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Announcement:

Moody's affirms FCX's Baa3 rating; stable outlook, reviews Plains Exploration's and McMoRan's ratings for upgrade

Global Credit Research - 05 Dec 2012

New York, December 05, 2012 -- Moody's Investors Service. Inc. ("Moody's") affirmed the senior unsecured debt ratings of Freeport-McMoRan Copper & Gold Inc. ("FCX") and Freeport-McMoRan Corporation at Baa3 and Baa2, respectively. The rating outlook was changed to stable from positive. The affirmation follows the company's announcement that it had entered into an agreement to acquire Plains Exploration & Production Co. ("PXP" - CFR Ba3, ratings under review - downgrade) for $6.9 billion in cash and stock and McMoRan Exploration Co. ("McMoRan" - CFR B3 stable) for approximately $2.1 billion in cash net of the 36% interest currently owned by FCX and PXP. Including the assumption of debt, the transaction is valued at approximately $20 billion.

At the same time, Moody's placed the ratings of Plains Exploration & Production Company and McMoRan Exploration Co. on review for upgrade. The review for upgrade for PXP and McMoRan reflects their acquisition by a larger and stronger company as well as the downstream guarantees that are to be provided to the PXP debt by FCX.

The debt portion of the transaction will be financed by a $9.5 billion bridge loan, which FCX intends to refinance in the bank and capital markets.

The affirmation reflects the strong debt protection metrics currently evidenced by FCX as well as its low leverage, In addition, the affirmation acknowledges that PXP brings both producing and development properties with earnings and cash flow generating capacity that will support the consolidated debt position. Also considered in the affirmation is our view that FCX will focus on reducing debt over the next 12 to 18 months given its cash flow generating capacity and disciplined approach to its capital structure.

RATINGS RATIONALE

FCX's Baa3 senior unsecured rating reflects the company's significant reserve profile in copper, gold and molybdenum, and the low cost nature of its mining operations -- particularly its operations in Indonesia, which allows the company to continue to generate solid earnings and cash flow despite volatility in the metal prices. The rating also considers the diversification provided to FCX's current operating footprint and the increase in the company's revenue and earnings base in North America. Although this diversification into oil and gas brings some level of integration risk, we do not consider it overly high given the company's prior experience in the oil and gas business.

Given the material reduction in debt in recent years and the solid debt protection metrics that FCX exhibits, as well as the company's strong liquidity position, the company's Baa3 senior unsecured rating has cushion to tolerate an increase in debt. The increase in debt to approximately $20 billion is supported by FCX's current low leverage position and the strength of the expected cash flow generation from Plains. While we anticipate that leverage, as measured by the debt/EBITDA ratio could initially peak at around 3x, this remains acceptable for a Baa3 rating. FCX has the ability to generate strong cash flow, even at recent copper trading prices ranging between $3.40/lb - $3.60/lb.

Other key considerations in the rating include:

Plains has a good suite of oil and gas assets, both producing and development, and is expected to generate strong cash flow to cover its development requirements. Nonetheless, it has recently closed on a roughly $6 billion acquisition that takes the company into deep-water drilling and production in the US Gulf of Mexico. Reinvestment requirements will be considerable, particularly in the 2015/2016 time frame

McMoRan, despite having some producing wells, is essentially a development play. The key producing property to come on stream is Davy Jones, which has been significantly delayed. The inability to successfully bring this into production could materially alter the profile of McMoRan.

McMoRan will continue to be cash consumptive and the cash flow generation from FCX and Plains will need to be sufficient to cover the anticipated roughly $500 million annual capital spend at McMoRan.

The one year tenor of the bridge loan facility, with no term-out feature, exposes FCX to market availability concerns on refinancing.

The stable outlook reflects our expectation that prices for FCX's key metal products as well as oil prices will remain at levels sufficient to allow for strong earnings and cash flow generation and support both the capital investment profile while providing for debt reduction.

Upward rating action is unlikely over the next 12-18 months given the need to integrate the acquisitions and evidence an ability to delever. However, should the company be able to reduce the absolute level of debt in its capital structure and evidence a sustainable debt/EBITDA ratio of no more than 2.5x, then a positive rating action could occur.

A downward rating action could occur if debt/EBITDA were to be sustained above 3x or operating cash flow minus dividends-to-debt is less than 25% on a consistent basis.

The principal methodology used in rating Freeport-McMoRan was the Global Mining Industry Methodology published in May 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in Phoenix, Arizona, FCX had revenues of $17.7 billion for the twelve months through September 30, 2012. Pro-forma for the transaction, revenues would have been approximately $20.2 billion (excluding PXP's recent acquisition).

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Carol Cowan
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Brian Oak
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms FCX's Baa3 rating; stable outlook, reviews Plains Exploration's and McMoRan's ratings for upgrade
No Related Data.

 

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