TEXT-S&P puts AngloGold Ashanti on watch negative

Wed Oct 17, 2012 12:24pm EDT

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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