DBRS Downgrades Anglo American plc Rating to BBB, Stable Trend

DBRS Limited (DBRS) has today downgraded the Issuer Rating of Anglo American plc (Anglo or the Company) to BBB from BBB (high) and has changed the trend to Stable from Negative. The downgrade reflects a deterioration of Anglo’s credit metrics and current challenging market conditions in most of its major commodities (iron ore, coal and copper). Cash flow was negatively affected by the low price environment in 2014, which is expected to continue in H1 2015. In the meantime, substantial cash flow deficits caused an increase in debt levels. As a result, all Anglo’s 2014 credit metrics weakened and were either in the BBB range or weaker and are not expected to improve over the near term as challenging market conditions persist well into H1 2015.

Over the past few years, Anglo incurred large net free cash flow deficits, mainly as a result of its ambitious expansion program and its increased investment in De Beers Group of Companies (De Beers) in 2012. Capex in 2015 remains substantial (estimated to be $5.2 billion) as Anglo continues to focus on bringing some key projects into production, including Minas-Rio (iron ore), which was in operation in October 2014, Barro Alto (nickel) and Grosvenor (metallurgical coal) projects. As a result, DBRS expects Anglo to continue to generate large free cash flow deficits in 2015 (albeit significantly lower than in 2014), which would further pressure the balance sheet and credit metrics in 2015.

The Stable trend reflects DBRS’s expectation that a large part of the expected free cash flow deficit in 2015 will likely be financed with cash from asset divestitures. Further capex reduction in 2016 is possible since Minas-Rio is in commercial operations. As a result, cash flow deficit should decrease substantially and the Company would have more flexibility to cope with the low price environment. As a result, credit metrics are expected to weaken modestly in 2015 (compared with 2014) should Anglo’s major commodity prices remain at the current levels.

The BBB rating reflects the following factors: (1) Anglo is one of the largest and most diversified mining companies in the world and (2) Anglo’s iron ore and manganese, copper, diamond, thermal coal and metallurgical coal units generate the majority of earnings and cash flow. These business units are low cost and have generated strong margins. These factors give the Company the ability to cope with price volatility. DBRS recognizes that there has been good progress with Anglo’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, should the current price environment worsen further and Anglo’s credit metrics deteriorate materially from the 2014 level, 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.

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

The applicable methodology is Rating Companies in the Mining Industry (September 2014), which can be found on our website under Methodologies.