DBRS Confirms Xstrata Ratings at A (low), R-1 (low), Trends Stable

DBRS has today confirmed the ratings of Xstrata plc and its related entities (collectively, Xstrata or the Company) at A (low), R-1 (low) and Pfd-2 (low), as listed below. All trends are Stable. The confirmation reflects Xstrata’s solid balance sheet and credit metrics and ongoing improvements in the cost-competitiveness of its large-scale, diversified operations. In addition, DBRS has today discontinued the rating on Xstrata Capital Corporation A.V.V.’s Guaranteed Convertible Bonds, which were converted into common shares of Xstrata plc.

Debt levels were reduced by $4.3 billion in 2010 (or 31% of total debt at the end of 2009), well down from the Company debt level at the end of 2008 ($17.5 billion). The 2010 debt reduction was financed by free cash flow and the $2.3 billion sale of the Prodeco coal assets to Glencore International AG (Glencore), which were conditionally acquired from Glencore in 2009. Xstrata’s debt level at the end of the first half (H1) of 2011 was $9.8 billion, up modestly from $9.5 billion at the end of 2010. As a result, the debt-to-capital ratio decreased to 17.7% as of June 2011, which DBRS views as a low level and appropriate for a company operating in such a volatile environment and with an ambitious expansion program underway.

DBRS notes that Xstrata issued $3.0 billion in debt on November 4, 2011, which DBRS expects will be used to reduce short-term debt and to fund upcoming debt maturities. Xstrata’s operating cash flow reached a record-high in 2010 and remained strong in H1 2011, boosted by high commodity prices, especially in H2 2010 and H1 2011. In addition, Xstrata benefited from record production in coking coal and nickel while reducing operating costs (despite the unfavourable headwinds of a weakening U.S. dollar) as a result of the restructuring undertaken in late 2008 and 2009.

Liquidity remained strong at June 30, 2011, with improving operating cash flow, $1.4 billion in cash on hand, unutilized credit facilities of approximately $6.6 billion, and a manageable amount of short-term debt due in 2012. Subsequent to June 30, 2011, the Company reduced its available credit facilities from approximately $8.7 billion to $6.0 billion and issued $3.0 billion in new debt, yielding a similar level of available liquidity.

The current ratings are supported by Xstrata’s solid business profile, underpinned by its diversified portfolio of products such as copper (42% on average, Xstrata operating EBITDA before other net as reported by the Company for the five-years to 2010), coal (27%), zinc (13%), nickel (12%), and ferrochrome and other alloys (5%). Demand for most of Xstrata’s products is tied to the long-term urbanization and industrialization of emerging market countries such as China, India and Brazil. The cost-competiveness of Xstrata’s key outputs has been improving, with average cash cost for copper at the median of the copper industry cost curve; thermal coal in the third quartile (higher than the median) and coking coal in the second quartile; zinc and chrome in the lowest-cost quartile and nickel in the low-second quartile. Xstrata’s increasing cost-competitiveness allows it to better cope with low price environments than higher-cost producers. In addition, Xstrata’s business profile is supported by its long-life and high-quality reserves, which generally could last for more than 15 years, based on the current production levels.

Xstrata was an aggressive consolidator in the mining industry until 2008, substantially increasing debt to $17.5 billion at the end of 2008. Although the Company has entered a phase of aggressive organic growth, it remains on the lookout for smaller, bolt-on acquisitions that would enhance its existing businesses or add further diversification to its product portfolio. The Company expects to increase its overall production by 50% (measured on a copper-equivalent volume basis) by 2014 and has an $18.0 billion capital expenditure (capex) program for the 2011-2013 period. Currently, Xstrata has 20 major projects under construction, notably the $5.0 billion Koniambo nickel project in New Caledonia (expected to be in service in H2 2012); the $1.5 billion Anatapaccay copper project in Peru (H2 2012); the $4.2 billion Las Bambas copper project in Peru (H2 2014); the Ravensworth North coal project in Australia (2012); and the $1.1 billion Ulan West coal project in Australia (2014). Notably, the Company has also begun to build a position in iron ore resources, a commodity that it has not produced to date, in contrast to the other super-major mining houses. These projects are subject to significant risks including cost overruns, technological challenges, and new potentially unstable political areas – in addition to normal commodity market volatility – which could lead to a potential strain on Xstrata’s financial resources, given the slowing of the Chinese economy and European debt concerns.

DBRS expects Xstrata’s cash flow and existing borrowing capacity to largely remain sufficient to finance these projects and its other financial programs (scheduled debt repayments and increasing dividends). However, in the event that commodity prices turn unfavourably, rendering insufficient cash flow to fund its capex program, DBRS expects Xstrata to remain flexible on its capital spending and/or to employ a prudent financing strategy so that it would maintain reasonable financial metrics in line with DBRS’s rating parameters for the Company’s current rating.

DBRS believes the long-term outlook for commodities remains favourable as urbanization and industrialization of emerging economies are expected to support demand and prices. The severity of the 2008-2009 downturn led to the slowdown of many output expansion projects, which could constrain supply over the next several years. Xstrata, with an expanding diversified portfolio of increasingly competitive, high-quality operations, is well positioned to profit from the ongoing demand for basic commodities.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The Commercial Paper of Xstrata Finance (Canada) Limited is bank-line supported.

The ratings of Xstrata Finance (Canada) Limited are bank-line supported and guaranteed by Xstrata plc. The ratings of Xstrata Canada Corporation are guaranteed by Xstrata plc.

The applicable methodology is Rating Companies in the Mining Industry, which can be found on our website under Methodologies.