DBRS Downgrades Anglo American plc Rating to BBB (low), Trend Changed to Negative

DBRS Limited (DBRS) has today downgraded the Issuer Rating of Anglo American plc (Anglo or the Company) to BBB (low) from BBB and changed the trend to Negative from Stable. Although DBRS recognizes Anglo as one of the largest and most diversified mining companies in the world, the downgrade reflects DBRS’s view that the Company’s H1 2015 credit metrics were weaker than previously expected and that the credit metrics for full-year 2015 and into 2016 are expected to deteriorate further given the continuing difficult market conditions faced by its core commodities. There currently appears to be little prospect for price recovery over the near to medium term.

The Negative trend reflects DBRS’s view that the Company’s financial profile could weaken to a level that will not be consistent with DBRS’s investment-grade category and that there are uncertainties with respect to the Company’s proposed restructuring revealed on its December 8, 2015, investor day. These uncertainties reflect the following issues:

(1) With respect to asset sales, the Company proposes to reduce its portfolio of 55 assets to about 22 assets. The assets to be disposed of are expected to be those that currently generate negative cash flow and/or are low margin. However, there is little certainty with respect to (a) the impact of asset disposal on EBITDA and cash flow, (b) the use of any cash proceeds and (c) the timing of the asset sales. Additionally, DBRS views that the Company will face challenging market conditions as a seller of these assets during a period of weak commodity prices.

(2) With respect to cutting the work force, uncertainty remains as to how the Company would implement this plan. Substantially reducing its workforce to approximately 50,000 employees from 135,000 employees will be a challenge, particularly if Anglo’s plan does not solely rely on asset sales.

DBRS recognizes that dividend suspension and the reduction of capital expenditures (capex) will support free cash flow and liquidity. Anglo has indicated it will suspend common dividends in H2 2015 and 2016 (the Company paid approximately $680 million in H1 2015 and $1.01 billion in 2014), as well as substantially reduce capex in 2016 and 2017. DBRS estimates capex in 2016 and 2017 to be approximately $3.5 billion and approximately $2.5 billion, respectively, compared with $6.1 billion in 2014.

Free cash flow for 2015 is expected to remain negative (DBRS estimates between $1.3 billion and $1.5 billion). However, DBRS expects the cash flow deficit to be largely funded with approximately $1.9 billion in proceeds from the sale of the Company’s interests in the Lafarge Tarmac joint venture, and in Anglo American Norte S.A. (copper mines in Chile), both of which closed in H2 2015. In September 2015, the Company also reached an agreement to sell its Rustenburg platinum operations to Sibanye Gold for at least ZAR 4.5 billion ($330 million), which should further support the Company’s still solid liquidity.

DBRS expects to resolve the Negative trend with the next six to 12 months. Should the current restructuring process preserve the core components of Anglo American’s earnings power, its current net debt level be maintained and negative net free cash flow be eliminated, the trend on Anglo’s rating could be returned to Stable. Should Anglo American’s restructuring materially impair the earnings power of its remaining assets without a commensurate reduction of indebtedness, or if the current commodity market conditions weaken further resulting in additional deterioration of Anglo’s credit metrics and liquidity, the rating could be downgraded to non-investment grade.

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 methodologies are Rating Companies in the Mining Industry (October 2015) and Rating Companies in the Industrial Products Industry (June 2015), which can be found on our website under Methodologies.