DBRS Downgrades Glencore plc Ratings to BBB from BBB (high), Stable Trend

DBRS has today downgraded the Issuer Rating of Glencore plc (Glencore or the Company) to BBB from BBB (high) with a Stable trend. DBRS has also downgraded and discontinued the ratings of each of Glencore Finance (Canada) Limited (formerly Xstrata Finance (Canada) Limited) and Glencore Canada Corporation, as listed below. The downgrade reflects DBRS’s view that Glencore’s current credit risk profile is not in line with DBRS’s BBB (high) rating category because of the factors discussed below.

DBRS’s view that Glencore’s current business risk profile is weaker than that of Xstrata plc standalone reflects Glencore’s marketing operations, which DBRS sees as potentially subject to higher earnings and cash flow volatility than in the mining sector. Higher risk in marketing activities reflects: (1) potential market exposure due to the mismatch of purchase contracts and sales contracts, (2) counterparty risk and (3) open-ended margin risk of any unmatched purchase contract and sales contract prices.

From a financial profile perspective, the Company’s credit metrics (adjusted for debt and cash flow associated with its marketing activities and for the net proceeds received from the sale of the Las Bambas copper assets, less the consideration paid for Caracal Energy Inc.) are in the weak BBB range, even though they have shown some improvement in H1 2014. The Company’s weak credit metrics are attributable to high debt levels and soft commodity prices, such as those of thermal coal and copper. Glencore’s financial profile reduces the Company’s ability to cope with the high uncertainty of current commodity markets.

Glencore is one of the largest mining companies and the largest commodity trader in the world. Its BBB rating and Stable trend is supported by the fact that it is the world’s (1) largest zinc producer, (2) third-largest copper producer, (3) largest export thermal coal producer and (4) fifth-largest nickel producer. The rating is also supported by the following factors: (1) Glencore’s major products (zinc, thermal coal, copper and nickel) are low cost in the first quartile or second quartile of the industry cost curve; (2) many of Glencore’s mines have reserves that are expected to last more than 15 years at current production levels; and (3) its marketing arm provides financing and logistics to producers and customers in ways that other trading companies cannot. The rating, however, is limited by the fact that Glencore is exposed to significant risks associated with its marketing activities.

The Stable trend reflects DBRS’s expectation that Glencore will focus on maintaining good liquidity with its recent debt reduction, solid cash on hand and sizable unused credit facilities. In addition, Glencore has completed or has nearly completed some of its major projects, which also supports the Stable trend. Accordingly, capital expenditures are expected to reduce substantially over the medium term (approximately $11 billion in 2014), which should support the free cash flow profile.

Notes:
All figures are in Canadian 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 Oil and Gas 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.