TEXT - S&P revises Freeport-McMoran Copper & Gold outlook
Overview -- Freeport-McMoRan Copper & Gold Inc. announced it intends to acquire Plains Exploration & Production Co. and McMoRan Exploration Co. in transactions totaling $20 billion. -- We are affirming our ratings on Freeport, including the 'BBB' corporate credit rating, and revising the outlook to negative. -- We are placing all ratings on Plains Exploration & Production Co. and McMoRan Exploration Co. on CreditWatch with positive implications. -- The negative outlook on Freeport reflects the leveraged nature of the proposed acquisitions, as well as risks associated with integrating the targeted companies. Rating Action On Dec. 6, 2012, Standard & Poor's Ratings Services revised its rating outlook on Phoenix-based Freeport-McMoRan Copper & Gold Inc. to negative from stable, while affirming all ratings on Freeport, including the 'BBB' corporate credit rating. In addition, we placed all ratings on Plains Exploration & Production Co. and McMoRan Exploration Co., including the respective 'BB-' and 'B-' corporate credit ratings, on CreditWatch with positive implications. It is our expectation that if the transactions are completed as proposed, we would raise the corporate credit ratings on Plains and McMoRan to a level commensurate with that on Freeport, and subsequently withdraw the ratings on the former two companies. Rationale The rating actions follow Freeport-McMoRan Copper & Gold's announcement that it intends to acquire Plains Exploration & Production Co. and McMoRan Exploration Co. in transactions totaling $20 billion. Freeport intends to finance the acquisitions with approximately $9 billion of cash and stock, and an incremental $9.5 billion in debt. The negative outlook on Freeport reflects a large debt burden following these acquisitions, with total pro forma book debt estimated at about $20 billion, as well as risks associated with absorbing and integrating two oil and gas companies. Still, the rating affirmation reflects our view that the company's credit metrics would remain sufficient to support the current 'BBB' rating, albeit with far less capacity for further deterioration. Freeport's credit measures have been strong for the rating, with adjusted debt to EBITDA less than 1x and adjusted funds from operations (FFO) to total debt near 100%. Since the beginning of 2009, the company has reduced debt by more than $3.5 billion, with adjusted debt currently about $4.8 billion. The contemplated transactions would result in pro forma total debt (adjusted for operating leases, pension, other post-employment benefits, and asset retirement obligation) of about $22 billion. Pro forma for the transactions, we estimate debt to EBITDA in 2012 would be 2.5x and FFO to total debt would be about 27%--levels we would consider to be more consistent with an "intermediate" financial risk profile. Although copper and gold prices have been volatile, we continue to expect commodity prices to remain relatively high in 2012 and 2013 because of a combination of continued, albeit slower, growth in Asia and some degree of increased demand from the very slow recovery of Western economies. As a result, we currently expect pro forma EBITDA to be about $8.1 billion in 2013--resulting in leverage of above 2x and FFO to total debt below 30%, before improving somewhat in 2014. This assumes about $7 billion of debt reduction from asset sales and internal cash flow in the next two years. We also make the following assumptions (which approximate our commodity price deck): -- Copper of about $3.50 per pound for the remainder of 2012, and $2.75 per pound thereafter; -- Gold prices of about $1,675 per ounce in 2012 and $1,500 per ounce thereafter; -- WTI crude of $95 per barrel in 2012 and $70 per barrel thereafter; -- Brent crude of $110 per barrel in 2012 and $70 per barrel thereafter; and -- Natural gas of about $2.85 per mcf in 2012 and $3.00 per mcf thereafter (factoring in hedging programs in place). Our ratings also consider management's demonstrated commitment to credit quality, and we continue to expect that the company will take steps during the next few years to reduce debt to more conservative levels. We have taken into consideration actions that Freeport could take--and would likely take--to improve cash flow and lower debt, such as reducing capital spending and selling assets. The rating and outlook reflect Freeport-McMoRan Copper & Gold's leading market position in copper mining, significant and diverse reserve base, and very low-cost Indonesian operations. They also incorporate the risk Freeport faces in operating in lower-rated jurisdictions, in particular Indonesia, which can account for 45%-65% of segment income depending on prices, mine plans, and business conditions. The ratings also reflect the company's exposure to cyclical and volatile commodity prices, rising mining costs, higher costs at its mature U.S.