Fitch CutsFreeport-McMoRan (FCX) Issuer Default Rating To BB+ From BBB-

March 9, 2017 3:05 AM EST
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Fitch, the rating agency, posted late Wednesday that Freeport-McMoRan (NYSE: FCX) would see about $14 billion of notes and $3.5 billion in facilities impacted by the agency's downgrade of the firms paper. Further, Fitch has a negative outlook on FCX.

To wit (emphasis ours): "The downgrade reflects Fitch's view that FFO adjusted leverage will be above 3x through 2019 but that the company will remain free cash flow (FCF) positive. The Negative Outlook reflects the risk that resolution of the dispute with the government of Indonesia takes a prolonged period to resolve. Fitch believes that failure to gain concentrate export approval will result in FFO adjusted leverage of 5x in 2017 before falling to about 3.4x in 2019 but that cost and capital expenditure cuts could result in FCF generation.

The ratings at Freeport Minerals have been affirmed at 'BBB-', since that entity does not provide upstream guarantees and is lightly levered with minimal debt. Cerro Verde debt, which is consolidated at Freeport Minerals, is non-recourse and serviceable with cash flows from that entity."

The full release is below.

* * * * *

Fitch Ratings-New York-08 March 2017: Fitch Ratings has downgraded the Issuer Default Rating (IDR) of Freeport-McMoRan Inc. (NYSE: FCX) to 'BB+' from 'BBB-'. In addition, Fitch has affirmed Freeport Minerals Corporation's 'BBB-' senior unsecured ratings. A complete list of rating actions follows at the end of this release.

The Rating Outlook is Negative.

Approximately $14 billion of notes and $3.5 billion in facilities are affected by today's rating action.

The downgrade reflects Fitch's view that FFO adjusted leverage will be above 3x through 2019 but that the company will remain free cash flow (FCF) positive. The Negative Outlook reflects the risk that resolution of the dispute with the government of Indonesia takes a prolonged period to resolve. Fitch believes that failure to gain concentrate export approval will result in FFO adjusted leverage of 5x in 2017 before falling to about 3.4x in 2019 but that cost and capital expenditure cuts could result in FCF generation.

The ratings at Freeport Minerals have been affirmed at 'BBB-', since that entity does not provide upstream guarantees and is lightly levered with minimal debt. Cerro Verde debt, which is consolidated at Freeport Minerals, is non-recourse and serviceable with cash flows
from that entity.

Fitch is also withdrawing the IDR on Freeport-McMoRan Oil & Gas LLC (FMOG) given that the rating is no longer relevant to investors. FCX exchanged new FCX notes for the bulk of FMOG notes, the FMOG notes benefit from an FCX guarantee, and FMOG is a much smaller entity following asset sales.

KEY RATING DRIVERS

FINANCIAL LEVERAGE

FCX entered the commodities downcycle with elevated debt levels following the acquisition of Plains Exploration & Production Company as well as high capital commitments at that business and the Cerro Verde brownfield expansion in Peru. FFO adjusted leverage was 4.3x at the end of 2016 and could fall to 3.1x by the end of 2019 if Indonesian exports are resumed. Fitch expects $4.6 billion of debt to be repaid on schedule through 2019, but earnings would fall if Indonesian operations are cut to roughly 40% which could result in FFO adjusted leverage of 3.4x by the end of 2019. Fitch does not expect cash on hand to be used to call notes prior to maturity.

BALANCE SHEET REPAIR

Fitch acknowledges the strides management has made in delevering the balance sheet through assets sales, equity issuances and capex cuts. Net proceeds from the sale of equity were $1.9 billion in 2015 and $1.5 billion in 2016. In addition, FCX exchanged $407 million in principal amount of senior notes for common stock in 2016. Net proceeds from asset sales in 2016 were $6.4 billion.

At Dec. 31, 2016, cash on the balance sheet was $4.2 billion, debt was $16 billion, and $3.9 billion of debt had been repaid in the year.

INDONESIAN EXPORTS HALTED

PT Freeport Indonesia's (PT-FI) rights to export are permitted under its existing contract of work (COW) without restriction or payment of export duties, but the government of Indonesia has implemented new regulations, the most recent of which permit concentrate exports for a five-year period, subject to various conditions. These include conversion from a COW to a special operating license (known as an IUPK), commitment to completion of smelter construction in five years, and payment of export duties to be determined. Export licenses would be valid for one-year periods, subject to review every six months, depending on smelter construction progress.

