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Rating Action:

Moody's affirms FCX's ratings (CFR Ba1); changed outlook to negative

19 May 2020

New York, May 19, 2020 -- Moody's Investors Service, ("Moody's") affirmed Freeport-McMoRan Inc.'s (FCX) Ba1 Corporate Family Rating (CFR), Ba1-PD Probability of Default rating, its Ba1 senior unsecured note ratings and the (P)Ba1 shelf rating for senior unsecured notes. The Baa2 rating for Freeport Minerals Corporation's guaranteed senior unsecured notes was also affirmed. The Speculative Grade Liquidity rating remains SGL-1. The outlook was changed to negative from stable.

"The affirmation of FCX's ratings reflects the company's strong position in the global copper markets and solid liquidity position. Although metrics will be outside the rating category in 2020, gradual improvement over the second half of 2020, a stronger rebound in 2021 on increasing volumes and lower cost copper and gold production in Indonesia as the underground mining continues to ramp up is expected to return metrics to a level more in line with the rating. The negative outlook captures the duration of uncertainties caused by the impact of the coronavirus" said Carol Cowan, Senior Vice President and lead analyst for FCX.

Affirmations:

Issuer: Freeport-McMoRan Inc.

.... Corporate Family Rating, Affirmed Ba1

.... Probability of Default Rating, Affirmed Ba1-PD

....Senior Unsecured Shelf, Affirmed (P)Ba1

....Gtd. Senior Unsecured Regular Bond/Debenture, Affirmed Ba1 (LGD4)

..Issuer: Freeport Minerals Corporation

....Gtd. Senior Unsecured Regular Bond/Debenture, Affirmed Baa2 (LGD2)

Outlook Actions:

..Issuer: Freeport Minerals Corporation

....Outlook, Changed To Negative From Stable

..Issuer: Freeport-McMoRan Inc.

....Outlook, Changed To Negative From Stable

RATINGS RATIONALE

FCX's Ba1 Corporate Family Rating (CFR) incorporates the company's leading position in the global copper market as a low-cost producer with a diversified operating footprint in the US, South America and Indonesia. The rating considered the negative impact on copper and gold production at the Indonesian operations in 2019 and 2020 and higher cash costs as a result of the transition to underground mining and the reductions in volumes, particularly impactful in 2019. Copper prices however were lower than anticipated in 2019 due to the concerns on trading relationships between the US and China as well as global economic growth concerns and prices remained relatively range bound only bumping up late in the year on the Phase One agreement. Consequently, the company's performance was weaker than anticipated with adjusted leverage increasing to 4.9x at year-end 2019 from 1.9x the prior year.

In 2020, the impact of the coronavirus and the increasing expectation for deterioration in global GDP, including for China, a key producer and consumer of copper, resulted in a significant collapse in copper prices. Average prices plummeted from approximately $2.74/lb in January to around $2.29/lb in April 2020. This precipitous drop also contributed to an approximate $238 million adjustment in the first quarter given the provisional pricing mechanism and a $222 million metal inventory adjustment. This is not expected to be repeated in the second quarter given the recent upward tick in copper prices. Freeports performance for the second half of 2020 is expected to show improvement as operations resume at Cerro Verde following Peruvian Government mandated mining curtailments since mid-March and ramp up continues at the Indonesian operations as the transition to underground mining continues within expectations. This is particularly important as the increasing gold production will contribute to reducing cash costs, especially at current gold prices. Based upon a $2.38/lb copper price in 2020 and $1,400/oz gold price, leverage will remain high at around 6x. This is expected to improve to around 3.6x in 2021 as copper and gold production in Indonesia continue to increase, thereby reducing cash production costs, assuming a $2.50/lb copper price and $1,400/oz gold price.

In response to the impact of the coronavirus, FCX, as it has done in previous copper market downturns, has announced a number of actions to balance production to expected demand, reduce costs, and maintain balance sheet strength. These include, but are not limited to (based upon a $2.30/lb copper price, $1,600/oz gold price and $9/lb molybdenum price: a) reducing output, particularly in the company's North and South American copper mines and an overall global copper reduction of around 11%, reduction in unit cash costs due to energy savings, foreign exchange benefits, reduced milling and mining costs, higher by-product credits from gold in Indonesia and other savings. In total, given the actions put in place, approximately $1.3 billion in operation cost reductions and $100MM in exploration and administration cost reductions are expected. Additionally, capital expenditures have been reduced to $2 billion from the January 2020 guidance of $2.8 billion and dividends have now been suspended. Nonetheless, FCX is expected to have a modest cash burn in 2020, which is comfortably accommodated within its liquidity profile.

The company has also implemented a number of actions at all its operations focused on the health and safety of its employees.

