Johannesburg - Ratings agency Standard & Poor’s (S&P) on Tuesday slashed its assessment of Anglo American’s ability to repay its debt because of the sharp drop in iron ore prices.
In a statement yesterday, S&P said it had lowered the corporate credit ratings on the company to BBB-/A-3 from BBB/A-2 and the South Africa national scale rating to zaAA from zaAA+. The outlook is stable.
It said the stable outlook reflected its view of the limited downside to the rating over the coming 12 to 18 months, supported by the company’s expectations that it will complete its divestment programme by the end of 2016.
Anglo shares on the JSE yesterday climbed 2.85 percent to close at R205.09.
Rubin Renecke, an analyst at Kagiso Asset Management, said the credit rating cut would increase Anglo’s cost of debt and its ability to raise cheap funding on the debt capital markets.
“The iron ore industry has been hard hit by the iron ore price slump and most companies actively are looking to reduce their cost base to cope with lower prices,” Renecke added.
The agency said it had revised its price assumptions for iron ore downward, because it expected a severe supply and demand imbalance in the next two years.
“We expect that low iron ore prices will lead to lower earnings and weaker credit metrics at global mining company Anglo American. We have revised our business risk profile assessment of Anglo down to satisfactory from strong,” it said.
The agency said under its base-case scenario, it projected that Anglo’s adjusted earnings before interest, taxes, depreciation and amortisation (Ebitda) would be between $5.4 billion (R65.2bn) and $5.6bn in 2015 and between $5.8bn and $6.2bn in 2016, compared with $7.5bn in 2014. The downgrade follows the recent significant drop in the iron ore price to about $50 per ton from $70 at the end of 2014.
Historically, the iron ore division was the main contributor to Anglo’s Ebitda, making up about 30 percent in 2014.
“Under our new price deck, we project material drops in the contributions from Kumba Iron Ore, the owner of Anglo’s legacy iron ore assets, and from the new Brazilian greenfield mine Minas Rio,” S&P said.
It said it believed that the competitive iron ore volumes coming to the market, especially from producers such as Rio Tinto and Vale, may change the global cost curve somewhat.
Coupled with Anglo’s profitability levels, which historically have been lower than its large peers, this somewhat weakens Anglo’s competitive position.
In response to inquiries, Anglo media specialist Hulisani Rasivhaga said the mining company would not comment on the matter.