The government has indicated that PT-FI would be required to immediately convert to an IUPK in order to export concentrates. The IUPK does not provide the rights to fiscal and legal certainty contained in the COW and further requires foreign IUPK holders to divest 51% to Indonesian interests no later than the 10th year of production. PT-FI has advised the Indonesian government that attempts to enforce the new regulations on PT-FI violates its COW and that it is unwilling to terminate its COW unless replaced by a mutually acceptable stability agreement to support its long-term investment plans. On Feb. 17, 2017, PT-FI provided formal notice of an impending dispute to the government listing the government's multiple breaches of the COW. If the dispute is not resolved by June 17, 2017, PT-FI may commence arbitration under the United Nations Commission on International Trade Law Arbitration rules to enforce all provisions of the COW and seek damages. Such proceedings would take place in Indonesia, and, for limited purposes, would be overseen by the Indonesian courts.

As a result of PT-FI's inability to export concentrates, PT-FI is suspending investments, reducing its production by approximately 60% from normal levels and implementing cost savings plans. FCX states that for each month of delay in obtaining approval to export, PT-FI's share of production is expected to be reduced by about 70 million pounds of copper and 70,000 ounces of gold.

Fitch believes PT-FI could operate at roughly 40%, mine in higher grades for a longer period, and generate FCF but that FFO leverage would rise to about 5x in 2017 before falling to about 3.4x with scheduled repayment of debt.

EXPOSURE TO COPPER

Fitch estimates that copper revenues will be about 70% of consolidated revenues in 2017 based on our $1,100/oz. gold and $2.49/lb. copper price assumption. FCX estimates that a $0.10/lb change in the price of copper would change EBITDA by $415 million and operating cash flow by $320 million in 2017. Copper prices have averaged about $2.68/lb for the first two months of 2017 compared with average realized prices of $2.39 for the fourth quarter of 2016.

HIGH-QUALITY ASSETS

The company's remaining assets are large-scale, long-lived mines with competitive costs in North America, average costs in South America and first-quartile costs in Indonesia. FCX has scaled back development since the commodities price slump except for Cerro Verde and underground development at Grasberg. FCX has several brownfield development opportunities to pursue when capital resources are less constrained.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Freeport-McMoRan Inc. include:

--Production at guidance;
--Unit site cost at guidance;
--Fitch's commodity price assumptions: Brent oil prices at $52.50/barrel in 2017 and $55/barrel in 2018, and $60.00/barrel in 2019; copper prices at $5,500/tonne in 2017, $6,000/tonne in 2018, and $6,200/tonne in 2019; and gold prices of $1,100 in all periods;
--Notes repaid on schedule;
--Capital expenditures at guidance.

RATING SENSITIVITIES

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

--Failure to gain approval to export concentrate on reasonable terms from Indonesia;

--FFO adjusted leverage staying above 3.7x on a sustained basis and free cash flow negative.

Future developments that may, individually or collectively, lead to positive rating action include extension of the Contract of Work or attaining a stability agreement in Indonesia and expectation of FFO adjusted leverage below 3.3x on a sustained basis.

The ratings could be stabilized if exports of concentrate are permitted in Indonesia.

LIQUIDITY

Liquidity is robust given expectations of at least $1.2 billion in FCF generation for 2017, and backstopped by $4.1 billion of available cash on hand and $3.5 billion available under the revolving credit facility ($43 million of LOCs outstanding) at Dec. 31, 2016. The revolver matures May 31, 2019. Financial covenants under the revolver include a maximum net debt to EBITDA ratio of 4.25x in 2017 and 3.75x thereafter, and a minimum interest coverage ratio of 2.5x. Fitch does not anticipate a breach.

Fitch expects cash on hand to build while the company is in negotiations with the government of Indonesia.

FULL LIST OF RATING ACTIONS

Fitch has downgraded the following ratings:

Freeport-McMoRan Inc.
--IDR to 'BB+' from 'BBB-';
--$3.5 billion unsecured bank revolver to 'BB+/RR4' from 'BBB-';
--Senior unsecured notes to 'BB+/RR4' from 'BBB-'.

The Rating Outlook is Negative.

Freeport-McMoRan Oil & Gas LLC.
--Senior unsecured notes to 'BB+/RR4' from 'BBB-'.

Fitch has withdrawn the following rating:

Freeport-McMoRan Oil & Gas LLC.
--IDR.

Fitch has affirmed the following ratings:

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-'.



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