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S&P ratings boost for Anglo as miner wins war on debt

Dec 02 2016 15:37
Matthew le Cordeur

AngloGold Ashanti CEO Mark Cutifani is stepping down to take over as the head of global mining firm Anglo American.

Company Data

ANGLO AMERICAN PLC [JSE:AGL]

Last traded 364
Change 6
% Change 2
Cumulative volume 365732
Market cap 0

Last Updated: 01/01/0001 at 12:00. Prices are delayed by 15 minutes. Source: McGregor BFA

KUMBA IRON ORE LIMITED [JSE:KIO]

Last traded 387
Change 11
% Change 3
Cumulative volume 56840
Market cap 0

Last Updated: 01/01/0001 at 12:00. Prices are delayed by 15 minutes. Source: McGregor BFA

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Cape Town – Anglo American was on Friday rewarded with a ratings upgrade by S&P Global Ratings after meeting its net debt reduction target this week.

On Thursday, Anglo American [JSE:AGL] announced its sale of a R3bn stake (10% stake) in Exxaro to reduce its debt levels, the fourth sale of a business in its “shrink to survive” strategy it implemented this year.

As a sign of change in fortunes, Anglo told analysts last week that “it was prepared to hang on to assets previously deemed non-core, and run them for cash - unless it receives the ‘right’ offers”, FT reported.

"Since the plan (to sell assets) was unveiled there has been a dramatic rebound in bulk commodity prices, boosting Anglo’s cash generation and profitability to such an extent that it should now comfortably achieve its year-end debt-reduction target without more disposals in 2016," FT explained.

The rally in the prices of bulk commodities, notably iron ore and coking coal, together with the divestment of the niobium and phosphates division, should result in improved credit metrics for Anglo American, S&P said in a statement on Friday.

It raised Anglo’s long-term corporate credit and issue ratings to BB+ from BB. This means it is now one notch below junk status, after S&P plunged the miner into non-investment grade in February, amid the commodities slump.  

“The stable outlook on Anglo American reflects our expectation that the company will be able to reduce its debt over the next 12 to 18 months through cash flow from operations and the divestment of non-core assets,” S&P said.

“At this stage, we do not assume a change in the company's financial policy, and dividends may only be restored in 2018, after ensuring its financial flexibility through a period of low prices.”

How Anglo won war on debt

If the Exxaro sales goes ahead, it would mean that Anglo has succeeded in its aim to reduce net debt to below $10bn (R140.3bn) by end-2016.

Anglo’s interim results in July showed debt at 30 June 2016 decreased to R164.34bn from R181.21bn at 31 December 2015. Further sales – if they are approved - show that it would have surpassed its R140bn target.

In November, Anglo announced the sale of Rustenburg Operations by its wholly owned subsidiary Rustenburg Platinum Mines to Sibanye Rustenburg Platinum Mines.

“The upfront disposal proceeds of R1.5bn received in the form of cash will reduce net debt and further strengthen Anglo American Platinum’s balance sheet,” it said on 1 November.

On 30 September, Anglo said it had sold its Niobium and Phosphates businesses in Brazil to China Molybdenum. Anglo American made R23.88bn from that sale, which is also used to reduce its debt.

In August, it sold a 70% interest in the Foxleigh metallurgical coal mine in Australia, but the cash received remained confidential.

CEO's debt vision

In February, Anglo CEO Mark Cutifani said the firm is taking decisive action to sustainably improve its cash flows and materially reduce net debt, while focusing on its most competitive assets.

"We have detailed a series of measures, including $1.9bn (R26.7bn) of additional EBIT benefits from cost and productivity improvements to deliver positive free cash flow in 2016 and beyond, and an additional $3bn-$4bn (R42bn-R56bn) in asset disposal proceeds.

“As a result, we are targeting net debt of less than $10bn (R140.5bn as of 1 December) in 2016, assuming current commodity prices and exchange rates.

“In the medium term, we are targeting net debt of $6bn (R84.28bn), supporting a return to a solid investment grade credit rating.”

Anglo American said it will focus on competitive, long life assets with considerable organic growth opportunities that mine consumer-driven materials that are expected to benefit from long term growth trends as the global economy evolves and developing economies mature.

Kumba HEPS up 20%

Anglo also announced on Friday that iron core subsidiary Kumba [JSE:KIO] would post an increase in headline earnings for the year ending 31 December of over 20% higher than the comparative period translating to an increase of at least R758m.

S&P said in a statement that its current ratings “factor in the lack of clarity regarding the divestment of Kumba Iron Ore (the owner of the South African iron ore mines). We would consider it detrimental for the rating if the company decided to spin-off the assets to its shareholders.”

S&P sees Anglo American's unadjusted Ebitda rising to between $5.3bn and $5.5bn in 2016 and about $6bn and $6.3bn in 2017 (compared to the previous assumption of $4.3bn and $4.7bn for 2016).

S&P said that Anglo’s decision to pursue more value for its non-core assets is supportive in the short term given the current prices, and would allow the company to continue deleveraging through 2017.

“The stable outlook reflects our view that Anglo American's execution of its deleveraging plans would translate into a financial buffer under the current rating.

“We do not expect to raise the ratings in the short term,” it said. “A future upgrade would be subject to obtaining more clarity on the execution of Anglo's portfolio restructuring plan, including the timeline and proceeds.”

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