DBRS Downgrades Anglo American plc Rating to BB (high), Maintains Negative Trend

DBRS Limited (DBRS) has today downgraded the Issuer Rating of Anglo American plc (Anglo or the Company) to BB (high) from BBB (low) and maintained the Negative trend. The downgrade reflects the more significant-than-expected deterioration of Anglo’s key credit metrics for the full-year 2015 and a weaker business risk profile reflecting a shift in the Company’s business risk as a result of its restructuring efforts and the overall industry dynamics. Additionally, DBRS does not expect the Company’s credit metrics to materially recover in 2016, as Anglo’s core products continue to face a depressed pricing environment that is not likely to recover in the near to medium term.

The Negative trend reflects DBRS’s view that the Company’s credit metrics could deteriorate further if commodity prices continue to weaken and that there continue to be uncertainties with respect to the Company’s proposed business restructuring and debt reduction plans. As part of the restructuring, Anglo announced that it would focus on its core assets, which consist of the diamond, platinum and copper segments, with all other assets (iron ore, manganese, coal, nickel and niobium) being considered as disposable non-core assets. This change in core asset focus represents a significant shift toward increasing the Company’s focus on consumer commodities. DBRS believes that the restructuring will increase Anglo’s business risk as the Company materially decreases its business diversification and size. Additionally, earnings from relatively high political risk countries, such as South Africa, will remain a substantial part of Anglo’s overall earnings.

In 2016, the Company plans to sell $3 billion to $4 billion in non-core assets, which is in addition to the approximately $2 billion already sold in 2015. Anglo plans to reduce the number of its assets to 16 from 45 (as at the end of 2015), with dispositions focusing on negative free cash flow and low margin assets. While proceeds from these dispositions would allow Anglo to reduce its debt balance, DBRS views that Anglo could face difficulties carrying out its disposition plan under the currently challenging market conditions. Additionally, Anglo is dependent on the sale of these non-core assets in order to achieve its target of reducing its workforce from 128,000 current employees to 50,000, as 68,000 employees are tied to for-sale assets. While there is significant execution risk associated with Anglo’s restructuring efforts, once completed, the Company will be leaner and more cost competitive, although this would be achieved at the expense of diversification, size and critical mass.

However, DBRS notes that as part of the restructuring, Anglo has suspended its dividends and substantially reduced its capex to $3.0 billion in 2016 compared with $4.3 billion in 2015. The reduction of capex and dividends would support the Company’s free cash flow and liquidity. DBRS also notes that Anglo maintained solid liquidity consisting of $6.9 billion of cash and $7.9 billion of undrawn committed bank facilities at December 31, 2015.

DBRS expects to resolve the Negative trend within the next six months. Should the restructuring and assets sales progress as planned, current net debt level be meaningfully reduced, the negative free cash flow be eliminated, and the Company’s key ratios improve, the trend could be changed back to Stable. On the other hand, should Anglo fail to execute any of these, the rating could be downgraded.

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 (October 2015), which can be found on our website under Methodologies.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.