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Johannesburg – Anglo American’s default rating was upgraded to Ba1 by ratings agency Moody’s on Thursday.
The international mining company’s outlook remains positive, Moody’s said in a statement.
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"We have upgraded Anglo American's ratings to Ba1 with a positive outlook to reflect its improving credit profile following accelerated debt reduction in 2016 and improving operating cash flows," said Elena Nadtotchi, senior credit officer and the lead analyst for Anglo.
"Anglo's ability to affirm its financial policies, including the dividend policy, will play a key part in sustaining the improved financial profile and higher ratings".
Among the reasons for the rating was the company’s “strengthened” leverage profile, its reduced debt levels and its improved earnings and cash flow from operations, the ratings agency said.
“Anglo has taken effective measures to adapt to the new environment of highly volatile commodity prices, as it cut costs and improved operating resilience of the iron ore division,” said Moody’s.
The recovery in commodity prices had improved Anglo’s earnings before interest, taxation, depreciation and amortisation (Ebitda) to $6.1bn(R79.8bn) in 2016. This was up from $4.9bn (R64.15bn) reported in 2015.
“We expect Anglo to deliver higher Ebitda in 2017 of around $7bn (R91.bn).”
Moody’s is of the view improved Ebitda could see improved free cash flow which would lead to the reinstatement of dividends.
The company’s improved iron ore business has influenced the decision to upgrade the rating, added Moody’s.
“Anglo's South African iron ore operation has also improved its cost position and reported a break-even iron ore price of below $30 (R392.78) per tonne compared to $49 (R641.55) per tonne in 2015.”
Anglo’s journey to investment grade
Moody’s expects the Anglo rating to be upgraded to investment grade.
“In the coming months, we are looking for the company to maintain a strong operational performance and reaffirm financial policies, including dividend policy,” said Moody’s. This will help the mining company maintain a strong financial position, Moody’s highlighted.
An upgrade to investment grade would require Anglo to sustain its leverage profile and its liquidity. Moody’s will also be looking at how the company maintains a strong financial position amid different commodity price scenarios.
A reversal of the progress made in terms of its leverage profile and a higher debt to Ebitda ratio would put negative pressure on its rating, said Moody’s.
Earlier this week, ratings agency Fitch said that the company’s stronger results and debt reduction could turn its strategy as a “forced seller” of assets to cut debt.
Fitch added that the improved commodity prices also contributed to its decision to revise its outlook for the 2017 global mining sector from negative to stable.
“Leverage ratios across the industry, although still high compared to longer-term expectations, are coming down and we believe that in the short term companies will remain focused on reducing absolute debt,” said Fitch.
Anglo American's share was trading at R208.20 at 5.15pm.
