THE downgrading of globally diversified mining company Anglo American came as no surprise because it had reported lower earnings and high capital expenditure, Raphael Veverka, a mining analyst of Exane BNP Paribas, said yesterday.
“The downgrade is a reflection of lower earnings and the fact that capital expenditure is going up. As a result, the company’s credit matrix is going to deteriorate in the next year,” Veverka said.
Credit ratings agency Standard & Poor’s (S&P) on Wednesday downgraded Anglo American’s long-term credit rating by a notch to BBB from BBB+, just two marks above junk status.
The downgrade followed concerns that the company would generate a negative cash flow over the next two years amid higher capital spending and dividend payments to shareholders. At the same time, S&P affirmed Anglo American’s A-2 short-term credit rating and had a stable outlook on the company.
It said the stable outlook reflected S&P’s view of limited potential for a further rating downgrade in the next 12 months, given Anglo American’s diversified business risk profile and strong liquidity.
According to S&P, Anglo American’s key weakness was that it remained less geographically diverse than its peers.
Its operations were concentrated in South Africa, which contributed 54 percent of operating profit last year, followed by South America (in particular Chile), which earned 38 percent of profit. Australia contributed about 8 percent of operating profit last year.
“The developments in South Africa’s mining industry will be an important factor in our business risk assessment for Anglo American,” it said in the report yesterday.
S&P assumed there would be no major strikes or labour unrest in the South African operations. It estimated that further production growth of key commodities between 2012 and 2015 would come from Chilean copper project Los Bronces; South African iron ore operation Kolomela, which was commissioned in 2011; and Brazilian nickel project Barro Alto, which was commissioned last year.
“These projects will also be important for Anglo American to further improve its cost base while somewhat reducing its exposure to South Africa,” the report read.
Anglo American posted a 44 percent drop in underlying operating profit to $6.2 billion (R57 billion) last year because of weaker commodity prices.
It was severely hit by operating losses at its platinum business, which was rocked by a two-month illegal strike and write-offs in its $8bn Minas Rio iron ore project in Brazil.
After the two-month strike at the Amandelbult, Union and Rustenburg operations, the platinum business lost 306 000 ounces of production and suffered an underlying operating loss of $120m last year.
Cynthia Carroll quit as chief executive in October after Anglo lost about $14bn in value during her tenure. Former AngloGold Ashanti chief executive Mark Cutifani took over from Carroll on Wednesday.
Anglo American shares lost 0.4 percent to close at R229.18 on the JSE yesterday. – Additional reporting by Bloomberg