Moody's assigns first-time Baa3 ratings to Freeport Indonesia; outlook stable

(Singapore, April 05, 2022) -- Moody's Investors Service has assigned a Baa3 issuer rating to Freeport Indonesia (P.T.) (PTFI), and a senior unsecured bond rating of Baa3 to PTFI's proposed USD bonds.

This is the first time that Moody's has assigned ratings to PTFI.

The ratings outlook is stable.

PTFI will primarily use the bonds to finance its smelter projects, refinancing and for general corporate purposes.

RATINGS RATIONALE

"The Baa3 rating reflects PTFI's established track record of operations at the Grasberg mineral district, reserve life through 2041, very low-cost operations given the significant gold content in its copper concentrate, and strong EBITDA margins of over 60%," says Nidhi Dhruv, a Moody's Vice President and Senior Analyst.

The rating also considers the company's prudent financial policies and solid financial metrics, with leverage, measured by adjusted debt/EBITDA, of 0.1x at December 2021. Financial policies and dividends are agreed between the two shareholders, Freeport-McMoRan Inc. (FCX, Baa3 stable) and Indonesia Asahan Aluminium (Persero) (P.T.) (Inalum, Baa2 stable) through a shareholder agreement. While the shareholders agreement allows PTFI to be leveraged up to 4.0x, Moody's expects the company to operate well within 1.0x over the next three years.

"At the same time, PTFI's Baa3 ratings incorporate the company's exposure to downside risks, given its limited operational, commodity and geographical diversity. Its copper sales contribute about 70% of revenues and gold sales account for 28%, with the balance attributed to silver. Notwithstanding the product concentration, PTFI will likely benefit from the supportive prices for copper and gold over 2022-2023," adds Dhruv, also Moody's lead analyst for PTFI.

Under its current mining license (IUPK), PTFI is required to construct new downstream smelting capacity of 2.0 million metric tons of concentrate per annum (mtpa) by end-2023. The company plans to construct a 1.7 million mtpa greenfield smelter and fund the expansion of the current smelting capacity at its 39.5% owned affiliate, PT Smelting by another 300,000 mtpa.

"PTFI has substantial capital spending plans of $3.4 billion over the next three years to expand its downstream smelter facilities, which expose the company to significant execution risks with regard to completing the projects on time and within budget, especially amid inflationary pressures and supply chain disruptions," adds Dhruv.

The rating also considers the regulatory uncertainties and socio-political risks of operations in Papua, Indonesia.

The company has been operating the Grasberg open pit since 1990. Following the completion of open pit mining activities in 2019, mining activity has fully transitioned underground since 2021.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

The global mining industry is exposed to very high environmental risk and high social risk stemming from the industry's inherent risk exposures to wastewater discharges, site remediation and mine closure, waste rock and tailings management, air emissions, environmental law and regulations, health and safety risks and social responsibility given the often-remote location of the mines.

By the nature of its business, PTFI faces very high environmental risks based on its very highly negative exposure to natural capital risk. Copper mining operations and copper smelters require high energy intensity and tend to cause a significant impact on water, air and land resources. Although all of the company's 2P reserves are located within 5 kilometers of protected areas, mining activities have fully transitioned underground which limits the impact on protected areas.

PTFI's social risks are also very high, given its very highly negative exposure to health and safety risks, as reflected by the high number of fatalities in 2009-21 in the mining area and due to separatist activity in the region.

The company is a strategic investment for its shareholders, FCX and Inalum, not only because it represents a significant investment and source of dividends, but also because of the quality of the asset, given the high ore grades and competitive production cost. Moody's expects PTFI to continue to be managed prudently by its owners. Both companies jointly manage PTFI, although operating control is with FCX, which also consolidates the company.

LIQUIDITY

PTFI has excellent liquidity and no material maturities until 2025. The company's cash of $1.49 billion and available credit facilities of about $3.0 billion, coupled with cash flow from operations of about $3.0 billion, is sufficient to cover its capital spending ($3.8 billion) and dividends ($2.3 billion).

OUTLOOK

The stable outlook reflects Moody's expectation that PTFI will maintain its production in line with its mining plan, with costs remaining in the first quartile of the industry average. The stable outlook also reflects Moody's expectation that PTFI will manage capital spending and dividend distribution prudently while maintaining robust liquidity.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

There is limited upward pressure on the rating, given the execution risk of PTFI's substantial downstream and other expansion projects including its smelter projects, as well as the resulting regulatory overhang. Upward rating pressure would also require the credit quality and ratings of the main shareholders, FCX and Inalum, to strengthen.

In conjunction with the qualitative factors, specific indicators that Moody's would consider for an upgrade include (1) leverage below 1.5x on a sustained basis; (2) EBIT margin above 50%; and (3) a strong liquidity position.

Moody's could downgrade PTFI's rating if the company's operating performance weakens, with a decline in production or significant increase in cash costs, PTFI adopts a more aggressive financial or dividend policy, or its liquidity deteriorates. Specific indicators that Moody's would consider for a downgrade include (1) debt/EBITDA exceeding 2.0x on a sustained basis; and (2) EBIT margin below 35%.

A deterioration in the credit quality of its main shareholders would also lead to downward pressure on the rating.

The principal methodology used in these ratings was Mining published in October 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1292752. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

PT Freeport Indonesia (PTFI) holds the exclusive right to mine and operate the Grasberg minerals district, one of the largest copper and gold mining deposits in the world in terms of mineral reserves and production. PTFI's reserves include 32.2 billion pounds of copper and 26.6 million ounces of gold.

FCX owns a 48.76% share in PTFI, while the remaining 51.24% is collectively held by Inalum, an Indonesia state-owned enterprise, and PT Indonesia Papua Metal Dan Mineral (PTIPMM), which is expected to be owned by Inalum and the provincial/regional government in Papua, Indonesia. (ends)