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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
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
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.
Corporate Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
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Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
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