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Rating Action:

Moody's revises Xstrata rating outlook to negative

22 Dec 2008
Moody's revises Xstrata rating outlook to negative

London, 22 December 2008 -- Moody's Investors Service has today revised to negative from stable the outlook on the Baa2 senior unsecured ratings of Xstrata and its guaranteed subsidiaries.

Moody's said that the outlook change to negative from stable reflects the reduced flexibility enjoyed by Xstrata at its current level of ratings in view of the level of indebtedness it is expected to report at year-end and the rapid decline in commodity prices witnessed over the past few months, which is expected to continue to impact the group's financial performance and credit metrics going into 2009.

Moody's notes that the continuous external growth strategy pursued by Xstrata in the aftermath of its acquisition of Falconbridge for USD22 billion (including assumed debt) in late 2006, have left the group carrying a substantial amount of debt going into the current severe commodity downcycle. The string of bolt-on acquisitions and purchase of a 24.9% stake in Lonmin completed over the past two years at an aggregate cost of approximately USD7.8 billion has prevented the group from using its strong free cash flow generation to reduce net debt, which is expected to be largely unchanged at 2008 year-end compared to the USD15.5 billion reported at the end of June.

Looking ahead, and despite the mitigating effect of a stronger US dollar relative to the currencies of producing countries such as Australia, Canada and South Africa, Xstrata's earnings and cash flow are expected to be significantly affected by the sharp decline in metal prices, in particular copper which accounted for nearly 50% of group operating profit in the last twelve months to June 2008, and the cuts, albeit more contained, in coal prices (20% of group operating profit) that are likely to be demanded by customers when new contracts are negotiated for the Japanese fiscal year starting in April 2009.

The negative outlook therefore reflects the heightened uncertainty weighing on the group's future profitability and cash flow generation, which may result in reduced headroom under some of the financial covenants governing its bank facilities (including maximum Total Debt to EBITDA of 3.0x and a minimum EBITDA Gross Interest cover of 4.0x) at the 2009 year-end.

However, in this context, Moody's expects management to give priority to conserving cash and shoring up the group's financial profile. It takes some comfort from the actions already taken by Xstrata to close/mothball various nickel, ferrochrome and coking coal operations in response to the severe deterioration in operating environment while maintaining a strong focus on cost efficiency. Possible additional corrective measures such as significant cuts in expansionary capital spending and an adjustment to the company's shareholder distribution policy, may allow the group to remain free cash flow positive and trim down debt. This in turn could help rebuild some cushion under its financial covenants and pave the way for a stabilisation of the rating outlook.

Moody's previous rating action on Xstrata was the assignment of provisional Baa2 senior unsecured ratings on 8 November 2006 to notes issued by Xstrata Finance (Canada) Limited and Xstrata Finance (Dubai) Limited that are fully and unconditionally guaranteed on a senior, unsecured and joint and several basis by Xstrata plc and its main direct wholly-owned subsidiary, Xstrata (Schweiz) AG. In addition, both Xstrata Finance (Canada) Limited and Xstrata Finance (Dubai) Limited cross guarantee the notes issued by the other.

For the assignment of this rating, Moody's has used its methodology for the Global Mining Industry, which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Credit Policy & Methodologies directory.

Headquartered in Zug, Xstrata plc is a global mining house with major operations in base metals, coal and alloys located in the Americas, Australia, South Africa and Europe. In fiscal 2007, it reported consolidated revenues of USD28.5 billion.

London
David G. Staples
Managing Director
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Francois Lauras
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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