009.

As calculated by DBRS, Anglo American’s net leverage at year-end 2008 was 35.7%, high for the prior A (high) and R-1 (middle) ratings, and its EBITDA interest coverage for 2008 was 11.6 times, down from 17.6 times at the end of 2007. In addition, key debt coverage metrics (debt-to-EBITDA at 1.47 and cash flow-to-total debt at 0.58) were weak for the prior ratings.

The drop in commodity prices since the second half of 2008, including prices for platinum group metals, base metals and diamonds, has been dramatic. As well, prices for bulk commodities such as seaborne-traded metallurgical and thermal coal (both reportedly down 55% to 60% for the 2009 coal year) and iron ore (expected to decline 30% to 40% for 2009) – all mainstays of Anglo’s strong 2008 earnings – are expected to be down significantly in 2009. These price drops and weak sales volumes, for at least the first half of 2009, are all expected to contribute to significantly reduced earnings and operating cash flow for the Company. Even though there is a lack of consensus as to 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 only take hold in 2010.

Anglo has taken a number of measures to meet deteriorating market conditions and to stabilize its financial profile: (1) Dividend payments to ordinary shareholders (US$1.6 billion in 2008) and Anglo’s share repurchase program ($0.7 billion in 2008, $6.2 billion in 2007) have been suspended; (2) Capital expenditures in 2009 have been reduced by more than 50% to $4.5 billion ($1.3 billion sustaining and $3.2 billion project capital); (3) Production is to be cut where appropriate to adjust to lower commodity demand, and (4) Cost-reduction measures are being implemented, including headcount reductions, aggressive supply chain management and new procedures to optimize the use of existing assets. In addition, Anglo has been restructuring its portfolio of assets, which has led to asset sales that include the disposition of its remaining interest in Anglo Gold Ashanti Limited (Anglo Gold Ashanti) for $1.8 billion in the first quarter of 2009. This should help to moderate debt levels.

Anglo’s liquidity remains sound. At year-end, the Company had cash available of $2.8 billion and unutilized credit availability of $4.5 billion. Debt at the end of 2008 totalled $14.0 billion, including current portions. Impending debt maturities are manageable and include a $3 billion revolving bank facility, of which $1.1 billion was drawn at December 31, 2008, in 2009, and a GBP 300 million bond maturing in December 2010. The Company expects to be able to operate throughout 2009, and for the foreseeable future, within the level of its current credit facilities.

Although DBRS views Anglo’s actions to control its leverage and improve its credit metrics as beneficial, it is uncertain whether they will be sufficient to offset the sharp deterioration in commodity markets and stabilize the Company’s financial profile. Based on DBRS’s stress analysis and using what we consider reasonably conservative commodity price estimates and Anglo’s guidance on commodity production volumes (where available), DBRS expects essentially no change in the Company’s debt levels in 2009. Projected operating cash flows, supplemented by the proceeds from the Anglo Gold Ashanti share sale, are absorbed by forecast capital expenditures of $4.5 billion, taxes and higher financing costs. Accordingly, we expect that debt levels will remain higher than is appropriate for the Company’s “A” rating and that coverage metrics will deteriorate from 2008 levels.

This level of performance will be tolerable for what we expect to be the low year in the commodity cycle, to be followed by improving financial metrics more acceptable for the rating in 2010 as commodity prices recover. If commodity prices decline to levels lower than DBRS currently expects or if the downturn extends beyond 2009 and Anglo is unable to maintain its leverage at current levels through cost reductions, reduced capital expenditures, asset sales or other means, a further downgrade of the Company’s ratings is likely. Alternatively, if debt levels are kept in check through the current cyclical low and evidence of a sustained recovery in commodity prices becomes evident, the Negative trend will be changed to Stable in anticipation of Anglo’s credit metrics being restored to levels commensurate with its ratings.

Anglo American remains one of the largest diversified mining companies in the world, with significant positions in platinum, diamonds, coal, copper and iron ore. These operations have been able to consistently generate strong cash flow and are likely to do so again in the future. Today’s downgrade reflects the Company’s strong business profile, but weaker financial profile brought on by increased leverage due to high acquisition, capital and share repurchase spending and weaker coverage metrics triggered by the higher leverage and cyclically reduced earnings. DBRS expects Anglo to be able to at least maintain its debt levels during a difficult year in 2009, and to begin to reduce its leverage as commodity markets recover. Additional asset sales to reduce leverage would be viewed as a welcome development.

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.