Fitch Affirms Freeport-McMoRan's IDR at 'BB+'; Outlook Positive

(Fitch Ratings - New York - 17 Feb 2021)-- Fitch Ratings has affirmed Freeport-McMoRan Inc.'s (FCX) Issuer Default Rating (IDR) at 'BB+'. The Rating Outlook is revised to Positive from Stable. FCX's senior unsecured debt ratings were affirmed at 'BB+'/'RR4'. Fitch has also affirmed the IDR for Freeport Minerals Corporation (FMC) at 'BBB-' with a Stable Rating Outlook, and its senior unsecured debt at 'BBB-'.

FCX's Positive Outlook reflect Fitch's expectations that FCF will be generally positive, net debt (excluding noncontrolling interest share of cash) will be about $6.5 billion on average and total debt/operating EBITDA to trend below 2.5x after 2022.

The ratings reflect FCX's high-quality assets, strong liquidity and improved capital structure. Substantial advancement of underground mining at Grasberg provides comfort in the remaining ramp-up and cash flows to FCX once their economic interest in PT Freeport Indonesia (PT-FI) drops to about 49% from about 80% beginning in 2023.

The cadence and quantum of spending to satisfy the Indonesian smelter requirement are important variables in analyzing future consolidated financial leverage and calls on PT-FI cash flows. An alternative that alleviates PT-FI's need to build a greenfield smelter in Indonesia could be credit positive depending on the treatment and refining charges agreed.

The Rating Outlook could be revised to Stable if Fitch expects total debt/EBITDA to be sustained in the 2.3x to 3.0x range on a consolidated basis.

KEY RATING DRIVERS

Credit Conscious Financial Policies: On Feb. 2, 2021, FCX announced a financial policy to allocate cash flows consistent with its strategic objectives of maintaining a strong balance sheet, increasing shareholder returns and advancing growth opportunities. The policy would be implemented after achieving a net debt target in the range of $3 billion to $4 billion (excluding smelter project debt) and 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. FCX also announced reinstatement of common dividends at an annual rate of $0.30/share (roughly $437 million per year) with the initial dividend expected to be paid on May 1, 2021.

Net debt was $6.1 billion and Fitch estimates total debt/operating EBITDA at 2.7x as of Dec. 31, 2020. Fitch does not expect net debt to reduce further under its rating case but does expect total debt/operating EBITDA to fall to below 2.5x on a consolidated basis after 2022. Fitch views the company's net debt target, strategic objectives and capital allocation policy as supportive of an investment grade financial profile.

Grasberg Underground Ramp-up Visibility: In 4Q20, ore extracted and milled from the Grasberg underground mines was 109,300 tonnes per day up 86% from 4Q19 and 4Q20 annualized metals sales from Grasberg underground mining were 68% of post ramp-up targets. FCX expects metals sales to approach 90% of post ramp-up targets by mid-2021. Spending on the project was about $1 billion in 2020 and is guided to $1.3 billion in 2021 and $0.9 billion in 2022 of which PT Indonesia Asahan Aluminum (Inalum) is responsible for contributing $0.2 billion. Fitch believes the projects are substantially de-risked and remaining execution risk is manageable.

FCX guides to PT-FI sales volumes of 1.7 billion pounds of copper and 1.8 million ounces of gold in 2023 when FCX's economic interest drops to about 49% from about 80% compared with 0.8 billion pounds of copper and 0.8 million ounces of gold in 2020.

Smelter Debt/Capex: PT-FI committed to construct a new smelter in Indonesia by Dec. 21, 2023. The preliminary capital cost for the project was estimated at $3 billion and was expected to be financed with bank loans at the PT-FI level and consolidated at FCX. PT-FI has notified the Indonesian government of delays in achieving completion of the new green field smelter in Gresik as a result of mobility constraints from pandemic mitigation measures. Fitch does not expect the delay to impact PT-FI's ability to have its concentrate export license extended when it expires on March 15, 2021.

PT-FI is in discussion with the majority owner of the existing smelter in Gresik, Indonesia (25% owned by PT-FI) to increase concentrate treatment capacity by 30%. Such an expansion would reduce PT-FI's smelter development commitment to 1.7 million tonnes from 2 million tonnes of concentrate per year and likely reduce the capital required. PT-FI would provide the estimated $250 million to finance the expansion and completion would be expected in 2023.

