DBRS Downgrades Teck Cominco to BBB with Negative Trend

DBRS has today downgraded the Unsecured Debentures rating of Teck Cominco Limited (Teck or the Company) to BBB from BBB (high) and maintained a Negative Trend as a result of the Company’s lack of progress in reducing its high debt levels and resolving the impending US$5.3 billion debt maturity (due October 29, 2009) in the face of difficult credit conditions, drastically reduced product prices and deteriorating credit metrics.

Teck’s BBB (high) rating was confirmed but placed on Negative trend on October 30, 2008, when the Company closed the US$12.8 billion purchase of the assets of Fording Canadian Coal Trust (Fording) that it did not already own. DBRS expressed concerns at the time that it would be difficult to sell assets in weak commodity markets and that asset sales would be unlikely to make up for an expected decline in cash flow from operations.

Teck financed the Fording purchase through new debt of US$9.8 billion, sale of Fording Trust units (US$2.5 billion), equity issuance ($US0.4 billion) and cash on hand. The US$9.8 billion in debt taken on was comprised of a US$4.0 billion senior term loan facility, to be repaid in 11 equal quarterly installments beginning April 2009 and a US$5.8 billion senior bridge loan facility that matures on October 29, 2009.

On February 16, 2009, Teck reported its fourth quarter 2008 results, which were less than expected. Although operating profits before depreciation and pricing adjustments of $808 million were up over the 2007 fourth quarter, there was significant weakness in copper and zinc results, and coal operating results were less than expected given the very large increase in nominal average coal contract prices from $91 per metric ton (tonne) to $275 per tonne and the high proportion of copper sales hedged in the quarter.

Coal shipment volumes for the fourth quarter on a 100% basis were only 4.7 million tonnes, 1.4 million tonnes below the average of the first three quarters of the year. Average realized prices were $247 per tonne, well down from nominal contract prices of $275 per tonne due to the sale of lower quality coals and some non-contract tonnage. In addition, unit coal costs increased to $97 per tonne due to lower production volumes and in spite of a weaker Canadian dollar and lower energy costs. Teck indicates that along with continued weakness in shipping volumes, their expected average first quarter 2009 price for coal will be only $190 per tonne, even though the nominal contract price in place will remain at $275 per tonne. New, significantly lower contract prices for coal are expected to come in force beginning April 1, 2009, which has led DBRS to lower its expectations of operating cash flow from coal, making debt reduction from operating cash flow less likely.

With low zinc prices in the fourth quarter of 2008, the Company’s zinc operations were only modest contributors to operating profits in the quarter. With even lower zinc prices expected on average in 2009, contribution to debt reduction is expected to be minimal.

Contribution from copper operations was similarly disappointing even though much of copper sales were hedged at above market prices. Cash from copper operations in the first quarter of 2009 is expected to be largely maintained due to hedging currently in place for 55% of sales at US$2.40 per pound, but after that, realizations will drop to market levels, which DBRS expects to average about US$1.60 per pound in 2009. Accordingly, DBRS expects reduced cash from copper operations in 2009.

Teck continues to indicate that they are exploring a wide range of asset sales and or investments in portions of their business including the coal division. To the end of 2008, asset sales completed have been minor, totalling only $196 million and the challenge of selling assets in very weak commodity markets remains. DBRS believes successful assets sales will be critical in reducing leverage in the near term.

Teck’s leverage is high (54% at year-end 2008) and debt will have to be reduced to bring it down significantly. The Company is currently in compliance with the financial covenants under their credit agreements, which require them to maintain a maximum debt-to-debt plus equity ratio of 60% at the end of each calendar quarter in 2009, until the covenant declines to 50% at September 30, 2009. The Company currently has access to short-term liquidity with $0.9 billion cash on hand at year end 2008 (currently estimated at $1.4 billion following receipt of a tax refund of $950 million in early 2009). They also have access to a $1.1 billion undrawn revolving credit facilities. With quarterly installments on the term portion of the Fording related debt beginning in April 2009, the Company will likely have to seek refinancing of at least a portion of the US$5.8 billion bridge facility. Although DBRS continues to believe Teck will be able to refinance the facility, the new debt is likely to come at a significantly higher cost.

Teck’s current and projected credit metrics remain weak for a BBB rating. The Company faces serious challenges in reducing debt by way of asset sales in the current market environment and if asset sales are realized, they could weaken the Company’s business profile. The outlook for 2009 operating cash generation is not positive and is clouded by the uncertainty around now critical metallurgical coal price negotiations. Additionally, higher interest costs on refinanced debt will put further pressure on coverage metrics. Accordingly, unless Teck can stabilize its operating results in 2009 and reduce its leverage, further negative rating action is likely.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Mining which can be found on our website under Methodologies.

This is a Corporate rating.