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Johannesburg - Standard & Poor's (S&P) Ratings Services on Thursday said it has placed diversified mining group Anglo
American (AGL) on CreditWatch with negative implications for its "A-/A-2" long- and short-term corporate credit ratings.
"This is due to a sharp market downturn that we consider could lead to much lower cash flows and weaker leverage in 2009," the ratings agency said.
Recession in developed markets, a marked slowdown in economic growth in emerging markets, and turbulent capital markets have led to substantial falls in spot metals and minerals prices in the past few months.
As with peers, Anglo American's cash flows fluctuate significantly with
changes in market prices.
"The CreditWatch placement reflects our need to evaluate further the likely effect of a sharp downturn in global economic conditions, and the commodity cycle, on Anglo American's credit quality," said S&P's credit analyst Alex Herbert.
"We also need to assess the scale and timing of likely corrective actions by management. A clear and deliverable strategy is needed to mitigate negative pressures that could otherwise result in a lowering of the long-term rating of up to two notches," said Herbert.
S&P noted that Anglo American is somewhat concentrated on base metals and platinum group metals, where spot prices have fallen very significantly.
Some mitigation comes from Anglo American's iron ore and coal operations which, as contract bulk commodities, have less short-term volatility and currently enjoy high prices.
Nevertheless, S&P expect these prices to "weaken quite markedly next year".
While Anglo American has announced some corrective measures to adjust its business strategy and financial profile by more than halving capital expenditures for 2009 to US$4.5 billion, S&P suggest this may not be enough.
"In our view, given the severity and speed of the market decline, the group will need to take quite material steps, such as cutting back on expansionary capital expenditures, closing production capacity when it becomes uneconomic, halting further acquisitions, and taking other measures as needed," S&P said.
Anglo American's debt at end June 2008, was about US$8 billion
(including S&P debt adjustments), rising to a pro forma about US$14.0 billion including US$5.5 billion spent on IronX in the second half of the year.
"Standard & Poor's aims to resolve the CreditWatch status during January 2009, after further discussions with management," said Herbert.
Shares in Anglo American closed 5.82% or R14.51 weaker at R235 on the JSE.
- I-Net Bridge