Third Party Alternative: PT-FI is also in discussion with a third party to develop new smelter capacity at an alternate location in partnership with PT-FI. This alternative would not require capital from PT-FI and would satisfy the smelter commitment but would require PT-FI to agree to supportive treatment and refining charges. This smelter would provide the third party with sulfuric acid for its nickel operations and potentially some downstream battery operations. Fitch believes this alternative could be credit positive depending on the treatment and refining charges agreed. A decision concerning this option is likely in 1H21.

Copper Price Exposure: Copper accounted for 80% of consolidated revenues in 2020. FCX estimates that a $0.10/pound change in the price of copper would change operating cash flow by $380 million in 2021. FCX's average realized price per pound of copper was $2.95 in 2020 compared with $2.73 in 2019. Current spot prices are around $3.76/pound which compares to Fitch's assumptions of $2.72/pound in 2021, $2.81/pound in 2022 and $2.90/pound in 2023 published Aug. 28, 2020.

FCX guides to EBITDA of about $8 billion and operating cash flows of $5.5 billion in 2021 based on FCX's volume outlook, estimated unit site production and delivery costs of $1.78/pound of copper and assuming prices of $3.50/pound of copper, $1,850/ounce of gold and $9/pound molybdenum.

Favorable Copper Markets: As of Feb. 4, 2021, CRU forecasts the London Metal Exchange (LME) three-month copper price will average $7,500/tonne ($3.40/pound) in 2021, which is $2,500/tonne above cash costs net of by-products for the 90th percentile mine. CRU expects the market will move to surplus during 2022 through 2024 before moving to deficit in 2025. CRU forecast the LME 3-month copper price will average $6,700/tonne ($3.04/pound) in 2022 and $6,875/tonne ($3.12/pound) in 2023.

DERIVATION SUMMARY

FCX's closest operational peer is Southern Copper Corporation (SCC; BBB+/Stable), given the spread of its copper assets. FCX is less profitable than SCC and expected to have higher leverage in 2021 as underground mining at Grasberg continues to ramp up but would generally have a financial profile consistent with SCC's longer-term.

FCX's financial profile is expected to be broadly in line with 'BBB' category peers, beginning in 2022 including Anglo American plc (BBB/Stable), Teck Resources Ltd. (BBB-/Negative), Agnico Eagle Mines Limited (BBB/Stable) and Kinross Gold Corporation (BBB-/Positive).

The bulk of debt is at the FCX level or benefits from FCX's guarantees, with the exception of the $525 million Cerro Verde loan (not rated) and any future smelter loan at PT-FI. FMC does not provide upstream guarantees, its notes have no cross-default to FCX debt, and it is lightly levered, with minimal debt (Cerro Verde is consolidated at the FMC level).

KEY ASSUMPTIONS

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

--Copper sales at 3.7 billion pounds in 2021 and about 4.2 billion pounds in 2022 and 2023;

--Copper prices at $2.72/lb., $2.81/lb. and $2.90/lb. in 2021, 2022 and 2023, respectively;

--Gold prices at $1,400/oz in 2021 and $1,200/oz, thereafter;

--Unit site cost at $1.88/lb. on average in 2021-2023;

--Capex at FCX guidance in 2021;

--$500 million, and $1 billion of debt financed green field Indonesia smelter expenditure in 2022 and 2023, respectively;

--Dividends and capital allocation as announced on Feb. 2, 2021.

RATING SENSITIVITIES

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

--Visibility on cadence and quantum of capex or treatment and refining charge support to satisfy Indonesian smelter requirement;

--Expectations of FFO leverage below 2.8x on a sustained basis;

--Total debt/EBITDA sustained below 2.3x;

The Rating Outlook could be changed to Stable if Fitch expects total debt/EBITDA to be sustained in the 2.3x to 3.0x range on a consolidated basis.

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

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

--FFO leverage above 3.5x on a sustained basis;

--Total debt/EBITDA sustained above 3.0x;

--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 roughly $500 million of FCF burn in 2021 before contributions from Inalum. Available cash (net of noncontrolling interest share) was $3.3 billion, and nearly $3.5 billion was available under the revolving credit facility ($10 million utilization for LOCs) at Dec. 31, 2020. Fitch expects smelter spending to be financed at the PT-FI level and for FCF, excluding smelter capex, to be generally positive.

Of the $3.5 billion revolver commitment, $3.28 billion matures in April 2024 and the remaining $220 million matures in April 2023. Financial covenants under the revolver include a maximum net debt/EBITDA ratio of 5.25x reverting to 3.75x beginning with the period ending Sept. 30, 2021 once the Covenant Reversion Notice is delivered (required prior to declaring dividends). There is also a minimum interest coverage ratio of 2.25x. Fitch expects the company to comply with its financial covenants under Fitch's rating case.

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)