MOODY'S DOWNGRADES DEBT RATINGS OF PHELPS DODGE CORPORATION'S SENIOR UNSECURED TO A3, SHORT TERM TO PRIME-2, UPGRADES SENIOR UNSECURED DEBT RATINGS OF CYPRUS AMAX MINERALS COMPANY TO A3.
Moody's Investors Service today lowered the long-term senior unsecured and short-term debt ratings of Phelps Dodge Corporation (Phelps Dodge) to A3 and P-2 respectively. The ratings had been placed under review for possible downgrade on September 22, 1999. The ratings downgrade reflects Phelps Dodge's heightened risk profile arising from the increased debt levels following its acquisition of Cyprus Amax Minerals Corporation (Cyprus) for a cash (approximately $690 million) and stock consideration of $1.8 billion and for an aggregate consideration of $3.6 billion including the assumption of total debt. The ratings downgrade also takes into consideration the increased debt service requirements in an industry where earnings and cash flow generation are sensitive to cyclical commodity prices. The rating action acknowledges Phelps Dodge's position as the second largest copper producer globally at 2.4 billion pounds of copper, its low cost production capability, the synergies to be achieved from the acquisition of Cyprus, the business and cash flow diversity provided by its Phelps Dodge Industries subsidiary and the quality of management.
In a related action, Moody's Investors Service upgraded the senior unsecured debt ratings of Cyprus Amax Minerals Company to A3 reflecting the assumption of this debt by Phelps Dodge upon the merger of Cyprus into Phelps Dodge.
The ratings downgraded are:
Phelps Dodge Corporation -- senior notes, debentures, IRB's, bank credit facility to A3 from A2, shelf rating for senior debt securities from (P)A2 to (P)A3, and commercial paper rating to Prime-2 from Prime-1.
The ratings upgraded are:
Cyprus Amax Minerals Company: senior unsecured notes, debentures and equipment trust certificate ratings (backed) to A3 from Baa3,
Amax Inc. (backed): senior unsecured notes, industrial revenue/pollution control bond ratings to A3 from Baa3.
The last several years have exhibited declining trends in the copper industry in terms of consumption and consequent price deterioration while supply of copper is increasing from new production coming on stream. Spot copper prices hit a low of $0.61/lb in March 1999 and averaged $0.65/lb for the first six months of 1999. These market fundamentals have caused earning weakness across the sector, tightened debt protection measurements and pressured mining companies in their ratings categories. While Moody's acknowledges that the business combination of Phelps Dodge with Cyprus will benefit and enhance earnings over the longer term, and believes that the $100 million in expected synergies will be achievable going forward, the risk profile for the intermediate term is increased. On a pro-forma basis, Moody's anticipates that initial EBIT and EBITDA ratios will be in the high 1X and mid 4X range while the debt to capitalization ratio will be in the low 40% range (43% pro forma year end 1999), marginal for the ratings category.
While copper prices have strengthened in recent months from the extreme lows reached earlier this year, the market is expected to remain in surplus into 2000 as new production comes on stream with gradual strengthening of prices thereafter as supply demand equations improve. Moody's expects therefore that Phelps Dodge will demonstrate strengthening cash flow performance and a return to more historically strong ratios given management's focus on and commitment to reducing debt levels as expediently as possible.
Headquartered in Phoenix, Arizona, Phelps Dodge had 1998 revenues of $3.1 billion. Fiscal 1998 pro-forma revenues of Phelps Dodge and Cyprus Amax are $4.5 billion.
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