-- Freeport-McMoRan Copper & Gold Inc. announced it intends to
acquire Plains Exploration & Production Co. and McMoRan Exploration Co.
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
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
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
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
-- 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
-- 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;
-- 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
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.
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.
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
Related Criteria And Research
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18,
-- 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 Affirmed; Outlook Action
Freeport-McMoRan Copper & Gold Inc.
Cyprus Amax Minerals Co.
Corporate Credit Rating BBB/Negative/-- BBB/Stable/--
Freeport-McMoRan Copper & Gold Inc.
Senior Secured BBB
Senior Unsecured BBB
Preferred Stock BB+
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