Fitch Affirms Freeport-McMoRan's IDR at 'BBB'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings affirmed the Issuer Default Ratings (IDRs) of Freeport-McMoRan Inc. (NYSE: FCX) and Freeport-McMoRan Oil & Gas LLC (FM O&G) at 'BBB'. Debt and commitments aggregating approximately $22 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 is Stable.

The Stable Outlook reflects Fitch's belief that the company has sufficient flexibility to manage through a low commodity price environment and return to financial leverage consistent with the ratings once its projects complete.

KEY RATING DRIVERS

COMPANY PROFILE

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.

OIL & GAS DIVERSIFIES

The acquisition of oil and gas operations in June 2013 diversified the company's Indonesian copper exposure. Dec. 31, 2014 SEC proved reserves were 390 million barrels of oil equivalents (MMBOE) of which 63% were proven developed and 74% were oil. Proved reserve life is estimated at 8.1 years and proved developed reserve life is estimated at 5.1 years. During the year, the company produced 57 MMBOE, added 16 MMBOE from extensions and discoveries, acquired 16 MMBOE and sold 62 MMBOE of reserves. As of Dec. 31, 2014 the standardized measure of proved reserves was $6.4 billion down from $9.4 billion as of Dec. 31, 2013.

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 near-term. Fitch expects new borrowings to be limited to drawings under the $1.8 billion Cerro Verde credit facility and working capital finance under the revolver. Pro forma for the February 2015 amendment to the term loan, scheduled maturities of debt are estimated to be $478 million in 2015, $226 million in 2016, $1.6 billion in 2017, $2.6 billion in 2018, and $979 million in 2019.

OPERATING RISK

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 2015 and 2016 before returning to 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 $500 million and operating cash flows by $350 million over a 12-month period on average in 2016 and 2017. In particular, FCX's average copper realizations were $3.09/lb. for the full year 2014. Fitch's mid-cycle copper price assumptions are $2.95/lb. in 2015 and 2016 and $2.72/lb. longer term compared with current prices of about $2.65/lb.

Over a 12-month period on average in 2016 and 2017, a $5 per barrel (bbl.) decrease in oil price from a $65/bbl. Brent price base would result in a decrease in EBITDA of $145 million and a decrease in operating cash flows of $120 million per year. Fitch's Base Case Brent price is $55/bbl. in 2015, $65/bbl. in 2016, and $80/bbl. in 2017 and longer term which compares with a current price of $54.6/bbl.

EXPECTATIONS

FCX guides to operating cash flows of $4 billion in 2015 assuming $2.60/lb. copper, $1,300/oz. gold, $50/bbl. Brent oil, and $9/lb. molybdenum as well as capital expenditures of $6 billion, which would result in a cash short fall. The company is engaged in seeking external equity commitments to fund a portion of the $2.3 billion of oil and gas capital expenditures for the year. Fitch also expects the company to draw $1.375 billion on the remainder of the $1.8 billion Cerro Verde credit facility to support capital expenditures. Fitch expects the company to manage through 2015 without new financing and 2015 EBITDA of at least $6 billion. The company should generate cash flow from operations exceeding capital expenditures beyond 2015 as projects complete.

STRONG LIQUIDITY

Of the $464 million in cash on hand at Dec. 31, 2014, $357 million would available to the holding company after withholding taxes and minority interests. The $4 billion revolver, maturing in May 2019, was fully available except for $45 million representing letters of credits. Financial covenants under the revolver and term loan include a maximum Net Debt to EBITDAX ratio of 4.75 times (x) in 2015 and 2016 with a step-down in 2017 and reverting to 3.75x in 2018, and a minimum interest coverage ratio of 2.5x.

FINANCIAL LEVERAGE

As of Dec. 31, 2014, total debt/operating EBITDA was 2.2x and FFO adjusted leverage was 3.0x. 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 3.75x in 2015 and drop to about 2.0x by the end of 2016. FFO adjusted leverage is expected to drop below 2.5x by the end of 2016.

