TEXT - S&P revises Freeport-McMoran Copper & Gold outlook

Thu Dec 6, 2012 9:43am EST

Related Topics

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
FILED UNDER: