DBRS Downgrades Anglo American to A (low), Stable Trend

DBRS has today downgraded the Unsecured Debenture rating of Anglo American plc (Anglo or the Company) to A (low) with a Stable trend from “A” with a Negative trend following a review of the Company’s business and financial profiles. The Commercial Paper ratings of the Company and its finance subsidiary, Anglo American Capital plc, have been confirmed at R-1 (low) with a Stable trend. The rating action reflects deterioration of the Company’s financial metrics to a level more commensurate with an A (low) rating of a cyclical commodity producer at the low point in an economic cycle. DBRS has had Anglo’s long-term debt rating under a Negative trend since April 2009. Even though the Company has made some solid progress with its restructuring and efficiency programs, looking forward, further work remains to be done and it continues to face significant project development risks and the sometimes challenging operating environment in South Africa.

The result is that DBRS does not now expect that Anglo will be able to restore A-level credit metrics in the foreseeable future and that its business profile will continue to be dominated by South African operations for longer than expected. The long-term outlook for Anglo’s core commodities remains favourable although some of the Company’s key operations have been hard hit by the “stress test” of the recent economic downturn. DBRS believes that the lows in the current economic cycle were seen in the fourth quarter of 2008 and the first half of 2009 and that recovery in the commodities sector will continue albeit with some setbacks along the way. Anglo, with its ongoing strategic refocusing and its efficiency programs, can be expected to be a stronger company with increased long-term profitability, but it will require prudence in providing an adequate timeline and financing structure for its aggressive capital program.

Anglo is well positioned in product markets where there are few producers and growing demand (platinum, diamonds and iron ore) but this is somewhat offset by a concentration of operations in South Africa. The Company also has robust production in coal and copper.

Anglo has been undergoing a period of change and refocus since at least 2006 including the spin out or disposal of a number of operating units as well as acquisitions and investment in a core set of operations. Part of the process has been a number of board and management changes and organizational restructurings as well as a significant reduction in the equity base through share buybacks (about $11 billion). The restructuring process has continued and Anglo announced a further streamlining of its management structure and divestment on non-core businesses in October 2009. Combined with restructuring and in response to the economic downturn, Anglo has initiated programs to optimize the use of existing assets and to enhance the materials procurement process across the Company targeted at providing $2 billion in annual cost savings by 2011.

The Company maintains an aggressive capital expenditure program in order to expand production capacity in core areas by developing projects in its $17 billion pipeline of development projects. In the near term, new-capacity spending will be concentrated on iron ore (Minas Rio in Brazil), copper (Los Bronces in Chile) and nickel (Barro Alto in Brazil), which will also serve to expand an already large presence in South America. Although Anglo expects project expenditures to expand its output by one-third by 2013, these projects present added completion, technical and market risks to the Company during their development and early production stages. DBRS believes that prudence will be required in providing an adequate timeline and financing structure for the aggressive expansion program.

Anglo’s first-half of 2009 results reflected the drop in commodity prices brought on by the economic troubles, partially offset by generally strong production volumes (except for diamonds), and the Company’s actions to cut costs and realign operations. Although earnings and cash flow were down significantly from the prior year period, reduced dividends and divestitures of $2.0 billion helped preserve funds for $2.1 billion in capital expenditures, increased working capital and other needs, resulting in a modest decrease in net debt. In the second half of 2009, DBRS expects that increased earnings and cash flow due to higher base and precious metal prices will be offset by declines from iron ore and coal operations, which had not felt the full impact of commodity price declines in the first half of the year, and the impact on costs due to the strengthening of the rand and other production currencies. DBRS also expects that Anglo will maintain dividend and capex outflows in concert with operating cash flows, with any debt reduction being driven by dispositions. Accordingly, Anglo’s leverage is expected to trend downward but its coverage metrics are expected to remain close to the bottom-of-the-cycle lows seen in the first half of 2009.

Anglo’s liquidity remains sound. At June 30, 2009, the Company had cash available of $2.6 billion and unutilized credit availability of $7.5 billion. Debt totalled $14.3 billion, including current portions and the equity component of the recently issued convertible debenture. Impending debt maturities are manageable and the Company expects to be able to operate throughout 2009, and for the foreseeable future, within the level of its current credit facilities.

Anglo 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. 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. However, if infrastructure, social and political concerns in South Africa negatively impact operations there, or the economic recovery falters, Anglo could suffer a shortfall of operating cash flow to fund capital and other needs, resulting in further strain on its financial metrics and, possibly, negative rating actions.

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.