DBRS Comments on Xstrata $2.3 Billion Sale of Prodeco Coal Asset

DBRS notes that Xstrata plc (Xstrata or the Company) today announced that it has received formal notice from Glencore International AG (Glencore) of Glencore’s decision to exercise its option to re-acquire the Prodeco coal operations in Colombia sold to Xstrata in conjunction with Xstrata’s rights offering in March 2009. Under the option agreement, Glencore will pay Xstrata $2.25 billion in cash upon completion of the sale plus any profits accrued but not distributed to Xstrata during the period from January 1, 2009, to the completion date and the net balance of any cash invested by Xstrata. DBRS views the impact of this transaction on Xstrata’s ratings to be neutral, with the expected sale proceeds offsetting anticipated long-term cash flow from this productive addition to the Company’s business profile.

Although the Prodeco assets are considered to be a competitive thermal coal operation with growth potential, Xstrata is already a significant player in the international thermal coal trade (Prodeco provided 10.5 million tonnes of the Company’s 82.6 million tonnes of thermal coal production in 2009). The Company retains a solid portfolio of organic growth options in coal and other commodities and has indicated that it intends to dedicate approximately $14 billion to expansionary capital spending over the next three years, including approximately $4.9 billion in 2010. Xstrata’s gross leverage of 29% at year-end 2009 was reasonable for its rating; its debt position (total debt $13.6 billion) was reduced during 2009 but with its robust capital program, the added cash from the Prodeco sale can be put to good use.

Xstrata remains one of the world’s top-tier international, diversified mining companies. The Company has good cash-generating fundamentals and with improved commodity markets expected by DBRS in 2010, its earnings and cash flow are expected to increase over 2009 levels. Xstrata has ambitious plans for growth and is expected to continue to be judicious in the funding of those plans.

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.