REGULATORY RISK

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 with the Indonesia government with an initial term expiring in 2021 (COW) and a Memorandum of Understanding (MOU) executed in July 25, 2014 and amended January 2015 due to expire in July 2015. The COW can be extended for two 10-year periods subject to Indonesian government approval, which pursuant to the COW cannot be withheld or delayed unreasonably. Under the MOU, PT Freeport Indonesia (PT-FI) and the government agreed to negotiate an amended COW to address provisions related to the size of the concession area, royalties and taxes, domestic processing and refining, divestment, local content, and continuation of operations after 2021. The execution of the MOU obliges PT-FI to pay additional royalties and export duties as well as work toward building additional smelting and refining capacity in Indonesia. Fitch views this risk as manageable.

TRACK-RECORD

The company has been operating in Indonesia for over 40 years. FCX exhibits a balanced approach to capital expenditures, dividends and financial leverage.

KEY ASSUMPTIONS

--Production at guidance;

--Unit site cost decline with higher incremental production and upon project completion;

--Fitch's Corporate Oil and Gas Price Deck Base Case adjusted for 2015 hedges and Mid-cycle Commodity Price Assumptions for commodities prices;

--Cerro Verde senior secured credit facility drawn to full $1.8 billion by the end of 2015;

--Capital Expenditures at guidance;

--At least $900 million sale of interest in oil and gas subsidiary in 2015.

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

--FFO adjusted leverage staying above 2.5x on a sustained basis and free cash flow negative in a normalized price environment beyond 2015;

--Failure to bridge negative free cash flow with non-debt activity such as reduction in dividends, asset sales, equity sales or other self-help measures.

Positive: not anticipated at this time but would include accelerated repayment of debt.

Fitch has affirmed the following ratings:

FCX

--IDR at 'BBB';

--$4 billion unsecured bank revolver at 'BBB';

--$3.05 billion unsecured term loan at 'BBB';

--$500 million 2.15% senior notes due 2017 at 'BBB';

--$750 million 2.3% senior notes due 2017 at 'BBB';

--$1.5 billion 2.375% senior notes due 2018 at 'BBB';

--$1 billion 3.1% senior notes due 2020 at 'BBB';

--$600 million 4% senior notes due 2021 at 'BBB';

--$2 billion 3.55% senior notes due 2022 at 'BBB';

--$2 billion 3.875% senior notes due 2023 at 'BBB';

--$850 million 4.55% senior notes due 2024 at 'BBB';

--$800 million 5.4% senior notes due 2034 at 'BBB';

--$2 billion 5.450% senior notes due 2043 at 'BBB'.

Freeport Minerals Corporation

--$115 million 7.125% senior unsecured debentures due 2027 at 'BBB';

--$107.4 million 9.50% senior unsecured notes due 2031 at 'BBB';

--$123.5 million 6.125% senior unsecured notes due 2034 at 'BBB'.

Freeport-McMoRan Oil & Gas LLC.

--IDR at 'BBB';

--$236.9 million 6.125% senior notes due 2019 at 'BBB';

--$617 million 6.5% senior notes due 2020 at 'BBB';

--$261.5 million 6.625% senior notes due 2021 at 'BBB';

--$448.5 million 6.75% senior notes due 2022 at 'BBB';

--$778.5 million 6.875% senior notes due 2023 at 'BBB'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Relevant Research:

--'Corporate Rating Methodology' (May 2014);

--'Updating Fitch's Mid-Cycle Commodity Price Assumptions' (July 2014);

--'Fitch Oil and Gas Assumptions Summary Feb 2015' (February 2015).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Fitch Oil and Gas Assumptions Summary Feb 2015

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=862009

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981572

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Fitch Ratings
Primary Analyst
Monica M. Bonar
Senior Director
+1 212-908-0579
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Gregory Fodell
Associate Director
+1 312-368-3117
or
Committee Chairperson:
Mark C. Sadeghian, CFA
Senior Director
+1 312-368-2090
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
[email protected]
Elizabeth Fogerty, +1 212-908-0526
[email protected]

Source: Fitch Ratings

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