MOODY'S DOWNGRADES RATINGS OF CYPRUS AMAX MINERALS COMPANY (SENIOR TO Baa3)
Moody's Investors Service today downgraded the senior unsecured debt ratings of Cyprus Amax Minerals Company (Cyprus Amax) to Baa3 from Baa2. Additionally, Moody's assigned a senior unsecured rating of Baa3 to the company's syndicated bank credit facility. The outlook for the ratings is negative. The rating actions acknowledge Cyprus Amax's successful cost reduction efforts, asset sales program, and significant debt reduction performance over the past two years. However, the rating actions also reflect Cyprus Amax's high balance sheet leverage, deteriorating debt protection measures, and continuing exposure to fundamental weakness in the global copper sector. Looking ahead, the action also considers the risks and benefits associated with the potential sale most of the company's coal assets over the near term.
The ratings downgraded are:
Cyprus Amax Minerals Company -- senior unsecured ratings to Baa3 from Baa2; equipment trust certificate ratings (backed) to Baa3 from Baa2; preferred stock ratings to "ba2" from "ba1"; shelf ratings to (P)Baa3 from (P)Baa2 for senior unsecured, to (P)Ba1 from (P)Baa3 for senior subordinated, to (P)Ba2 from (P)Ba1 for subordinated, and to (P)"ba2" from (P)"ba1" for preferred.
Cyprus Amax Finance Corporation (backed) -- shelf ratings to (P)Baa3 from (P)Baa2 for senior unsecured, to (P)Ba1 from (P)Baa3 for senior subordinated, to (P)Ba2 from (P)Ba1 for subordinated.
Amax Inc. (backed) -- senior unsecured ratings to Baa3 from Baa2; industrial revenue/pollution control bond ratings to Baa3 from Baa2.
Moody's noted that the commodity diversification and steadier cash flow characteristics of Cyprus Amax's coal operations, currently the 5th largest in the U.S., have always been a significant factor in the credit rating. Notwithstanding coal's relatively good continued performance, with operating margins of approximately 9%, severe weakness in the copper sector was the key contributor to Cyprus Amax's depressed 1998 results. COMEX copper pricing fell to an average of $0.74/lb. in 1998 vs. $1.04 in the prior year, averaged $0.70/lb. in 4Q98, and is currently languishing in the $0.65/lb. range. As a result, Cyprus Amax's sales were down 23% for 1998, with operating margins squeezed at 5% vs. 7% in the prior year. Despite reduced interest burden due to debt reduction, EBIT to interest coverage was extremely weak at 0.8x and EBITDA to interest fell to 3.0x. The ratio of retained cash flow (net cash from operations minus dividend) to total debt fell to 8% vs. 17% last year, but considering the recent 75% dividend cut, would have been 12% on a pro forma basis. Leverage improved to 46% debt/cap from 50% last year, largely due to the merger of Amax Gold Inc. with Kinross Gold Corporation, and resultant conversion of debt to equity, but remains high for the sector. Adjusted for Cyprus Amax's weak share price (currently in the $13/share range, or roughly half of book value), leverage as a function of market capitalization is significantly higher. Cyprus Amax's debt protection measures thus remain below typical investment grade levels, Moody's concluded.
Moody's noted, however, several reasons for preserving Cyprus Amax's investment grade status. First, the company has responded admirably to difficult exogenous commodity pricing conditions; total debt, capital spending, and the quarterly dividend have been reduced significantly, and the cash cost of producing copper dropped to $0.56/lb. in 1998 from $0.62 in 1997. These trends are likely to be sustained. Most importantly, Cyprus Amax is potentially on the verge of selling the bulk of its coal operations. While the probability, timing, and likely proceeds from the sale of these assets are far from clear, Moody's believes the chances of selling most or all of the U.S. properties for reasonable prices over the near term are fairly good. Based on other coal transactions over the past two years, Moody's commented that total proceeds for Cyprus Amax could be as much as $1 billion or more, and that depending on the timing and application of the proceeds, could significantly improve Cyprus Amax's overall financial profile. Moody's recognizes, however, that other potential uses of the proceeds, including share repurchases and additional acquisitions, could temper the beneficial effects of potential debt reduction.
Looking ahead, Moody's rating action incorporates the potential for Cyprus to nearly completely exit the coal business. Despite the associated likelihood of balance sheet improvement, future earnings and cash flow volatility will increase as the company concentrates its focus on copper at a time when outlook for pricing remains questionable. Asian demand for copper, which has weakened significantly in the last 18 months, shows no signs of an overall rebound any time soon, and global demand could at some point be tempered by a periodic cyclical softening in the larger economies of Europe and the United States. Supply, on the other hand, remains fairly strong, and present and near term future expansions of low cost mines will continue to counteract the effect of the higher cost mine closures over the past year. Thus, LME inventories continue to build in the face of continued global economic strength; to the extent this strength softens, pricing could hit new lows, but the greater danger to Cyprus Amax and other rated copper issuers is the potential for pricing to remain trapped in its current low range for several years, primarily due to stubbornly high copper supply. As such, Moody's concluded that Cyprus Amax's rating could solidify in the Baa3 range depending on the magnitude and timing of the coal asset sales, but further noted that sustained weakness in copper pricing and alternative uses of asset sale proceeds could put further pressure on the rating; hence, the present outlook for the rating is negative.
With respect to the bank loan rating assignment, Moody's noted the pari passu treatment of the bank debt relative to the company's senior unsecured obligations. Moody's further commented that the syndicated loan agreement features financial covenants stipulating maximum leverage of 65% and limitations on liens, sale/leasebacks, and asset sales.
Cyprus Amax Minerals Company, headquartered in Englewood, Colorado, had sales of $2.6 billion 1998.
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