The upgrade from Fitch Ratings reflects the improvement in Anglo American’s financial profile on the back of stronger-than-expected results and cash-flow generation since mid-2016, and steps taken by the company to strengthen its balance sheet.
The group used free cash flow from the recovery in commodity prices, and to a lesser extent proceeds from non-core asset disposals, to reduce leverage.
Gross debt fell from US$19.8 billion at end-2015 to $13.6 billion at 30 June 2017.
The financial profile is now in line with an investment-grade rating and Fitch Ratings’ base case assumes that FFO adjusted leverage will remain around the 2.5x guideline for a ‘BBB’ rating category over the next four years.
Fitch Ratings views Anglo American’s operational profile to be commensurate with the mid-‘BBB’ rating category.
Key rating drivers
Stronger financial profile: Anglo American’s funds from operations (FFO) adjusted gross leverage fell to 3x at end-2016 from 5.4x at end- 2015.
Since December 2015, the group has been able to reduce gross debt to US$13.6 billion from US$19.8 billion. FCF was boosted by the recovery in commodity prices and was used, along with proceeds from divestments, to pay down debt.
Anglo American generated around US$1.8 billion mainly from the sale of its niobium and phosphates assets in 2016. Fitch Ratings expects leverage to decrease to 2.2x in 2017 as the group continues to pay down debt, albeit more slowly.
Investment-grade financial metrics: Fitch Ratings’ projections include a gradual increase in capex after 2017 to US$2.5 billion in 2018 and US$3 billion in 2019.
Dividend forecasts from Fitch Ratings are in line with the company’s policy at 40% of underlying earnings or roughly US$1 billion per annum. Under the base case, Anglo American generates positive FCF of around US$500 million in 2018 and 2019, which translates into leverage of 2.6x in 2018, and 2.5x in 2019 and 2020.
Fitch Ratings projections show that the net debt to EBITDA ratio would remain within the group’s target range of 1x-1.5x.
Sufficient headroom: Fitch Ratings now believes that Anglo American is well placed at a ‘BBB-‘ rating level, with adequate headroom under its debt protection measures.
Fitch Ratings also assumes that if its performance exceeds our forecasts, the group will increase its investments in growth projects or increase shareholder returns, in line with its capital allocation framework.
The latter allocates cash flow in the following order of priority: sustaining capex; balance sheet flexibility to support dividends; and then discretionary capital options (including portfolio upgrades, future project options and additional shareholder returns).
Strong performance to continue: A stronger-than-expected performance in 2016 and 1H17 was mainly driven by the recovery in coal and iron ore prices and, to a lesser extent, operational performance initiatives.
This translated into FCF of around US$2.3 billion in 2016 and US$2.6 billion in 1H17. As a result, we have revised our assumptions upwards with FCF forecast to be US$500 million higher in 2017 at US$2.4 billion.
This assumes that prices will fall from the highs seen in 1H17. Fitch Ratings also expect that the group will achieve its target cost improvements; given its strong record and the US$600 million already delivered as at 30 June 2017 against targeted US$1 billion cost and volume improvements in 2017.
Strong business profile: Anglo American’s operational profile is commensurate with a mid-‘BBB’ rating category. The group has significant commodity and geographic diversification, although it is reliant on South Africa which we view as a challenging environment for mining companies.
It also benefits from competitive platinum assets and its iron ore franchise is expected to improve as production from Minas Rio’s ramps up.
Fitch Ratings believes that the bulk commodities division (iron ore and manganese, coal and nickel) will remain part of the group’s portfolio as improved headroom under its financial profile provides flexibility to hold onto those assets.
Anglo American is one of the world’s largest mining companies with significant commodity and geographic diversification. It is however smaller and less diversified than key peers Rio Tinto and BHP Billiton and is highly exposed to South Africa, which Fitch Ratings views as a challenging operating environment for mining companies, given the context of an active, unionised workforce and comparatively high wage and electricity cost inflation.
Historically, Anglo American has also been more levered than BHP and Rio Tinto. The current rating reflects the fact that in the last year, the group has been able to substantially decrease its high debt load.
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