DBRS Comments on Teck Resources Limited’s $825 Million Asset Sale

DBRS notes that Teck Resources Limited (Teck or the Company) announced that it has entered into a non-binding memorandum of understanding with BC Hydro for the sale of a one-third interest in the Company’s 490-megawatt Waneta Dam power station in southeastern British Columbia for $825 million. DBRS has been anticipating asset sales by Teck and we view this as a positive and necessary development as the Company seeks to reduce its debt burden brought on by the $13.6 billion acquisition of the assets of Fording Canadian Coal Trust (Fording) in October 2008. Teck’s leverage remains high, with $13.3 billion in total debt at March 31, 2009, and gross leverage in excess of 50%. The Company’s credit metrics remain weak for a BB (high) issuer rating after giving consideration to the proposed asset sale announced yesterday. Accordingly, DBRS is maintaining Teck’s ratings with a Negative trend until we can better assess the Company’s ability to more meaningfully reduce its debt levels through additional assets sales, other financial transactions or net free cash flow generation despite dramatically lower coal prices in the 2009–2010 coal contract year and very weak coal shipments in the first quarter of 2009.

Teck indicates that it has tax pools available to shelter the proceeds of the sale from cash taxes and that it will apply the entire proceeds of the transaction to reduce indebtedness. The proposed transaction is subject to the completion of due diligence and definitive documentation and to the receipt of certain third-party consents and necessary regulatory approvals. Teck expects the transaction to close by year-end.

Teck continues to face the impact of the global economic downturn on commodity prices and demand, particularly with respect to steel-making coal, which now forms the core of the Company’s business. First-quarter 2009 coal shipments were very weak and coal prices for the Company’s highest-quality coal products were set at US$128 per tonne, more than 55% below contract prices for the prior year. Although Teck has reduced its near-term liquidity pressures through the rescheduling of the repayment dates on the bulk of the debt related to the Fording acquisition and through the issuance of US$4.2 billion in senior secured notes in May, 2009, the need to reduce debt levels remains. Teck has indicated that it will seek additional asset sales, including a portion of its coal business. DBRS believes Teck will continue to face serious challenges in meaningfully 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.

For more information on Teck, please see the DBRS press releases published on May 5, 2009, May 1, 2009, April 27, 2009 and February 17, 2009 or our rating report issued May 25, 2009.

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.