DBRS Changes Teck Resources Trend to Stable

DBRS has today confirmed the Issuer Rating of Teck Resources Limited (Teck or the Company) at BB (high) and the Company’s Senior Secured Notes at BBB (low). The trend for both ratings has been changed from Negative to Stable. The change in trend reflects the Company’s debt reduction through a recent $1.7 billion equity issuance and asset sales; the rescheduling of large near-term debt maturities through successful negotiations with lenders and issuance of US$4.2 billion of mid-term notes; and greater certainty surrounding the beginning of a recovery for commodity markets important to Teck, particularly steel-making coal. DBRS considers that Teck, with lower but still high leverage and reduced refinancing risks, is better able to withstand the financial impact of any unforeseen deterioration in commodity markets if the economic recovery were to falter.

At the end of April 2009, Teck rescheduled the payments required under its US$5.8 billion bridge loan and US$4.0 billion term loan facilities used to finance the $13.6 billion acquisition of the assets of Fording Canadian Coal Trust (Fording) in October 2008. Under the revised payment schedule, 2009 payments on the facilities of US$6.3 billion were reduced to approximately US$1.9 billion, with the remainder due over a period ending December 2012. Subsequently, through applying the proceeds of US$4.2 billion in notes issued May 5, 2009, a US$1.5 billion issuance of equity in early July 2009, proceeds from asset sales and application of cash resources on hand, the Company reports that the bridge loan has been fully repaid and that the outstanding balance on the term loan at July 22, 2009, was US$2.7 billion, effectively resolving near-term liquidity issues.

Teck has also successfully reduced the total amount of its net outstanding debt from $12.0 billion at December 31, 2008, to $10.5 billion at June 30, 2009. The proceeds of the July equity issue have been used to reduce Fording-related debt, as will the expected $825 million in proceeds from the pending sale of a one-third interest in the Company’s Waneta Dam power station to British Columbia Hydro & Power Authority. The reduction of debt increases Teck’s flexibility in dealing with potential volatility in commodity markets and provides time to negotiate any additional asset sales or financial transactions into which the Company may wish to enter.

DBRS had expected that the collapse in commodity markets experienced in the fourth quarter of 2008 and first quarter of 2009 would prove to be part of a normal cycle of economic activity, with retrenchment followed by recovery. In this case, the collapse in prices and shipment volumes of commodities important to Teck, such as coal, zinc and copper, was dramatic, albeit from very high levels experienced in 2007 and the first three quarters of 2008. We have begun to see the signs of the economic recovery that we had expected, ranging from strong commodity demand growth in China – brought on in part by massive stimulus – to at least a slowing, if not reversal, of the decline in commodity consumption in North American and European markets. These factors are reflected in a significant recovery of base metal prices. In coal, the price drop triggered by the economic downturn was delayed by the annual contract nature of the bulk of coal sales. Now, prices have been largely established for the 2009-2010 coal contact year and although the price drop has been steep, prices remain the second-highest on record for the steel-making coals Teck sells. There are general reports of increased shipments by coal producers in the second quarter, which adds support to our view that we are in the early stages of recovery.

Teck’s Q2 2009 financial and operating results reported on July 23, 2009, also support our view of a normal cycle with signs of recovery. Teck reports the sale of five million metric tonnes of coal in the quarter, up from 3.7 million tonnes in Q1 2009. The Company also reports strong demand from customers, including an increase in expected deliveries of high-priced 2008-2009 contract year coal from 2.5 million to 3.0 million tonnes. Copper and zinc prices have risen from $1.56 and $0.53 per pound, respectively, to $2.12 and $0.67 per pound, both below current spot prices.

Accordingly, DBRS expects Teck to be able to fund its increased financing costs and relatively modest capital budget while generating sufficient additional free cash flow to supplement the debt reduction of its financial transactions. We also feel that Teck would generate free cash flow for debt reduction in 2009 if base metal prices were to slump again, due to the now largely established prices for coal for the rest of the year. In light of our view that Teck will continue to reduce its debt levels throughout 2009, DBRS has changed the trend on the Company’s ratings from Negative to Stable.

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.