MOODY'S DOWNGRADES ANGLO AMERICAN

MOODY'S DOWNGRADES ANGLO AMERICAN

By Alex MacDonald, 08/07/13, WSJ

LONDON--Moody's lowered Anglo American PLC's (AAL.LN) credit rating Wednesday on expectations that the miner will need to borrow more than expected to cover its huge capital needs amid weak commodity prices.

Anglo American remains at investment grade after the one-notch cut to Baa2 from Baa1.

The credit ratings agency also reaffirmed its negative outlook for the company on expectations Anglo's capital needs will remain high over the next two years. In particular, Moody's expressed concern about Anglo's ability to execute on time and within budget its long-delayed and costly Minas Rio iron ore project in Brazil and its platinum business in South Africa, where operations have been hit by labor unrest.

"Moody's expects Anglo American to continue to generate modest operational cash flows over the next 12 to 18 months due to persistently negative pressure from escalating costs and weak prices for base metals," the ratings agency said in a note.

It said the company will eventually be operating at a loss because of its large capital needs and this will mean "large additional debt funding."

Anglo American has allotted $6.5 billion to $7 billion for capital spending this year and $7 billion to $7.5 billion in 2014. It capital commitments include funds for the $8.8 billion Minas Rio project and the $1.95 billion Australian Grosvenor metallurgical coal project.

The ratings agency said any additional debt for capital needs combined with management's pledge to pay a dividend leaves the company with little financial maneuverability

Moody's said it doesn't expect any material recovery in the company's financial metrics before 2015 and added that even though Anglo is putting in place new measures to boost performance, the benefits aren't expected to become visible until 2016.

On the bright side, Anglo's $16.7 billion in available liquidity gives the company the necessary headroom to accommodate higher-than-expected capital expenditure and restructuring-related outflows, the credit ratings agency said.

The company had net debt of $9.8 billion at the end of June, up from $8.5 billion at the same time a year before.

Anglo American declined to comment on the downgrade.

-Write to Alex MacDonald at alex.macdonald@wsj.com