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Anglo American Outlook Revised To Negative On Exposure To Risks In South Africa; 'BBB+/A-2' Ratings Affirmed

19 october 2012

Standard & Poor's Rating Services revised its outlook on global mining company Anglo American PLC to negative from stable. The statement released last Wednesday by the rating agency says that at the same time Standard & Poor's affirmed the company's 'BBB+/A-2' long- and short-term corporate credit ratings.
“We have raised our long-term South Africa national scale ratings on Anglo American to 'zaAA+' from 'zaAA' and affirmed the 'zaA-1' short-term national scale rating,” the statement says.
“The revision of the outlook to negative reflects a combination of:
- Our view that Anglo American's business risk profile is weakening because of rising South African country risks. Our reassessment of South African country risk follows the recent series of strikes and increased underlying social tensions and inequalities, which translates into a weaker business and investment climate in our view. Mining companies in particular may face higher cost inflation as a result of the strikes, although this is mitigated by the recent substantial weakening of the South African rand. Our reassessment of country risk also follows our recent downgrade of South Africa to 'BBB/A-2' foreign currency and 'A-/A-2' local currency with a negative outlook. Anglo American's iron ore, platinum and coal operations in South Africa made up about 50% of its 2011 EBITDA, giving it greater exposure to the country than peers such as Xstrata (BBB+/Negative/A-2) and Rio Tinto (A-/Stable/A-2).
- The risk of further deterioration of profits and cash flow, if strikes in the platinum segment continue and if further strikes do not allow the company to promptly restart its Kumba Iron ore operation after the illegal occupation of the mine was brought to an end by police on Oct. 16. Kumba Iron Ore was alone responsible for 39% of reported EBITDA in the first half of 2012 (35% in 2011); and
- The risk that Anglo American's credit ratios and notably our fully adjusted ratio of funds from operations (FFO) to debt may drop and stay below the 45%-50% we see as commensurate with the current 'BBB+' rating, as a result of the lower price environment.
The raising of the South Africa national scale ratings follows our revision of guidelines for mapping this rating scale (see "Standard & Poor's Revises Mapping Guidance For South Africa National Credit Rating Scale Following Sovereign Downgrade," published Oct. 15, 2012).
The affirmation of the global scale ratings reflects our assessment of Anglo American's financial risk profile as "intermediate" and its business risk profile as "strong," albeit now very much in the lower part of the category.
The negative outlook reflects the risk that we could lower the rating in the next 18 months, if:
- The company's concentration in South Africa remains high and country risks remain elevated, which would likely lead us to revise the company's business risk profile to "satisfactory" from "strong";
- The company loses substantial production and cash flow from South Africa, due to protracted strikes continuing into 2013; or
- If Anglo American's credit ratios weaken, including as a result of rising debt and less supportive commodity prices, and the fully adjusted ratio of FFO to debt declines below 45% without any clear prospects of near-term improvement.
Stabilization of the outlook would require:
- Strikes in the platinum segment to end and iron ore production to be resumed;
- our future assessment of Anglo American's business risk profile to remain "strong"; and
- Improved commodity prices and/or adequate downside resilience and, if needed, management actions to ensure negative free cash flow remains manageable and ratios in line with the rating as mentioned above.”