OREANDA-NEWS. Fitch Ratings has downgraded Anglo American Plc's (AA) Long-term Issuer Default Rating (IDR) and senior unsecured rating to 'BB+' from 'BBB-'. The Outlook on the Long-term IDR is Negative. The Short-term IDR has also been downgraded to 'B' from 'F3'. All ratings have been removed from Rating Watch Negative (RWN), where they were placed on 11 December 2015. A full list of rating actions is at the end of this commentary.

The downgrade follows the release of additional information on the group's operational restructuring, which includes the sale of approximately 25 assets, and if completed will result in AA becoming a materially smaller mining company focused on diamonds, copper and platinum. We believe the reduced scale of the group together with the current weak credit metrics and uncertainty related to the timing and execution of the restructuring plan/asset sales are more commensurate with a 'BB' category rating.

The Negative Outlook primarily reflects the high level of uncertainty regarding the ultimate success of the group's restructuring plan. In part this comes from the large number of mining assets currently available for purchase, creating a buyers' market. With several of AA's available assets being marginally profitable or lossmaking, this raises the question of whether they will attract a purchase multiple that is acceptable to AA's management. Failure to sell assets as currently envisaged would result in the current elevated credit metrics being sustained for an extended period and in the absence of other factors would result in negative rating action.

KEY RATING DRIVERS
New Business Model
Assuming a successful implementation of the current restructuring programme, AA will have a leaner structure focused on three commodities - diamonds, platinum and copper. We note that AA will retain a meaningful market position in each of these commodities with cost-competitive assets. However, the business will be less diversified overall with a dependence on a smaller number of commodities and high exposure to Africa (around 54% of EBITDA), particularly South Africa. We believe South Africa is a less favourable country for mining companies to operate, given the recent history of an active, unionised workforce and comparatively higher wage and electricity cost inflation.

Addressing High Leverage
Management is addressing its elevated leverage primarily through asset sales as current free cash flow (FCF) generation is limited, given the weakness in commodity markets. We believe the company retains various strategic options to make a step change reduction in debt through the sale of its iron ore, coal and nickel assets. However, there is a high level of uncertainty regarding the timing and execution of asset sales and management's ability to deliver on cost-cutting measures. If management is able to successfully implement the measures its taking, it would support credit metrics as we would expect any cash received from the disposal programme to be used to pay down debt. However, we do not expect credit metrics to be in line with the current rating over the next 18-24 months.

Continued Cash Flow Preservation
We have already seen signs of the implementation of the new strategy, which include the announcement of the sale of assets (Dartbrook, Callide coal mine, Rustenburg, Kimberly), placing assets on care and maintenance (Snap Lake, Twickenham, closure of Thabazimbi) and reorganisation of some assets such as Kumba, where the company began the consultation process about workforce reductions.

These actions will continue to support FCF in the medium term, in addition to a further reduction of capex given the leaner business model. However, Fitch believes there are material risks to AA's strategy and notes that AA may face obstacles for example in reducing its work force, which could be an initial strain on cash flows.

Weak Performance in 2016
We expect 2016 to be another challenging year for AA, not only because of its major restructuring programme, but also due to the ongoing weakness in the commodities markets. Fitch recently updated its mid-cycle commodity price; which reflected downward price revisions due to evidence of a further weakening of Chinese demand for commodities, together with the impact of investor sentiment towards commodities, which is likely to remain deeply negative into 1H16 at least.

KEY ASSUMPTIONS
- Gradual sales of non-core assets between 2016-2018 at an average EBITDA sales multiple of between 3x-4x.
- Price assumptions for selected commodities: iron ore (USD45/t in 2016, USD45/t in 2017, USD50/t), platinum (USD800/oz gradually increasing in 2017-2018), copper (USD4,800/t in 2016, USD5,200/t in 2017 and USD6,000 thereafter), gradual price recovery in diamonds post 2017.
-No dividends paid until 2018.

RATING SENSITIVITIES
Positive: Future developments that could lead to a stabilisation of Outlook:
- Meaningful progress with asset sales and debt reduction together with the expectation of funds from operations (FFO) gross leverage below 3.0x by 2018.
- EBITDA margins above 25%.
- Sustained positive FCF.

Negative: Future developments that could lead to negative rating action include:
- The inability to successfully implement the proposed restructuring plan leading to FFO gross leverage being sustained above 3.5x by end-2018.
- EBITDA margin remaining below 20% with no expectation that FCF will reverse to positive.

LIQUIDITY
AA's liquidity remains strong with around USD7bn of cash and USD8bn of undrawn committed facilities as at end-2015 while short-term borrowings amounted to around USD2bn. Cumulative repayments for 2016-2018 amount to USD8.8bn

FULL LIST OF RATING ACTIONS

Anglo American Plc:
Long-term IDR: downgraded to 'BB+' from 'BBB-'; removed from RWN; Outlook Negative
Short-term IDR: downgraded to 'B' from 'F3'; removed from RWN

Anglo American Capital Plc:
Senior unsecured debt guaranteed by Anglo American Plc: downgraded to 'BB+' from 'BBB-'; removed from RWN