Morningstar is initiating credit coverage of Anglo American (AAL) with an issuer rating of BBB, reflecting strong credit metrics and a diverse asset base ranging from platinum to coal to copper, offset by the extreme cyclicality that besets all mining companies and an ample helping of country risk associated with a significant South African presence.
Anglo ended 2010 with $13.4 billion in debt, down modestly from $14.3 billion to begin the year. Surging commodity prices translated to buoyant profits and commensurately lower leverage on a debt/EBITDA basis, which fell to 1.2 times from a cyclically high 3.1 in 2009. Netting out a swelling cash balance, leverage was a razor-thin 0.6 times in 2010. While impressive on an absolute basis, this was far from a remarkable number relative to peers.
As with any mining firm, commodity price uncertainty--and the havoc it can wreak on presently strong credit metrics--represents the biggest risk to Anglo's credit profile. In the near term, this risk would manifest most seriously with a hiccup in China's hitherto nonstop ascent of the global GDP league table. The massive sums of capital expenditures Anglo and its peers are set to throw at expansion plans in the coming years also represent a risk to prices, given the magnitude of supply expected to be brought on line.
Finally, in contrast with large peers BHP Billiton (BLT), Rio Tinto (RIO), and Xstrata (XTA), Anglo's portfolio carries a higher degree of country risk, primarily as it pertains to the company's massive South African holdings (48% of revenue and 51% of operating profits in 2010). While we view the risk of asset nationalisation (a proposal pushed by powerful members of the ruling African National Congress party) as highly unlikely, this uncertainty and more benign forms of country risk--for example, price controls on domestic sales--nonetheless weigh on our assessment of Anglo's credit quality.
