Fitch Affirms Freeport-McMoRan's IDR at 'BBB-'; Outlook Revised to Positive

(Fitch Ratings - New York - 09 Mar 2023)--Fitch Ratings has affirmed Freeport-McMoRan Inc.'s (FCX) and Freeport Minerals Corporation's (FMC) Issuer Default Ratings (IDRs) and senior unsecured debt ratings at 'BBB-'. The Rating Outlook is revised to Positive from Stable.

The Positive Outlook reflects Fitch's expectation that consolidated EBITDA leverage in the forecast period will be sustained below 1.8x, supported by FCX's high-quality assets, strong liquidity and improved capital structure. Successful completion of underground transition at Grasberg, guidance on the Indonesian smelter capex and completion of the smelter financing, provide visibility into cash flows to FCX now that their economic interest in PT Freeport Indonesia (PT-FI) dropped to about 49% from about 80%.

The Rating Outlook could be revised to Stable if Fitch expects EBITDA leverage to be sustained in the 1.8x-2.3x range, on a consolidated basis.

Key Rating Drivers

Competitive Cost Profile: FCX's ratings reflect the company's large-scale assets, long-lived mines with competitive costs in North and South America and low first-quartile costs in Indonesia. The company expects 2023 copper cash costs net of by-product credits to be about $1.60/lb. assuming a $1,900/oz. gold price and $20/lb. molybdenum price in FY23. FCX expects site production and delivery costs to increase in 2023 compared with 2022, assuming continued industry-wide cost pressure from energy, equipment components, supplies and labor.

Copper Price Exposure: Copper accounts for about 77% of FCX's consolidated revenues. The company estimates that a $0.10/lb. change in the price of copper would change average 2024/2025 expected EBITDA by $425 million. FCX's average realized price per pound of copper was $3.90 in 2022 compared with $4.33 in 2021 and current spot prices at around $4.12/lb.

Fitch expects the copper market to reflect the need to incentivize supply given the growth in demand for de-carbonization and electrification. We expect copper prices to be volatile but to moderate from 2021/2022 highs to $8,000/tonne ($3.63/lb.) in 2023, $7,500/tonne ($3.40/lb.) in 2024 and 2025 and $7,000/tonne ($3.18/lb.) longer term. Fitch forecasts average annual EBITDA before non-controlling distributions to be about $7 billion at our assumptions.

Reduced PT-FI Interest: Fitch expects FCX's distributions from PT-FI (BBB-/Stable) to average about $800 million per year through 2026. While PT-FI debt is consolidated at FCX, the $3 billion PT-FI notes and the $1.3 billion PT-FI revolver are expected to fund construction of the greenfield smelter in Indonesia, thereby reducing calls on PT-FI's operating cash flows and bolstering distributions.

FCX states that annual debt service cost on the PT-FI debt is expected to be largely offset by the phase out of concentrate export duties. Export duties declined to 2.5% when development progress for additional smelting capacity in Indonesia exceeded 30% and would be eliminated when the figure reaches 50%, subject to governmental verification and approval. The smelter is expected to be commissioned in 2024.

Credit Conscious Financial Policies: FCX's announced financial policy, which aims to allocate cash flows consistent with its strategic objectives of maintaining a strong balance sheet, increasing shareholder returns and advancing growth opportunities, supports its credit quality. The policy was implemented after achieving a net debt target in the range of $3 billion to $4 billion (excluding net debt associated with Indonesian smelter projects). The policy calls for allocating 50% of available cash flows, after planned capex and distributions to noncontrolling interests, to shareholder returns, and the balance to debt reduction and investments in growth projects.

Derivation Summary

FCX's closest operational peer is Southern Copper Corporation (SCC; BBB+/Stable), given the spread of its copper assets. FCX is larger albeit less profitable given higher average costs than SCC but is similarly leveraged.

FCX is larger, more profitable and has lower leverage than Teck Resources Ltd. (BBB-/Stable) but less diversified by product and less exposed to favorable mining jurisdictions.

FCX is smaller, less profitable and has higher leverage than Vale S.A. (BBB/Stable) but has similar product concentration albeit with lower environmental exposure.

FCX's financial profile is broadly in line with other 'BBB' category mining peers such as Anglo American plc (BBB/Positive) and AngloGold Ashanti Limited (BBB-/Negative).

The bulk of debt is at the FCX level or benefits from FCX's guarantees, with the exception of the $350 million Cerro Verde (not rated) revolving credit facility and PT-FI (BBB-/Stable) notes and revolving credit facility. FMC does not provide upstream guarantees, its notes have no cross-default to FCX debt, and it is lightly leveraged.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer

--Average annual production at 4.2 billion pounds of copper and 1.6 million ounces of gold in 2023-2026;

--Copper unit site production and delivery cost at $2.21/pound on average in 2023-2026;

--Fitch's commodity price assumptions: LME spot copper at $8,000/tonne in 2023, $7,500/tonne in 2024 and 2025, and $7,000/tonne thereafter; gold at $1,600/ounce in 2023, $1,400/ounce in 2024 and $1,300/ounce thereafter;

--Capex at guidance including Indonesia smelter spending;

--Debt repaid at maturity; Application of stated financial policy.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

--EBITDA leverage sustained below 1.8x.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

--Failure to maintain approval to export concentrate on reasonable terms from Indonesia.

--EBITDA leverage sustained above 2.8x.

--Expectations of negative FCF on average.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Robust Liquidity: Fitch expects FCX to be FCF positive before smelter working capital and smelter capex on average under its ratings case. Available cash on hand was $5.8 billion, and $3 billion was available under the revolving credit facility ($8 million utilization for LOCs) at Dec. 31, 2022. Freeport refinanced and reduced its commitment under the revolver to $3 billion from $3.5 billion in October 2022, pushing back the maturity to October 2027. Financial covenants under the revolver include a maximum net debt/EBITDA ratio of 3.75x. Fitch expects FCX to remain in compliance with these covenants.

In April 2022, PT-FI amended and increased its unsecured revolving credit facility to $1.3 billion. The facility matures in July 2026. In May 2022, Cerro Verde entered into a $350 million unsecured revolving credit facility that matures in May 2027. As of Dec. 31, 2022, there were no outstanding borrowings under either facility.

Issuer Profile

Freeport-McMoRan Inc. is a top three global producer of copper with world class mines in Indonesia, Peru, Chile and the U.S. The company is also a major producer of gold and molybdenum. In 2022, copper accounted for 77% of mining sales, gold accounted for 14% and molybdenum accounted for 6%. Copper reserves are 44% in North America, 28% in Indonesia and 28% in South America.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. (ends)