The rating acknowledges FCX's continued focus on costs, and debt reduction undertaken since 2018, which include the early 2020 financing to redeem the 2021 maturities and repay a portion of the 2022 maturities. Actions taken by the company in recent years have provided a better cushion to tolerate a level of downward movement in copper prices, as seen in 2019 as well as the production volume and cost impact of transitioning to underground mining at the Indonesian operations given the depletion of the open pit mine. However, the weaker than anticipated copper prices in 2019 and the impact of the coronavirus in 2020 has absorbed some of this cushion.

Factored into the CFR is the reduced gold and copper production and resulting higher costs at Grasberg in 2019 and 2020 as the Grasberg Block Cave and Deep MLZ underground mine developments continue. Initial production at the Grasberg Block Cave commenced during 2019 with continued production increases continuing to date in 2020. Production at the Deep Mill Level Zone (DMLZ) continues to ramp with production increasing in each of 2020 and 2021, with full production expected in 2022. Particularly impactful to FCX's performance in 2019, in addition to lower copper prices, was the significant reduction in gold production at Grasberg to around 863,000 ounces (2.4mm ounces in 2018) and resultant increase in costs given the absence of significant by-product credits. Unit net cash costs at the Indonesian mining operations were $1.28/lb. in 2019 as compared with a credit of $0.58/lb. for the comparable 2018 period. Copper production is expected to increase in 2020, with the stronger jump in production seen in 2021. Production in 2020 will also reflect the start-up of the Lone Star Leach project in Arizona in the second half of 2020, which when fully ramped will produce around 200 MM lbs. per year.

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The copper market will be affected by the shock given the sensitivity of its customers to market demand and particularly sentiment as to GDP growth in China as well market sentiment as to global economic contraction expectations. In particular, copper is a leading indicator on expected GDP growth or contraction. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

By the nature of its business, FCX faces a number of ESG risks typical for a company in the mining industry including but not limited to wastewater discharges, site remediation and mine closure, waste rock and tailings management, air emissions, and social responsibility given its often fairly remote operating locations. FCX has detailed protocols in place to manage its environmental risks. The company is subject to many environmental laws and regulations in the areas in which it operates all of which vary significantly. The mining sector overall is viewed as a very high-risk sector for soil/water pollution and land use restrictions and a high risk sector for water shortages and natural and man-made hazards. In 2018 approximately 81% of FCX's water usage requirements were from recycled and reused sources. The company has spent between $400 million and $500 million on environmental capital expenditures and other environmental costs in each of the last several years.

The SGL-1 speculative grade liquidity rating considers FCX's very good liquidity including its $1.6 billion cash position at March 31, 2020 and borrowing availability of approximately $3.48 billion ($13 million in letters of credit issued) under its $3.5 billion unsecured revolving credit facility (RCF - $3.26 billion matures April 20, 2024 with the balance maturing April 20, 2023).

Financial covenants include a total net leverage ratio (total debt/EBITDA) of no more than 5.25x through June 2021 with cash of $1.25 billion to be offset to the debt covenant calculation and an interest coverage ratio (EBITDA/cash interest expense) of no less than 2.25x. The November 2019 amendment to the RCF increased the leverage ratio and reduced the amount of attributable cash that could be applied to the leverage covenant calculation.

The negative outlook contemplates the weaker debt protection metrics in 2020 and the uncertainty surrounding the duration of negative impacts from the coronavirus and timing of global economic improvement given the differing positions of governments and regional and local communities as to the reopening of economies. The outlook anticipates a maximum leverage position or around 6x in 2020 improving to around 3.7x in 2021.

The Ba1 rating on the FCX unsecured notes, at the same level as the CFR, reflects the absence of secured debt in the capital structure and the parity of instruments. The Baa2 rating of Freeport Minerals Corporation (FMC) reflects the fact that this debt is at the company holding all the North and South American assets and benefits from a downstream guarantee from FCX.

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

An upgrade to the ratings is unlikely until such time as the underground expansion at Grasberg is completed and the production profile at this mining site returns to higher copper and gold levels. Additionally, an upgrade would require better clarity on the company's financial policy and strategic growth objectives. An upgrade would be considered if the company can sustain EBIT/interest of at least 5x, debt/EBITDA under 2.5x and (CFO-dividends)/debt of at least 40% through various price points.

A downgrade would result should liquidity materially contract, (CFO-dividends)/debt be sustained below 20% or leverage increase and be sustained above 3.5x post 2020.

The principal methodology used in these ratings was Mining published in September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1089739. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

FCX, a Phoenix, Arizona based mining company, is predominately involved in copper mining and related by-product credits from the mining operations (principally gold and molybdenum). The company's global footprint includes copper mining operations in Indonesia, the United States, Chile, and Peru. Revenues for the 12 months ended March 30, 2020 were $13.4 billion.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain 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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, 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 issued the credit rating is available on www.moodys.com.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Carol Cowan
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Glenn B. Eckert
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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