S&P, Moody's downgrade Freeport-McMoRan Copper rating outlook

Two international credit ratings agencies, Standards & Poor's (S&P) and Moody's Investors Service, have downgraded their outlook on Freeport-McMoran Copper & Gold Inc., the parent company of PT Freeport Indonesia, due to unfavorable political situation in Indonesia.

However, both S&P and Moody's affirmed their all other ratings on the New Orleans-based copper and gold company.

S&P revised its outlook on Freeport-McMoRan from stable to negative, while Moody's changed the outlook from positive to stable.

Moody's said that the change in outlook for Freeport-McMoRan reflected Moody's change in outlook from positive to stable in its Indonesian rating as Freeport's primary asset -- the Grasberg copper and gold mining complex -- is located in Irian Jaya province (West Papua), Indonesia.

The change in outlook for Indonesia acknowledges that various indicators have shown an improving economic performance during 2000 but reflects Moody's belief that the political problems facing Indonesia and their effect on economic management as well as on the relationship with official creditors make it unlikely that Indonesia's ratings would be upgraded in coming months.

S&P, likewise, contended that the downgrade in outlook for Freeport-McMoRan reflected the company's exposure to the difficult operating environment and the significant political risks in Indonesia.

S&P also listed a number of notable risks, that could adversely affect the company's business and financial profile. They include its past close ties with the former regime of President Soeharto. Such ties remain under scrutiny and could potentially lead to a renegotiation of the company's contracts of work to mine Grasberg.

Another negative factor would be the implementation of a new regional autonomy law on Jan. 1, 2001. There is heightened uncertainty regarding comments by officials of the Irian Jaya provincial administration that it may seek a stake in the Grasberg operations, either through a partial transfer of Freeport's ownership or the Indonesian government's 9% interest in Freeport's operating subsidiary, PT Freeport Indonesia. Furthermore, the potential exists for future disputes between the local government and Freeport, as the new rules could contradict existing contracts of work.

Other negative factors are the intensifying separatist movements in the province of West Papua, mounting pressure over Freeport's environmental record and persistent sentiment by some Indonesian and Irian Jaya legislators to renegotiate the contracts of work and increase revenue to the respective governments.

Freeport is one of the largest copper and gold producers with copper and gold equity production in 1999 of 1.43 billion pounds and 2.4 million ounces, respectively.

Moreover, reflecting a high gold content in its copper ore, low labor costs, and favorable geologic conditions, Freeport's favorable cost profile ranks Freeport as the lowest cost global copper producer. Furthermore, with copper and gold reserves totaling 49.9 billion pounds and 61.1 million ounces respectively, the Grasberg pit is the largest copper-and gold-based deposit in the world and ensures Freeport of significant long-term, low-cost production.

Headquartered in New Orleans, Louisiana, Freeport had revenues of $1.9 billion in 2000. Moody's expects that Freeport's performance should improve this year. (*)