Posted on 31 Mar 2023
Fitch Ratings has upgraded Anglo American plc’s Long-Term Issuer Default Rating (IDR) to ‘BBB+’ from ‘BBB’ and affirmed its Short-term IDR at ‘F2’. The Outlook on the Long-Term IDR Stable. A full list of rating actions is below.
The upgrade reflects continued improvement in Anglo American’s geographical and asset diversification, expectations of solid operational performance coupled with a resilient financial profile.
The rating is underpinned by the group’s enhanced diversification and operational profile, following delivery of the Quellaveco copper project in Peru as well as lack of structural operational issues at the remaining assets. Fitch believes that the financial profile will remain robust despite moderating commodity prices and cost inflation. Fitch expects EBITDA net leverage to remain below 1.0x, despite continued investments and due to sound operational performance through the cycle.
The rating is supported by Anglo American’s significant scale, with leading positions in the diamond and platinum group metals (PGM) market, significant commodity and geographic diversification and competitive cost positions.
Anglo American’s Short-Term IDR of ‘F2’ reflects the lower of the two short-term options for the ‘BBB+’ Long-Term IDR based on our assessment of the company’s financial flexibility, financial structure and operating environment.
KEY RATING DRIVERS
Robust Financial Profile: Anglo American’s financial profile is strong, with Fitch-adjusted EBITDA net leverage of 0.6x in 2022, a moderate increase from 0.2x in 2021, despite falling commodities prices and rising inflation. Gradual reductions in commodities prices, partly offset by higher volumes, is expected to drive down Fitch-adjusted EBITDA towards USD10 billion by 2025 from USD13 billion in 2022. We expect EBITDA net leverage to remain below 1.0x and EBITDA gross leverage below 1.5x in 2023-2026.
We assume that high capex averaging USD6.3 billion per year in 2023-2025 under Fitch’s base case limits the group’s options for special shareholder distributions. Fitch’s capex assumptions include discretionary growth projects such as Woodsmith. In our view, the issuer has some optionality with expenditures above its sustained capex levels of between USD4 billion to USD5 billion annually.
Diversification and Operational Profile Enhancement: Anglo American continues its portfolio and geographical diversification versus peers. Startup of the low cost Quellaveco copper project in Peru is expected to boost copper output by around 45-50% compared with 2021 and diversify revenue streams further away from South Africa. The project delivered over 100kt of copper in 2022 with a 4Q22 run rate of 80kt and is expected to produce an average of over 300kt per year over the next decade. Anglo American continues to invest in the development of the UK-based Woodsmith polyhalite project, which would give the group a foothold in the fertiliser market.
Its current presence in platinum group metals (PGM), copper, nickel, high-quality iron ore and ongoing projects (copper, crop-nutrients and PGMs) reflects a portfolio that is well positioned for the global energy transition compared with other large diversified miners. Fitch believes that existing operating assets will continue to deliver solid operating performance.
Moderating Cost Increases: Higher volumes of production from Quellaveco coupled with a recovery in premium steelmaking coal production are expected to moderate unit cost increases in 2023 compared with the 15% spike in 2022. Fitch’s base case assumes no major disruptions in production levels in 2023. In our view, the containment of cost increases to the mid-single digits is achievable and provides a cushion for a decline in margins. Higher than expected inflationary pressures or unfavourable FX movements may have a negative impact on results.
Pricing Remains Supportive: Prices for most of commodities in Anglo American’s portfolio remain well above mid-cycle levels, amid generally strong fundamentals, despite coming off 2021-2022peaks. China’s reopening since the beginning of this year has boosted sentiment and spot prices for key industrial commodities such as iron ore, copper and met coal, which represent over 60% of mid-cycle EBITDA. The key exception to this trend is PGMs, where basket prices have declined significantly in recent months, hampered by subdued global auto demand.
We expect further normalisation of commodity prices over the coming years, although metals that are well positioned for the energy transition (i.e., copper, nickel), will perform better than others.
Conservative Financial Policies: Anglo American deploys operating cash flow in the following priority: sustaining capex; dividends at 40% of underlying earnings; and discretionary spending that includes growth spending and additional shareholder returns. Financial policy assumes net debt/EBITDA at no more than 1.5x at the bottom of a cycle pricing, without there being a clear path to recovery. The issuer has not exceeded 1.0x threshold in the past five years and Fitch expects credit metrics to remain strong through to 2026.
Ambitious Decarbonisation Strategy: Anglo American has set targets for a 30% improvement in energy efficiency, 30% reduction of scopes 1 and 2 greenhouse gas emissions by 2030 versus its 2016 baseline and operational carbon neutrality across operations and in controlled ocean freight by 2040. Its planned annual spend for decarbonisation projects, such as renewable power in South Africa and hydrogen powered technology (nuGen) over the next three years is around USD300 million.
In October 2022, the first phase of renewable energy projects in South Africa was announced, which will deliver 600MW of an ecosystem that will aim to generate 3-5GW by 2030. Other initiatives to improve metal recoveries, reduce energy consumption and switch to cleaner sources are underway. All South American operations switched to renewable energy from 2023. The Australian assets are expected be 100% powered by renewables by 2025.
Country Ceiling Not a Constraint: Ramp up of Quellaveco in Peru (BBB/Negative) is expected to reduce EBITDA generated from South Africa to one-third of the group from around 50% in 2022. As long as earnings from more creditworthy jurisdictions such as Australia, Chile or Botswana comfortably safeguard hard-currency interest service and the group has access to adequate liquidity from reputable international banks, the lower Country Ceilings of South Africa (BB-/Stable; Country Ceiling: BB) and Brazil (BB-/Stable; Country Ceiling: BB) will not limit the group’s rating.
DERIVATION SUMMARY
Anglo American is one of the world’s largest mining companies, with significant commodity and geographical diversification. Its portfolio of copper, platinum group metals, diamonds, iron ore, premium steelmaking coal, nickel, manganese and prospectively multi-nutrient fertiliser addresses a broader range of end-markets and exhibits more balanced earnings contributions from individual commodities than those of major peers Rio Tinto Plc and BHP Group Limited (A/Stable). Rio Tinto has a material concentration exposure in iron ore and BHP derives more than two thirds of its earnings from iron ore and copper.
Anglo American is smaller than its peers both in absolute terms and by individual assets. Rio Tinto and BHP mostly operate in OECD countries, whereas Anglo American has material exposure to more challenging operating environments, like South Africa (characterised by an active, unionised workforce, comparatively high wage and electricity cost inflation, and electricity shortages) and Brazil (characterised by increased scrutiny of mining companies linked to governance of operating practices following the Mariana and Brumadinho dam disasters). Peru and Chile have traditionally been considered stable mining jurisdictions, although social and political (fiscal) pressures, respectively, have been building in both countries over the past couple of years.
Anglo American has only incrementally higher leverage than BHP and Rio Tinto. The two-notch difference reflects the different scale of operations and country exposures of the portfolios.
We continue to view Anglo American’s portfolio as better diversified than its peers with commodities required for the global energy transition in the longer term.
Source:Fitch Ratings
