DBRS Downgrades Anglo American Rating to BBB (high), Trend Negative

DBRS has today downgraded the Issuer Rating of Anglo American plc (Anglo or the Group or the Company) to BBB (high) from A (low), maintaining the trend at Negative. These rating actions reflect Anglo’s weakened credit metrics and ongoing cost pressure, as well as heightened market and commodity risk in the mining sector. Combined with the challenges faced by the Company in financing its substantial capital expenditures program to bring major projects into production, these factors render the credit quality of the Company no longer commensurate with an A (low) rating.

The Negative trend reflects DBRS’s concern about the prospect of higher debt levels facing the Company in financing net free cash flow deficits expected by DBRS in 2014 as a result of high capital expenditures related to a number of expansion projects, notably the Minas-Rio iron ore project (Brazil) and the Grosvenor metallurgical coal project (Australia).

Over the past few years, Anglo’s balance sheet weakened significantly as a result of rising debt levels and erratic operating cash flow. Anglo incurred large net free cash flow deficits in 2012 and 2013, largely as a result of its ambitious expansion program, as well as its increased investment in De Beers in 2012, resulting in an $8.6 billion increase in net debt over two years. Added debt, coupled with generally weakening commodity prices, resulted in deterioration of its key credit metrics, largely into the BBB range.

The Company continues to face challenges in bringing some key projects into production, including Minas-Rio, which was about 88% complete as at March 31, 2014. In addition, Anglo American faces near-term challenges and added costs in returning its South African platinum operations to full production after a lengthy strike, as well as the longer-term challenge of restructuring its platinum operations. Combined with the uncertainty in key commodity prices such as iron ore, copper and coal, it is DBRS’s view that Anglo continues to have heightened near-term business risk.

DBRS recognizes that there has been good progress with the Group’s program to alter course through changes in senior management, a renewed focus on cost-containment, restructuring of lagging business units and expected decreases in expansion project expenditures in the medium term.

However, with Anglo American’s expectation of between $7.0 billion and $7.5 billion in capital expenditures in 2014, DBRS believes the Company will need to be prudent in its cash outflows and the financing of its net free cash flow deficit to maintain credit metrics at current levels, particularly in the face of weaker commodity prices. If the deterioration of credit metrics can be reversed or even stabilized, the trend of Anglo American’s ratings can be expected to be returned to Stable. However, should the Company’s credit metrics weaken further, a negative rating action could follow.

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 applicable methodologies are Rating Companies in the Mining Industry (primary) and Rating Companies in the Industrial Products Industry (secondary), which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

This is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer and did not include participation by the issuer or any related third party.