Ratings agency Moody's on Monday downgraded Anglo American's credit rating to below investment grade, saying the world's fifth largest diversified miner "now faces a higher business risk due to deterioration in commodities market conditions and a longer and more uncertain deleveraging period than previously expected."
After the downgrade to junk status Moody's also maintains a negative outlook on the London-listed company's credit rating reflecting "concerns over the potential for a further deterioration in Anglo American plc's bulk commodities portfolio, particularly in iron ore."
The downgrade also reflects Moody's view that the current environment "is not a normal cyclical downturn, but a fundamental shift in the operating environment for the global mining sector"Moody's also cited "high execution risk" associated with Anglo's radical restructuring plan announced in December "as challenging market conditions are likely to slow the pace of the portfolio transformation."
The company with roots going back more than a hundred years to South Africa's gold and diamond fields said last year it would cut around 85,000 employees, almost two-thirds of its workforce. Anglo also plans to reduce the number of mines it operates from 55 to the "low 20s".
Moody's expects weak production currencies, including the South African Rand and Brazilian Real, will continue to cushion Anglo's profitability:
"However, assuming relatively stable earnings in 2016-17 based on Moody's current base case price assumptions for AAL's key commodities, the rating agency does not expect AAL to generate sufficient operating cash flows to deliver substantial organic debt reduction in the next two years. The price declines also offset the management team's success in driving costs down since 2013, and the company targets to deliver $2.1B in further savings over the next two years."
The downgrade also reflects Moody's view that the current environment "is not a normal cyclical downturn, but a fundamental shift in the operating environment for the global mining sector."
The firm believes the downturn likely to be deeper and longer than previously anticipated and "price risk remains to the downside, given global economic uncertainties and slowing growth in China."
Anglo shares closed up 6% in London on Monday ahead of the announcement and the $8 billion counter has enjoyed a 39% rally so far this year.
Image of sculptures made of junk by German artist HA Schult by maratr / Shutterstock.com