Fitch Ratings has downgraded the Issuer Default Rating (IDR) of
Freeport-McMoRan Inc. (NYSE:FCX) to ' BBB-' from 'BBB' along with FCX's
senior unsecured debt. Debt and commitments aggregating approximately
$21.7 billion are affected by today's rating action. A complete list of
rating actions is provided at the end of this release. The Rating
Outlook has also been revised to Negative from Stable.
The downgrade reflects Fitch's view that commodity prices recovery will
be prolonged and financial leverage will be elevated before declining to
levels consistent with a 'BBB-' rating by the end of 2017. The Negative
Outlook reflects the risk of further weakness in commodity prices and
pressure on cash flow generation and financial leverage.
KEY RATING DRIVERS
LARGE DEBT BURDEN
FCX issued $6.5 billion of unsecured senior notes and borrowed $4
billion under an unsecured five-year term loan to fund the cash portion
of the oil and gas acquisitions. Since that time, the company has
completed $5 billion in asset sales ($4.3 billion net of tax) and repaid
$2.1 billion in debt. Repayment of debt has fallen short of original
expectations given weaker commodity prices, six months interruption in
concentrate exports in Indonesia, and high capital expenditures related
to projects expected to be completed in the near term. Borrowings in
2015 have been limited to drawings under the $1.8 billion Cerro Verde
credit facility ($1.5 billion outstanding as of Sept. 30, 2015) and
working capital finance under credit lines ($458 million outstanding
under the $4 billion revolver due 2019, and Fitch estimates a further
$195 million has been borrowed under other facilities through the third
quarter of 2015). Scheduled maturities of debt are estimated to be $206
million in 2016, $1.5 billion in 2017, $3.4 billion in 2018, and $2.4
billion in 2019.
As of Dec. 4, 2015, FCX raised $1.6 billion in gross proceeds from its
$2 billion at-the-market equity programs. During the year, FCX first
reduced its common dividend and then suspended it. In addition, the
company has amended the leverage ratio under its credit agreements from
a maximum Net Debt to EBITDAX ratio of 4.75x to 5.5x in 2015, 5.9x for
the first half of 2016, stepping down to 5.0x by year-end 2016 and 4.25x
in 2017 and reverting to 3.75x in 2018.
In December of 2015, FCX announced that it is evaluating other financing
alternatives including the potential sale of minority interests in
certain mining assets and other actions to provide additional proceeds
for debt reduction.
In October 2015, the company announced that its board was engaged in a
strategic review of its oil and gas business to evaluate alternative
courses of action to improve FCX's financial position, enhance long-term
value for its shareholders and achieve self-funding. Alternatives
include public offering of a minority interest in the business, a
spin-off, joint-venture arrangements and spending cuts. In December
2015, spending cuts were announced resulting in the expectation of
self-funding for 2017. The review is ongoing.
Long-term copper fundamentals benefit from limited new supply, solid
demand from China and strengthening demand from developed nations.
Copper prices are currently weak, however, given anticipation of a
near-term surplus and pressure by speculators. Copper is a relatively
small commodities market and broad-based risk-off sentiment or large
trading positions can move prices quickly and substantially. Fitch
believes copper supply will disappoint and surpluses will be relatively
small in 2016 and 2017 before returning to balance and further deficits.
The oil market has moved into oversupply driven by the combination of
strong global supply, weakening global demand, and lack of OPEC price
support. Fitch expects this oversupply to gradually correct as
substantial industry capital expenditure cuts begin to affect supply.
COMMODITIES PRICE EXPOSURE
Fitch notes that earnings and cash flows are highly levered to commodity
prices and a $0.10/lb. decline in copper prices could cut EBITDA by $475
million and operating cash flows by $330 million over a 12-month period
on average in 2016 and 2017. In particular, FCX's average copper
realizations were $2.64/lb. for the LTM ended Sept. 30, 2015. Fitch's
Mid-Cycle copper price assumptions are $2.18/lb. in 2016 and $2.36/lb in
2017 compared with current prices of about $2.11/lb.
Over a 12-month period on average in 2016 and 2017, a $5 per barrel
(bbl.) decrease in oil price from a $56/bbl. Brent price base would
result in a decrease in EBITDA of $170 million and a decrease in
operating cash flows of $140 million per year. Fitch's Base Case Brent
price is $55/bbl. in 2016, $65/bbl. in 2017, which compares with a
current price of about $36.55/bbl.
The company's payments for royalties, taxes, duties and fees and the
ability to export in respect of its Indonesian mining operations are
governed by a contract of work (COW) between PT Freeport Indonesia
(PT-FI) and the Indonesian government (GOI) with an initial term
expiring in 2021. Despite PT-FI's rights under the COW to export
concentrates without the payment of duties, PT-FI was unable to obtain
administrative approval for exports and operated at approximately half
capacity for about six months in 2014 as a result of new regulations.
