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Anglo American sees upgrades from S&P on strong H1 performance

S&P Global Ratings on Aug. 11 bumped up its long- and short-term corporate credit ratings on Anglo American Plc to BBB-/A-3 from BB+/B with a stable outlook.

The upgrade is a result of the company's strong financial performance in the first half of the year, which reflected the rebound in commodity prices, particularly for iron ore and coking coal.

The company reported a swing to a first-half net profit of US$1.42 billion from a year-ago loss of US$813 million and resumed its dividend payments six months early.

The rating agency noted that a lower CapEx level and the absence of dividends allowed Anglo American to generate a discretionary cash flow of US$2.7 billion, which helped reduce net debt to US$6.22 billion as compared to US$8.49 billion at the start of the year.

On the back of the improved balance sheet, the miner unveiled a new capital allocation plan and a new financial policy, which will focus on cash flow generation after sustaining CapEx and maintaining an investment-grade balance sheet, including a reported net debt-to-EBITDA ratio of 1.0x to 1.5x.

The company also outlined a new dividend policy targeting payout of 40% of underlying earnings and declared an interim dividend of 48 U.S. cents per share, equivalent to about US$600 million.

"Based on Anglo's CapEx guidance for the coming years, and our view that the company will stick with the base dividend payout in the coming 12 months, we expect the company will allocate the excess cash to further reduce reported net debt to about US$6 billion by the end of 2018," S&P said.

Under Global Ratings' base case scenario, the mining giant's EBITDA is projected at about US$6.9 billion to US$7.3 billion in 2017 and about US$5.4 billion to US$5.9 billion in 2018.

The base case assumes a South African rand-to-U.S. dollar exchange rate of 13.4 for the rest of 2017. It also assumes iron ore prices of about US$55/tonne for the rest of 2017 and US$50/tonne in 2018, copper prices of about US$2.3 per pound for the rest of 2017 and US$2.4/lb in 2018, and coking coal prices of about US$180/tonne for the rest of 2017 and US$140/tonne in 2018.

"Based on the above, we assume that Anglo will have neutral cash flow in the second half of the year and positive discretionary cash flow (free cash flows after CapEx and dividends) of about US$1 billion," the analysts noted.

Meanwhile, the stable outlook reflects S&P's view of the limited downside prospects for the rating over the coming 12 months. The agency believes that projected credit metrics and positive free operating cash flows, together with the new dividend policy, provide headroom to absorb a decline in commodity prices.

The outlook also reflects Anglo's decision to maintain the iron ore and coking coal assets as part of its core portfolio.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.