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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