The COW can be extended for two 10-year periods subject to Indonesian
government approval, which pursuant to the COW cannot be withheld or
In October 2015, FCX announced that PT-FI and the Government of
Indonesia have engaged in productive discussions regarding the company's
long term operating rights and investment plans. The Minister of Energy
and Mineral Resources for the Republic of Indonesia sent a letter to the
FCX's Chairman assuring FCX that the GOI is completing the amendment of
its legal framework governing coal and mineral resources including
changes to accommodate foreign investment and that a proposal to extend
the COW could be submitted immediately upon implementation of the
amendment and that approval would not be unreasonably withheld or
delayed. The letter stated that it was further understood that the
approval would ensure the same rights and the same level of legal and
fiscal certainty as contained in the COW. Concurrently with the approval
of the contract extension, the company would commit to continuing its
investment program in Indonesia involving approximately $18 billion.
The ratings reflect FCX's leading position in the mining industry,
strong liquidity, and sound operational and financial management.
Operations benefit from low average costs, large scale and long lived
copper reserves. The company has been operating in Indonesia for over 40
years. FCX exhibits a balanced approach to capital expenditures,
dividends and financial leverage.
Assuming prices of $2.00/lb. copper and $45/bbl. Brent crude oil for
2016, FCX estimates consolidated operating cash flows would exceed
capital expenditure of $3.8 billion by more than $600 million. Fitch
expects at least $600 million of free cash flow under its base case
commodity price assumptions.
--Production at guidance;
--Unit site cost decline with higher production upon project completion;
--Fitch's Corporate Oil and Gas Price Deck Base Case and gold at
$1000/oz, Copper at $4800/tonne in 2016 and $5200/tonne in 2017;
--Cerro Verde senior secured credit facility drawn to full $1.8 billion
by the end of 2015
--Debt repaid on schedule;
--Capital Expenditures at guidance.
Negative: Future developments that may, individually or collectively,
lead to negative rating action include:
--FFO adjusted leverage staying above 3.5x on a sustained basis and free
cash flow negative beyond 2015;
--Failure to bridge negative free cash flow with non-debt activity such
as asset sales, equity sales or other self-help measures.
Positive: Future developments that may, individually or collectively,
lead to positive rating action include stabilization in commodity price
expectations leading to the expectation of FFO adjusted leverage below
3.0x on a sustained basis.
Of the $338 million in cash on hand at Sept. 30, 2015, $243 million
would available to the holding company after withholding taxes and
minority interests. As of Sept. 30, 2015, $3.5 billion of the $4 billion
revolver, maturing in May 2019, was available. Financial covenants under
the revolver and term loan include a maximum Net Debt to EBITDAX ratio
of 5.5x in 2015 and 5.9x in the first half of 2016, stepping down to
5.0x by the end of 2016 and 4.25x in 2017 and reverting to 3.75x in
2018, and a minimum interest coverage ratio of 2.5x. Fitch expects FCX
to be in compliance with these covenants.
As of Sept. 30, 2015, total debt/operating EBITDA was 3.8 times (x) and
FFO adjusted leverage was 6.0x. Fitch expects these levels to peak in
2015 with lower earnings as well as borrowings under the Cerro Verde
credit facility. Fitch believes Total Debt to Operating EBITDA will
remain below 5.0x in 2015 and drop below 2.5x by the end of 2017. FFO
adjusted leverage is expected to drop below 2.75x by the end of 2017.
FULL LIST OF RATING ACTIONS
Fitch has downgraded the following ratings:
--IDR to 'BBB-' from 'BBB';
--$4 billion unsecured bank revolver to 'BBB-' from 'BBB';
--$3.05 billion unsecured term loan to 'BBB-' from 'BBB';
--$500 million 2.15% senior notes due 2017 to 'BBB-' from 'BBB';
--$750 million 2.3% senior notes due 2017 to 'BBB-' from 'BBB';
--$1.5 billion 2.375% senior notes due 2018 to 'BBB-' from 'BBB';
--$1 billion 3.1% senior notes due 2020 to 'BBB-' from 'BBB';
--$600 million 4% senior notes due 2021 to 'BBB-' from 'BBB';
--$2 billion 3.55% senior notes due 2022 to 'BBB-' from 'BBB';
--$2 billion 3.875% senior notes due 2023 to 'BBB-' from 'BBB';
--$850 million 4.55% senior notes due 2024 to 'BBB-' from 'BBB';
--$800 million 5.4% senior notes due 2034 to 'BBB-' from 'BBB';
--$2 billion 5.450% senior notes due 2043 to 'BBB-' from 'BBB'.
Freeport Minerals Corporation
--$115 million 7.125% senior unsecured debentures due 2027 to 'BBB-'
--$107.4 million 9.50% senior unsecured notes due 2031 to 'BBB-' from
--$123.5 million 6.125% senior unsecured notes due 2034 to 'BBB-' from
Freeport-McMoRan Oil & Gas LLC.
--IDR to 'BBB-' from 'BBB';
--$236.9 million 6.125% senior notes due 2019 to 'BBB-' from 'BBB';
--$617 million 6.5% senior notes due 2020 to 'BBB-' from 'BBB';
--$261.5 million 6.625% senior notes due 2021 to 'BBB-' from 'BBB';
--$448.5 million 6.75% senior notes due 2022 to 'BBB-' from 'BBB';
--$778.5 million 6.875% senior notes due 2023 to 'BBB-' from 'BBB'.
Additional information is available at 'www.fitchratings.com'.
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
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