TEXT-S&P puts AngloGold Ashanti on watch negative
Overview -- We believe that country risk for South African gold miner AngloGold Ashanti Ltd. (AngloGold) has increased in light of continuing strike action in South Africa and the possible implications of increasing social tensions for the mining industry. -- We recently lowered our foreign currency rating on South Africa to 'BBB' from 'BBB+' to reflect the deterioration in the social and economic environment. The outlook remains negative. -- We are therefore placing on CreditWatch negative our 'BBB-' long-term corporate credit and senior unsecured debt ratings on AngloGold. -- The CreditWatch placement reflects the possibility of us lowering the ratings by one notch following our reassessment of AngloGold's business risk profile in light of the increased country risk. Rating Action On Oct. 17, 2012, Standard & Poor's Ratings Services placed on CreditWatch with negative implications its 'BBB-' long-term corporate credit and senior unsecured debt ratings on South African gold miner AngloGold Ashanti Ltd. (AngloGold). In addition, we raised our long-term South Africa national scale rating on AngloGold to 'zaAA-' from 'zaA'. We affirmed our short-term South Africa national scale rating on AngloGold at 'zaA-1'. Finally, we placed our long- and short-term South Africa national scale ratings on AngloGold on CreditWatch negative. Rationale The CreditWatch placement reflects an increase in country risk for AngloGold in light of continuing strike action in South Africa, and the possible implications of increasing social tensions for the mining industry. Our lowering of our foreign currency ratings on South Africa to 'BBB' from 'BBB+' on Oct. 12, 2012, reflected this deterioration in the social and economic environment. (See "South Africa FC Long-Term Rating Lowered To 'BBB'; LC Ratings Lowered To 'A-/A-2'; Outlook Remains Negative," published on RatingsDirect on the Global Credit Portal.) The CreditWatch placement also reflects a potential rise in the company's unit cash cost, which we already consider to be comparatively high. We see a risk that AngloGold's cash costs could increase and its competitive position could deteriorate in the event of wage increases, or general inflationary pressure, although the steep weakening of the South African rand currently offsets this pressure. On average in 2011, AngloGold's unit cash cost was $728 per ounce of gold, compared with the industry average of $600-$650 per ounce. The unit cash cost in the second quarter of 2012 was $801 per ounce. We are planning to reassess AngloGold's business risk profile in light of increased country risk and the possible increase in the company's cash cost. As a result, we could revise AngloGold's business risk profile downward to "fair" from "satisfactory." The CreditWatch placement signals a 50% probability that such a revision will trigger a one-notch downgrade of AngloGold to 'BB+'. We plan to meet with management to ascertain whether the company can reduce both its exposure to country risk and its cash cost. The current strikes caused AngloGold to idle its South African gold mining operations on Sept. 25, 2012. AngloGold's South African operations contributed 43% of EBITDA and 32% of gold production in 2011. At this stage, we do not have any visibility on how long the strikes will last and, more importantly, on the nature of any future agreements between AngloGold and the unions. We view country risk for AngloGold as materially higher than for its North American peers. Even if the company has a pipeline of important growth projects, these are principally in non-OECD countries in continental Africa (such as the Democratic Republic of Congo). In our view, the current situation in South Africa could push AngloGold to move out of South Africa to operate in countries that in our estimation have a higher level of risk, thereby further increasing AngloGold's exposure to country risk. Financially speaking, AngloGold has low leverage and we forecast that profits and cash flows will remain strong, supported by prevailing high gold prices in the context of quantitative easing and global economic uncertainty. Under our base-case scenario, which assumes more prudent gold prices than current prices, we believe that AngloGold's funds from operations (FFO) to debt will remain in the range of 30%-35% in 2013, a