NEW YORK–(BUSINESS WIRE)–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 delayed unreasonably.
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-‘ from ‘BBB’;
–$107.4 million 9.50% senior unsecured notes due 2031 to ‘BBB-‘ from ‘BBB’;
–$123.5 million 6.125% senior unsecured notes due 2034 to ‘BBB-‘ from ‘BBB’.
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)
Dodd-Frank Rating Information Disclosure Form