DBRS Assigns Issuer Rating of A (low) to Anglo American, Stable Trend

DBRS has today assigned a new Issuer Rating of A (low) with a Stable trend for Anglo American plc (Anglo or the Company) and a new rating of A (low) with a Stable trend for Anglo’s Convertible Bonds. DBRS has concurrently discontinued Anglo’s Unsecured Debentures and Commercial Paper ratings. The discontinuation of the Company’s Unsecured Debentures and Commercial Paper ratings reflects that Anglo utilizes its financing subsidiary Anglo American Capital plc (ACC) or other subsidiaries to effect the issuance of senior unsecured notes and commercial paper. DBRS intends to update the ratings of ACC in a separate rating determination to be issued shortly. Anglo’s Issuer Rating and Convertible Bonds rating of A (low) reflect a recovery of the Company’s credit metrics, solid liquidity as well as good progress on recent restructuring initiatives.

Anglo’s credit quality deteriorated significantly in 2009 due to a sharp decline in earnings as a result of the collapse of commodity prices. However, as commodity prices started recovering in late 2009, EBITDA improved materially in 2010 and reached a record high in the first half of 2011 on an annualized basis, resulting in strong cash flow from operations over the past 18 months.

During the economic downturn and subsequent recovery period, the Company undertook a number of initiatives to preserve its liquidity and improve its overall cost structure, including (1) suspending dividend payout to common shareholders in 2009 ($1.6 billion in 2008), and (2) divesting non-core assets and investments (largely zinc, gold and building materials-related), which provided over $5.7 billion in cash in 2009 and 2010.

At the end of June 2011, the Company’s net debt was reduced by nearly 40% to $6.8 billion from $11.0 billion at the end of 2009. As a result, all key credit metrics improved significantly and remain well within the current rating category as would be expected in the current period of high commodity prices. In the first half of 2011, total debt-to-capital was moderate at 25.2% (2009: 34.6%) and EBITDA-to-interest coverage and cash flow-to-debt ratios doubled over 2009 levels, increasing to 16.4 (times) and 0.62 (times), respectively.

Commodity prices have been boosted by strong demand from Asia (especially China) since late 2009. This has helped the Company to generate strong cash flows in 2010 and H1 2011, which were sufficient to cover capital expenditures (higher than previous levels), and dividends, which were reinstated in 2010.

Anglo’s rating is also supported by the Company’s strong business profile and an improved cost structure through cost control initiatives and the divestiture of low-margin operations. Anglo benefits from being the world’s largest producer of platinum, the fourth largest producer of iron ore for seaborne trade, and the sixth largest copper producer. This gives the Company scale efficiencies and expertise not normally available to smaller mining companies. In addition, Anglo has made significant divestitures and refocused on developing its high-margin assets, as well as its efforts in cost control and operational efficiency thereby improving its competitiveness. Furthermore, Anglo also benefits from improved geographic diversification following the acquisition of iron ore assets in Brazil. The Company now owns and operates a portfolio of mining assets that are principally located in South Africa, Australia and South America.

Earnings over the medium term are expected to continue to remain strong as commodity prices are expected to remain elevated, albeit softer than H1-2011 levels. Future earnings are also expected to be strengthened by higher production levels in nickel, copper and iron ore. Currently the Company is engaged in several major expansion projects including: (1) Barro Alto (nickel, Brazil) start-up in March 2011 with full production expected in H2-2012, (2) Los Bronces (copper, Chile) is 97% completed and is on schedule for its first production in Q4-2011, (3) Kolomela (iron ore, South Africa) is 94% completed with full production expected in 2013, and (4) Minas-Rio (iron ore, Brazil) is expected to begin production in H2 2013.

Despite these strengths, the Company faces challenges. First, a substantial portion of the Company’s earnings are still generated from assets that are based in South Africa, which DBRS considers to have relatively higher business and political risk than South America and Australia. Further, capex on project developments remains higher ($13 billion expected over the next two years and approximately $70 billion over the next decade). These projects are large in scale and entail risks of potential cost overruns, project delays as well as environmental and regulatory risks. Substantial cost overruns could place pressure on the balance sheet and negatively impact credit metrics. Accordingly, DBRS expects the Company to remain disciplined in terms of financing its expenditures in a manner that will keep its credit metrics within DBRS’s current rating parameters.

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

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