NEW YORK–(BUSINESS WIRE)–Fitch Ratings has assigned a ‘BBB-‘ rating to the $2.1 billion in senior unsecured notes issued by Freeport-McMoRan Inc. (FCX) in exchange for a like amount of notes issued by Freeport-McMoRan Oil & Gas LLC, FCX Oil & Gas LLC and FMSTP Inc., as co-issuers, and guaranteed by FCX, as well as roughly $14.5 million in cash. The new notes are guaranteed by Freeport-McMoRan Oil & Gas LLC. A full list of ratings actions follows at the end of this release.
The Rating Outlook is Negative.
KEY RATING DRIVERS
HIGH FINANCIAL LEVERAGE
Pro forma for the required prepayment of term loans from 50% of proceeds of asset sales received in November and December of 2016 as well as the use of proceeds of the company’s at the market equity offer completed between Oct. 1, 2016 and Nov.23, 2016 to repay debt, total debt-to-EBITDA would have been 6.1x as of Sept. 30, 2016. If remaining asset sales proceeds were used to repay debt, leverage would drop to 5.5x. Fitch expects total debt-to-EBITDA to drop below 2.5x, and FFO adjusted leverage to drop below 3x, by the end of 2018.
FCX entered the commodities down cycle 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.
BALANCE SHEET REPAIR
Net proceeds from the sale of equity were $1.9 billion in 2015 and $1.5 billion through Nov. 23, 2016. In addition, FCX exchanged $369 million in principal amount of senior notes for common stock in the year through Sept. 30, 2016. Gross proceeds from asset sales through Dec. 15, 2016 were nearly $6 billion. In addition, a further $592 million in asset sales are pending.
Fitch expects the bulk of these proceeds to be used to repay debt. Fitch expects the company to meet its current debt reduction target of $10 billion by the end of 2017.
INDONESIA EXPORTS
Current Indonesian mining regulations ban the export of unprocessed concentrates after Jan. 12, 2017 and FCX’s export license expires the day before. The Indonesian government has indicated its intent to revise this regulation but FCX’s Indonesian operations operated at about half capacity for six months in 2014 while the government revised the export regulations associated with the 2009 mining law. Fitch believes disrupted shipments are likely in 2017 but expects these to be of short duration.
EXPOSURE TO COPPER
Fitch estimates that copper revenues will be nearly 70% of consolidated revenues in 2017 assuming pending asset sales are completed in 2016. FCX estimates that a $0.10/lb. change in the price of copper would change EBITDA by $410 million and operating cash flow by $325 million in 2017. Copper prices have averaged about $2.50/lb. Since Nov. 1, 2016 compared with averaged realized prices of $2.19 for the third quarter of 2016 and $2.39/lb. for the third quarter of 2015.
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 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 decline with higher production;
–Fitch’s corporate oil and gas price deck base case and midcycle commodity price assumptions;
–Remaining asset sale closes on schedule;
–Debt prepaid with some of the asset sales proceeds, other debt repaid on schedule;
–Capex at guidance.
RATING SENSITIVITIES
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;
–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.
LIQUIDITY
Liquidity is robust especially in consideration of reduced capex plans and prospects for lower interest expense. Of the $1.1 billion in cash on hand at Sept. 30, 2016, $981 million is available to the holding company after withholding taxes and minority interests. As of Sept 30, 2016, there were no drawings and $43 million in LOCs were issued under the $3.5 billion revolver maturing in May 2019, leaving nearly $3.5 billion available. Fitch estimates that repayment of the term loan will drop annual maturities by $63 million in 2017, $824 million in 2018, $313 million in 2019 and $1.3 billion in 2020.
Financial covenants under the revolver and term loan include a maximum Net Debt to EBITDAX ratio of 8x for the periods ending March 31, June 30 and Sept. 30, 2016 dropping to 6x for the period ending Dec. 31, 2016, dropping further to 4.25x for 2017 and then to 3.75x beginning March 31, 2018. The minimum interest coverage ratio is 2.25x for any period. Fitch expects FCX to be in compliance with these covenants.
FULL LIST OF RATING ACTIONS
Fitch has assigned the following ratings:
FCX
–$177,168,000 6.125% senior notes due June 15, 2019 ‘BBB-‘;
–$551,919,000 6.5% senior notes due Nov. 15, 2020 ‘BBB-‘;
–$227,640,000 6.625% senior notes due May 1, 2021 ‘BBB-‘;
–$403,019,000 6.75% senior notes due Feb. 1, 2022 ‘BBB-‘;
–$726,518,000 6.875% senior notes due Feb. 15, 2023 ‘BBB-‘.
Fitch currently rates FCX as follows:
FCX
–Long-Term IDR ‘BBB-‘;
–$3.5 billion unsecured bank revolver ‘BBB-‘;
–$2.4 billion unsecured term loan ‘BBB-‘;
–Senior unsecured notes ‘BBB-‘;
Freeport Minerals Corporation
–senior unsecured notes ‘BBB-‘;
Freeport-McMoRan Oil & Gas LLC.
–Long-Term IDR ‘BBB-‘;
–Senior unsecured notes ‘BBB-‘.
The Rating Outlook is Negative.
Date of Relevant Rating Committee: Jan. 8, 2016.
Additional information is available at ‘www.fitchratings.com‘.
Applicable Criteria
Corporate Rating Methodology – Including Short-Term Ratings and Parent and Subsidiary Linkage – Effective from 17 August 2015 to 27 September 2016 (pub. 17 Aug 2015)
https://www.fitchratings.com/site/re/869362
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