DBRS Places Xstrata Under Review with Negative Implications Following Shareholder Approvals of an All-Share Merger with Glencore

DBRS has today changed the ratings of Xstrata plc and its related entities (Xstrata or the Company; rated A (low), R-1 (low) and Pfd-2 (low)) to Under Review with Negative Implications following the Company’s announcement that eligible Xstrata’s shareholders have approved the proposed all-share merger by way of a scheme of arrangement proposed to be made under Part 26 of the U.K. Companies Act between Xstrata and Glencore International plc (Glencore) under which Glencore will acquire, directly or indirectly, the entire issued and to-be-issued share capital of Xstrata (Xstrata Glencore Merger). DRBS expects that if the Xstrata Glencore Merger proceeds as anticipated, Xstrata will become a wholly owned subsidiary of Glencore under common management. In addition, it is expected that all the bonds and subsidiary debt of Xstrata will remain in place post-merger but, to the extent necessary, the merged entity will provide up-stream and down-stream guarantees from appropriate group companies to ensure all senior unsecured debt of the merged group will effectively rank equally. Accordingly, DBRS expects the support of Xstrata’s current debt obligations will weaken from both financial metrics and business profile perspectives. Hence, if the Xstrata Glencore Merger is completed as contemplated, DBRS can be expected to downgrade Xstrata’s ratings. If the merger does not proceed, DBRS can be expected to return Xstrata’s current ratings to a Stable trend.

DBRS expects the Xstrata Glencore Merger will result in an overall weakening of asset quality and higher political risks due to the nature and location of Glencore’s mining and industrial assets. Financial metrics for the combined group are also expected to be weaker. DBRS anticipates that the significant changes in the management of the combined group may lead to lack of clarity in strategic direction for a period of time, in additional to the normal complexity of combining two very large international entities. As an only partial offset, DBRS considers the Xstrata Glencore Merger will result in an enhancement of Xstrata’s business profile with the addition of the commodities marketing group, and there will be synergy in combining the groups.

The Xstrata Glencore Merger remains conditional upon it becoming unconditional and effective, subject to the United Kingdom’s City Code on Takeovers and Mergers, by no later than December 31, 2012, or such later date (if any) as Glencore and Xstrata may, with the consent of the merger panel, agree and (if required) the sanctioning court may allow. The Xstrata Glencore Merger is also subject to: (1) the approval of Glencore shareholders; (2) admission of the new Glencore shares to be resultant of the Xstrata Glencore Merger, for listing on the U.K. Listing Authority’s Official List with a premium listing; (3) successful review and meeting the requirements of merger control entities, including the European Commission, the United States Hart-Scott-Rodino Antitrust Improvements Act of 1976, South African Competition Tribunal, Ministry of Commerce of the People’s Republic of China pursuant to the Anti-Monopoly Law of the People’s Republic of China and the Australian foreign investment approval; and (4) a number of other closing conditions. These conditions and other potential issues mean that uncertainty remains as to the timing of, or if, the Xstrata Glencore Merger will close.

On November 21, 2011, DBRS confirmed the ratings of Xstrata plc and its related entities at A (low), R-1 (low) and Pfd-2 (low), all with Stable trends. The confirmation reflected Xstrata’s solid balance sheet and credit metrics, and ongoing improvements in the cost-competitiveness of its large-scale, diversified operations. DBRS placed Xstrata’s ratings Under Review with Developing Implications on February 7, 2012, in response to the original Xstrata Glencore Merger announcement.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The Commercial Paper of Xstrata Finance (Canada) Limited is bank-line supported.

The ratings of Xstrata Finance (Canada) Limited are bank-line supported and guaranteed by Xstrata plc. The ratings of Xstrata Canada Corporation are guaranteed by Xstrata plc.

The applicable methodology is Rating Companies in the Mining Industry (June 2011), which can be found on our website under Methodologies.