level that we consider commensurate with an "intermediate" financial risk profile, before falling to less than 30% in 2014. Our base case includes EBITDA of $2.5 billion in 2012, under the hypothetical assumption that the strike lasts until the end of the year. This compares with EBITDA of $2.9 billion in 2011 and $1.5 billion in the first half of 2012. We assume that EBITDA falls to $1.7 billion in 2013. AngloGold is undertaking a sizable capital expenditure (capex) plan, which we understand amounts to $2.0 billion-$2.5 billion per year. If unchanged, this would translate into substantial negative free operating cash flow (FOCF) in the coming years. Consequently, we do not exclude the possibility of AngloGold's Standard & Poor's-adjusted debt surging to more than $3 billion in the coming years, from $1.4 billion at the end of 2011. However, we recognize that management may reduce growth spending--possibly to about $2.0 billion in 2013 and $1.0 billion in 2014--in the event of lower gold prices. The raising of the long-term South Africa national scale rating reflects our recent adjustment to our mapping guidance for the South African national credit rating scale. Liquidity We assess AngloGold's liquidity as "adequate" under our criteria. We estimate that the ratio of sources of liquidity to uses of liquidity will be comfortably above 1.2x for the next 12 months and the 12 months thereafter. Our assessment reflects minor debt maturities until 2014 ($872 million of mandatory convertible bonds are to be fully converted in 2013); low pressure to pay dividends; and a long-term, fully unutilized, committed credit facility of $1 billion. As of June 30, 2012, AngloGold had the following sizable liquidity sources: -- $1 billion of cash, excluding cash of $270 million that we consider as tied to operations; -- A $0.9 billion long-term, fully unutilized, committed revolving credit facility (RCF) of $1 billion due July 2017 (replacing a previous RCF maturing in April 2014); -- A $550 million unsecured four-year RCF linked to the Tropicana gold project in Australia; -- An additional $750 million of proceeds following issuance of senior unsecured notes in July 2012; and -- Cash flow from operations under our base case of about $2.1 billion by December 2013 and $1.1 billion in 2014. We project the following uses of liquidity as of June 30, 2012: -- Capex of about $2.0 billion-$2.5 billion per year in capex to execute current projects. Management could reduce this spending by about $1.0 billion-$1.5 billion in 2013 and 2014 if need be; -- $750 million of convertible bonds maturing in May 2014; -- A payment of $335 million to complete the acquisition of Mine Waste Solutions; and -- $0.2 billion of dividends per year, but we believe the company could reduce these if need be. CreditWatch We aim to resolve the CreditWatch placement by the end of December, after meeting with management and gaining further insight into the company's ability to reduce its exposure to country risk or better manage its cash cost. We could downgrade AngloGold by one notch to 'BB+' if we reassess AngloGold's business risk profile to "fair" from "satisfactory." Related Criteria And Research All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated. -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Key Credit Factors: Methodology And Assumptions On Risks In The Mining Industry, June 23, 2009 -- Standard & Poor's Revises Mapping Guidance For South Africa National Credit Rating Scale Following Sovereign Downgrade, Oct. 15, 2012 -- South Africa FC Long-Term Rating Lowered To 'BBB'; LC Ratings Lowered To 'A-/A-2'; Outlook Remains Negative, Oct. 12, 2012 -- High Prices Mask A Difficult Future For Gold Miners, Sept. 11, 2012 -- Standard & Poor's Revises Its Metals Price Assumptions For 2012, 2013, And Beyond, Jan. 16, 2012 Ratings List Ratings Affirmed; CreditWatch/Outlook Action To From AngloGold Ashanti Ltd. Corporate Credit Rating BBB-/Watch Neg/-- BBB-/Stable/-- AngloGold Ashanti Holdings PLC Senior Unsecured Debt* BBB-/Watch Neg BBB- Upgraded; CreditWatch/Outlook Action; Ratings Affirmed To From AngloGold Ashanti Ltd. Corporate Credit Rating South African National Scale zaAA-/Watch Neg/zaA-1 zaA/--/zaA-1 *Guaranteed by AngloGold Ashanti Ltd. Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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