Rationale
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 translate 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.
Anglo American’s intermediate financial risk includes a financial policy
focused on moderate debt and robust liquidity with a long-term debt maturity
profile. That said, we expect Anglo American’s current moderate debt to rise
in the coming years, due to substantial capital expenditures (capex) resulting
in negative free cash flow under our 2013 pricing assumptions. Other
constraints for its financial profile include volatile cash flows, substantial
minority holdings in its key iron ore asset Kumba Iron Ore and its key copper
asset Anglo American Sur.
Continued…
