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Rating Action:

Moody's assigns Baa2 issuer rating to Xstrata, upgrades Falconbridge bonds to Baa2; outlook stable

22 Aug 2006
Moody's assigns Baa2 issuer rating to Xstrata, upgrades Falconbridge bonds to Baa2; outlook stable

London, 22 August 2006 -- Moody's Investors Service today assigned a Baa2 senior unsecured issuer rating to Xstrata plc ("Xstrata"). In addition, Moody's upgraded the senior unsecured debt rating of Falconbridge Limited to Baa2 from Baa3. This concludes the review of Falconbridge's ratings initiated on May 17, 2006 following the announcement of Xstrata's unsolicited offer. The outlook is stable for all ratings.

Xstrata's Baa2 issuer rating is underpinned by the strength of the group's business profile recently enhanced by its successful acquisition of Falconbridge for a total consideration of USD21.8 billion (including assumed debt). The newly enlarged group is now positioned as one the world's largest and diversified mining groups. Xstrata will enjoy top 5 global positions for all its main products including copper, nickel, thermal and metallurgical coal, zinc and alloys (chrome, vanadium). The addition of a number of large-scale, high quality assets (half of which located in low risk Northern America) will also contribute to strengthen the group's reserve base with an indicated life in excess of 20 years. Also, Falconbridge's sizeable pipeline of greenfield and brownfield projects will provide Xstrata a range of opportunities to extend the life of its assets in most of its commodity segments.

In line with the strategy developed by management since the IPO of Xstrata in early 2002, the Falconbridge acquisition will help further enhance the diversity of its commodity and geographical profile while maintaining a good balance between exchange-traded and bulk negotiated commodities. While the group will remain intrinsically exposed to fluctuations in commodity prices and exchange rates of currencies such as the Australian dollar and South African Rand against the US dollar, its substantial entry into nickel as well as added Canadian dollar exposure will help diversify its overall commodity and currency exposure.

The Baa2 rating also reflects Xstrata's increased debt leverage post Falconbridge acquisition despite the significant equity component to be used to fund the transaction, as Moody's expects that the USD7 billion currently outstanding under a subordinated bridge facility part of a standby equity underwriting structure, will be fully repaid through a rights issue within the next couple of months. Near-term, the credit metrics of the combined group should be strongly positioned relative to the rating with adjusted Debt to EBITDA and RCF (post working capital) to Debt expected to be close to 1.6x and 30% respectively in 2006 on a pro-forma basis. This should however largely reflect the strong operating cash flow currently generated by the group as a result of buoyant commodity markets. While Moody's believes that supported by favourable supply/demand dynamics, commodity prices should remain relatively robust in the intermediate term and allow Xstrata to deliver significant deleveraging in the next 2-3 years, the Baa2 rating incorporates the heightened financial risk associated with the high absolute level of indebtedness taken on by the group at this admittedly high point of the commodity cycle.

Moody's however takes stock of Xstrata's good integration track-record and the relatively conservative financial policies it has maintained in recent years despite its rapid expansion through acquisitions. While Xstrata is likely to participate further in the ongoing consolidation of the sector, it is expected to fund any future sizeable deal so that its financial profile keeps in line with management's commitment to maintaining a minimum mid-Baa credit rating.

Also, Xstrata's Baa2 incorporates an element of structural subordination resulting from its position as the ultimate holding company of the group relative to the location of the group's acquisition bank debt at the level of the intermediate holding company Xstrata Schweiz AG. In this context, Moody's believes that Xstrata plc's creditors have more remote access to the cash flow streams and assets of the operating subsidiaries than senior lenders to Xstrata Schweiz AG, which owns either directly or indirectly all the operating subsidiaries of the group.

Reflecting management's intention to provide a guarantee from Xstrata plc to Falconbridge's bondholders, Moody's however feels appropriate to equalize the rating of Falconbridge's senior unsecured bonds with the issuer rating of Xstrata plc.

The outlook for all ratings is stable based on Moody's expectation that a continuous benign commodity market environment will enable Xstrata to reduce debt in a meaningful manner in the near to intermediate term by using the sizeable free cash flows to be generated from the group's operations.

Xstrata plc is a London-based producer of copper, coal and other metals, that had revenues of $8.0 billion at December 31, 2005.

Falconbridge Limited is a Toronto-based producer of copper, nickel, zinc and aluminum, that had revenues of $8.1 billion at December 31, 2005.

Frankfurt
Michael West
Managing Director
Corporate Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Francois Lauras
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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