S&P rates Freeport-McMoRan convertible CCC

Standard & Poor's assigned a CCC rating to Freeport-McMoRan Copper & Gold Inc.'s planned $1 billion of redeemable cumulative convertible perpetual preferred stock and confirmed its existing ratings including its senior unsecured debt at B- and preferred stock at CCC. The outlook is stable.

S&P said Freeport's ratings reflect its ownership in one of the lowest cost copper operations in the world and strong free cash flow generation overshadowed by the risks of operating in the Republic of Indonesia and its aggressive debt leverage.

Freeport should be able to sustain its very low cost position through the intermediate term, because the majority of its ore is produced from its Grasberg, Indonesia open pit mine, not expected to be depleted until 2015, S&P said. In 2003, cash production costs - with gold as a by-product credit - averaged a very low negative two cents per pound.

Despite the benefits from an extremely low-cost position, ratings are constrained by the considerable risks of operating in Indonesia. These risks include the possibility the provincial government might seek an increased stake and influence in the Grasberg mine; political instability; separatist movement issues; and a fragile law-and-order system, S&P added.

Freeport-McMoRan's management has been comfortable operating with a high debt leverage: total debt to capital has ranged from 70% to 94% over the past five years, S&P said. Part of this comfort comes from significant cash flows generated by the company. Indeed, while debt to capital was a very aggressive 70% at Dec. 31, 2003, debt to last 12 months EBITDA was more moderate at 2.1 times.

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