Fitch Positive on Freeport – Analyst Blog

Freeport-McMoRan Copper & Gold Inc. (FCX) shares rose 1.6% or $1.26 to close at $79.17 in after-trade hours after Fitch Ratings Services affirmed the issuer default rating and debt ratings of the world’s largest publicly traded copper company.

 

Fitch has retained its “BBB-” rating for issuer default as well as revolving bank loans of $1 billion and $500 million and unsecured notes due in 2015 and 2017, besides 7% convertible notes due in 2011, reports AP. Fitch’s “BBB” rating is issued for all investment grade medium class companies. Debt of such companies is long-term debt, which is satisfactory at the moment for Freeport. Fitch has assigned a “Positive” rating outlook to the stock.

 

Fitch is positive on Freeport’s strategy of debt reduction and its strong cash flow. Freeport’s total debt shot up after the $25.8 billion merger with Phelps Dodge in March. Phelps Dodge is a fully integrated producer of copper and molybdenum owning mines in North and South America, and several development projects, including Tenke Fungurume in the Democratic Republic of Congo, which we believe is one of the world’s highest potential copper and cobalt concessions. However, with its strong cash flows, Freeport has managed to pay off the majority of the debt so acquired.

 

During 2009, Freeport reduced its total debt by 13% from $7.3 billion in 2008. The company repaid about $1.0 billion in debt in 2009, including $277 million in the last quarter of the year. As of December 31, 2009, Freeport’s total debt approximated $6.3 billion and consolidated cash approximated $2.7 billion. The company’s net cash position as of December 31, 2009 was $3.9 billion or $7.8 per share.

 

Freeport’s operating cash flow totaled $1.5 billion for the fourth quarter of 2009 and $4.4 billion − net of $770 million in working capital uses − for the year 2009. The company’s return on equity has been improving and was over 45% in the last quarter of 2009.

 

The Phelps Dodge acquisition has positioned Freeport as the second-largest copper producer and the largest publicly traded copper company globally. Phelps Dodge had a geographically diverse operating base. With this merger, Freeport acquired a number of key copper projects including Cerro Verde in Peru, the exploration potential in Papua, Indonesia, and Tenke Fungurume in Congo, all of which would boost its metal output.

 

Separately, the recent upward movement in copper prices bodes well for the company. The increase in copper prices was primarily driven by stockpiling in China. Market conditions are expected to be favorable for copper in the next couple of years due to higher consumption of the metal in the Asia-Pacific region, especially in China and India. We believe the strong fundamentals for metals will be driven by an increasing demand from China and India due to per capita consumption levels rising towards U.S./European levels. Given the company’s leverage to copper prices, we believe Freeport will benefit immensely from the potential demand for copper in the developing markets.