-based operations, and exposure to political and sovereign risks in Indonesia and other lower-rated jurisdictions. In our view, the proposed acquisitions slightly improve the company's business risk by diversifying its operations away from Indonesia and adding commodity diversity, but there are high capital spending needs at both entities. McMoRan has faced mechanical difficulties in achieving production from the high-potential ultra-deep Gulf of Mexico shelf play, and Freeport will have exposure to the volatile oil and gas markets. Liquidity We view Freeport's liquidity as strong. Relevant aspects of our assessment of the company's liquidity profile are the following: -- We expect sources of liquidity over the next couple of years will exceed uses by at least 1.5x and believe sources would exceed uses even if EBITDA were to decline by 30%. -- We believe that Freeport has sufficient covenant headroom under its existing credit facilities and will arrange its new facilities, such that a 30% decline in EBITDA would not result in a breach of financial covenants. -- The company has manageable debt maturities over the next few years. As of Sept. 30, 2012, the company had available liquidity of about $4.5 billion, consisting of $1.5 billion available under its revolving credit facility due March 2016 and approximately $2.7 billion of available balance sheet cash, of which domestic subsidiaries hold $1.2 billion. The company is currently well within the revolving credit facility's financial covenants, including maximum leverage of 3.75x and an interest coverage test of 2.5x, and we expect it to maintain significant cushion under these covenants or any new ones negotiated in connection with the new credit facilities, given our performance expectations. On a pro forma basis, the company will have manageable maturities with $300 million due in 2014, $500 million in 2014, and $200 million in 2015. The company expects to arrange a $4 billion term loan that will mature in 2017. As part of this transaction, we expect the company will increase the size of its revolving credit facility from $1.5 billion to $3 billion. The current facility comes due in 2016. Under our price assumptions described above, we expect the company to generate cash from operations of around $6.5 billion in 2013 and $7.2 billion in 2014. Under this case, a portion of the cash balances will likely be used to fund a significant portion of the company's large capital spending plans (which could reach $7 billion per year for the next couple of years in a favorable price environment) and its ongoing dividend of about $1.3 billion annually, with the remainder going to debt reduction. However, we deem it highly likely that management would scale back capital spending if copper prices were around $2.75 per pound and gold at the $1,500 per ounce assumptions in our base case, and possibly sell assets in order to reduce debt. Very low copper prices could hurt liquidity, though we do not currently expect this. However, if this were to occur, we would expect the company to restructure its operations to ensure adequate liquidity. Outlook The negative outlook on Freeport reflects the large debt burden resulting from these acquisitions. In addition, the outlook reflects the risks involved in absorbing a large acquisition of an oil and gas company with significant operations in the deepwater Gulf of Mexico and, in the case of McMoRan Exploration, the development of a new, risky play that McMoRan has had difficulty bringing into production. We could revise the outlook to stable if the company showed progress in reducing debt and successfully incorporating these operations into its portfolio of mining assets. We could lower the ratings if the company were to encounter problems operating the acquired assets causing the company to raise more debt to finance their development. We could also take a negative action if copper and gold prices dropped significantly, causing the company's financial ratios to deteriorate. Specifically, we could lower the ratings if debt to EBITDA rose and stayed above 4x and FFO to total debt remains below 30% without any clear prospects for improvement. Related Criteria And Research -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Key Credit Factors: Methodology And Assumptions On Risks In the Mining Industry, June 23, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Temporary contact information: Marie Shmaruk (61-3-9631-2040), Megan Johnston Ratings List Ratings Affirmed; Outlook Action To From Freeport-McMoRan Copper & Gold Inc. Cyprus Amax Minerals Co. Freeport-McMoRan Corp Corporate Credit Rating BBB/Negative/-- BBB/Stable/-- Ratings Affirmed Freeport-McMoRan Copper & Gold Inc. Senior Secured BBB Senior Unsecured BBB Preferred Stock BB+ Freeport-McMoRan Corp Senior Unsecured BBB Ratings Put On CreditWatch Plains Exploration & Production Co. Corporate credit rating BB-/Watch Pos/-- BB-/Negative/-- Senior secured BB/Watch Pos BB Recovery rating 2 2 Senior unsecured B/Watch Pos B Recovery rating 6 6 McMoRan Exploration Co. Corporate credit rating B-/Watch Pos/-- B-/Developing/-- Senior unsecured B-/Watch Pos B- Recovery rating 3 3
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