DBRS Changes Trend on Anglo American Rating to Negative from Stable

DBRS has today changed the trend to Negative from Stable on the A (low) Issuer Rating of Anglo American plc (Anglo or the Company). The trend change reflects a number of challenges faced by the Company: generally heightened market and commodity risks in the mining sector, a major restructuring of its Platinum business and the need to fund the completion of several major capital projects. A further deterioration in the outlook for Anglo, unforeseen problems in the restructuring of its Platinum unit or further material delays or cost overruns in its major development projects over the course of the next year can be expected to lead to a rating downgrade.

Anglo continues to be one of the world’s largest diversified mining houses. The Company has successfully reshaped its business profile through investing in long-life/high-margin operations focused on upstream resource production and with diverse geographic locations while exiting low-margin or small-scale, non-core businesses. These efforts continued in 2012 and to date in 2013, with a number of major expansion projects underway in iron ore, coal, copper and diamond production as well as a 40% increase in its De Beers Société Anonyme (De Beers) investment to 85% ownership and a 4.5% increase in its shareholding in Kumba Iron Ore Limited to 70% ownership. The Company’s divestiture in 2012 of 24.5% of its interest in Anglo American Sur SA (50.1% now held), although a result of previous arrangements, did reduce some of its copper/South American exposure.

A significant part of Anglo’s business is in Africa (49% of non-current segment assets at December 31, 2012), particularly in South Africa (33% of non-current segment assets). Mining industry wage negotiations, which occur every two years, are currently underway. Over the last couple of years there has been a heightened level of labour volatility in the country, which has affected many mining operations. Anglo now faces an even more strenuous challenge as it has also announced plans to initiate a major restructuring of its Platinum unit, adding to its social and political risks.

Anglo’s financial profile weakened in 2012, with significantly lower earnings (before items considered by DBRS as non-recurring), which were down 54%, and operating cash flow, down 44%. This was a considerable decline from the record levels set in 2011 and can be attributed to lower commodity prices, high cost inflation and operating issues at various business units. Lower operating cash flows, combined with a high level of capital expenditures, as well as the De Beers and other investments, resulted in a tripling of net debt to $9.5 billion and a rise in gross debt leverage from 24% at the end of 2011 to 29% at the end of 2012. The drop in earnings and cash flow and higher debt levels eroded the Company’s coverage metrics. The difficulties in 2012 resulted in a number of management changes, including a new Chief Executive in early 2013.

More recently, commodity prices have continued to show high volatility, experiencing some firmness in Q4 2012 and early Q1 2013, only to suffer a sharp decline in the spring of 2013 brought on by concerns over the strength of growth in the Chinese economy, weak growth in the United States and ongoing uncertain financial stability in Europe. Closer to home, Anglo is engaged in the difficult process of restructuring its underperforming Platinum business. In this environment, Anglo can be expected to face continuing erosion of its financial metrics as it seeks to fund high capital expenditure requirements with lower and more volatile earnings and operating cash flow. This will require the Company to remain prudent with its financing strategy and its large capital expenditure program in the face of ongoing cost inflation if it wishes to maintain the strength of its credit metrics.

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

The rating of Anglo American plc is unsolicited, was not initiated at the request of the issuer, and was based on public information only.

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