Press Release: S&P affirms ?B? ratings on Freeport-McMoRan

Standard & Poor's said Monday it affirmed its ratings on Freeport-McMoran Copper & Gold Inc. (Freeport) and assigned its single-'B' rating to Freeport's $734 million in secured bank facilities. The facilities rated are: the tranche A, $320 million revolving credit facility available to Freeport's subsidiary PT Freeport Indonesia (PTFI); the tranche B, $265 million revolving credit facility available to Freeport and PTFI; and the tranche 1, $149 million term loan available to Freeport.

Freeport's obligations are secured by: 50.1 percent of PTFI's stock; Freeport's interest in PT Indocopper Investama Corp. (PTII); and intercompany loans to PTFI and other restricted subsidiaries. Also, Freeport and PTFI and certain restricted subsidiaries provide cross guarantees for each other's obligations.

The obligations of PTFI (including its guarantee) are secured by: 60 percent interest in the concentrate sales agreements; 60 percent of the proceeds of the concentrate sales agreements; the physical mining assets; PTFI's obligations (but not its guarantee of Freeport's obligations) are secured by its 60 percent undivided interest in the Contract of Work.

"The bank loan is rated the same as the company's corporate credit rating," said Standard & Poor's credit analyst Thomas Watters. "To the extent a default scenario would occur, Standard & Poor's believes it is highly uncertain whether the bank creditors would realize the value of their security interests."

Standard & Poor's recently upgraded Freeport's corporate credit rating and now views the Indonesian political climate and operating risks for Freeport-McMoRan, as well as the risk of sovereign intervention with foreign debt servicing, more favorably.??

Concerns have diminished over possible reprisals against Freeport-McMoRan for its close dealings with the former Suharto regime. The central government is continuing to publicly support both the company and its Contract of Work with Freeport-McMoRan. However, the risks in operating in Indonesia remain considerable, said the Standard & Poor.

According to the rating agency the company still faces risks concerning separatist movement issues in West Papua as well as uncertainties as to whether the provincial government might seek an increased stake in the company's primary asset, the Grasberg copper and gold mine in West Papua. Disputes between the local government and Freeport-McMoRan are possible because new rules could contradict existing work contracts governing Grasberg.

Freeport-McMoRan is one of the largest copper and gold producers in the world, with copper and gold equity production in 2001 of 1.4 billion pounds and 2.6 million ounces, respectively. Freeport-McMoRan ranks as the world's lowest-cost copper producer, due to the high gold content in its copper ore, low labor costs, favorable exchange rates and favorable geological conditions. The Grasberg mining district includes the largest copper-and gold-based deposit in the world; it ensures Freeport-McMoRan will have significant long-term, low-cost production.

The company benefits from a fair degree of vertical integration due to its ownership in two smelting and refining facilities: Atlantic Copper S.A. in Spain and PT Smelting Co. in Gresik, Indonesia, a joint venture with Mitsubishi Materials Corp. (75 percent). The two smelters process approximately 50 percent of the mine's output. Freeport-McMoRan spent more than $1 billion to expand its mining and milling operations, which commenced expanded operations in early 1998. The company has increased throughput to 243,000 metric tons of ore per day from 125,000 tons.

Standard& poor said Freeport-McMoRan's management has been comfortable operating with high debt leverage. As of March 31, 2002, debt leverage was a very aggressive 96 percent (including the book value of $462 million of debt-like preferred stock), due to significant capital expenditures and share repurchase programs.

The company has not repurchased its stock since early 2001 and is prohibited under its bank credit facilities from purchasing additional shares. An amendment to the bank credit facility provided a mechanism to finance payment of the guarantee. Freeport-McMoRan remains committed to reducing its burdensome debt levels.

Although copper prices currently are low, Freeport-McMoRan is expected to generate significant free cash flow, due to its superior cost position and significantly reduced capital expenditures. However, the company intends to refinance or restructure the preferred securities. If Freeport does not extend the maturity of the preferred stock beyond 2005, the amended bank agreement will prohibit the company from redeeming or paying dividends on any of that stock. It also faces the possibility of the lenders of the $250 million 7.2 percent senior notes holders exercising their put option in November 2003. However, liquidity measures are expected to be sufficient to meet the potential put options.

The outlook reflects the expectation that the company will continue to face a difficult operating environment including considerable country risk but will meet the liquidity and debt maturity challenges it faces in the near future. (*)