-- 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.
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.
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
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.
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
-- $0.2 billion of dividends per year, but we believe the company could
reduce these if need be.
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,
-- 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 Affirmed; CreditWatch/Outlook Action
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
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