DBRS Upgrades Teck Resources Issuer Rating to BBB (low) and Changes Trend to Positive

DBRS has upgraded the Issuer Rating of Teck Resources Limited (Teck or the Company) to BBB (low) from BB (high). The Company’s Senior Secured Notes are maintained at BBB (low); however, the trend on both ratings has been changed to Positive. With the Company’s Issuer Rating at BBB (low), we have discontinued the RR1 recovery rating on the Company’s Senior Secured Notes. Teck has made meaningful progress in reducing high debt levels and refinance risk that led to the downgrade of the Company’s ratings in 2009. Commodity markets have also recovered considerably from lows in the first and second quarter of 2009 leading to much higher operating cash flows for the Company. Accordingly, DBRS has placed Teck’s ratings on a Positive trend, which signifies the potential for a rating upgrade upon confirmation of further debt reduction and demonstration of the Company’s ability to maintain solid profitability from its coal operations.

Teck’s financial metrics were significantly weakened when it purchased the assets of Fording Canadian Coal Trust (Fording) in October 2008 and it was immediately faced with a steep downturn in its commodity businesses and the financial markets critical to replacing the short-term borrowings arranged for the purchase. The Company has since been able to reduce its debt levels through asset sales, equity issuance and cash flow generation. The Company has also made significant progress in improving its liquidity through rescheduling and terming out some of the Fording-related debt, building up its cash balances and securing access to approximately $1 billion in unutilized credit facilities. The Company’s efforts to reduce its debt burden through asset sales have not materially weakened its previously strong business profile, although it currently has a larger dependence on the prospects for metallurgical coal markets.

Teck is expected to have received about $1 billion in proceeds from previously announced asset sales in the first quarter of 2010, which will allow further debt reduction from reported December 2009 amounts. In addition, prices in metallurgical coal markets for the April to June 2010 quarter are expected to be up by more than 50% adding the prospect of solid operating cash flows for the Company in 2010.

Some concerns regarding Teck’s operations remain. Although the expected price settlements for metallurgical coal are positive for the Company, the pricing mechanics of the business are changing and the current arrangements being made are largely expected to be for a single quarter rather than a full year resulting in pricing risks beyond June 2010. The current uncertainty over the general economic outlook adds to the risk that metallurgical coal prices could slip from the high levels expected in the second quarter of 2010.

In addition, Teck faces a potential suspension of its Red Dog zinc operations due to its failure to license a new mining area. Historically, Teck’s zinc business has contributed about 15% of its operating profit before depreciation. If licensing issues do force a suspension of Red Dog production, there will be a negative impact on the Company’s earnings and cash flow. The size of the impact is likely to be overshadowed by any significant changes that may occur in coal or copper markets and operations. In addition, due to the seasonal nature of Red Dog’s concentrate shipping schedule, a suspension of operations in the fall of 2010 would generally only impact second quarter 2011 and beyond zinc production at Trail.

DBRS has discontinued the recovery rating on Teck’s Senior Secured Notes since we only assign recovery ratings to non-investment grade companies. We consider that higher-rated firms have a lower risk of default. Therefore, a recovery rating is less relevant to investors and the default scenario that underpins the recovery analysis becomes more remote and difficult to model realistically. However, DBRS continues to believe, despite no longer assigning a formal recovery rating, that Teck’s senior creditors are well covered in the unlikely event of a default.

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.