DBRS Confirms Teck Resources at BBB with Stable Trend

DBRS has today confirmed the Issuer Rating and the rating of the Senior Unsecured Notes of Teck Resources Limited (Teck or the Company) at BBB with a Stable trend. Teck’s ratings and Stable trend reflect the Company’s solid business profile as a leading producer of coal used in steelmaking (metallurgical or coking coal) and its diversification as a significant copper and zinc producer. Although Teck has a somewhat narrower business profile than prior to its 2008 major coal acquisition, the Company’s Coal, Copper and Zinc businesses are expected to contribute to robust operating cash flows despite growing inflationary cost pressures and the negative cost impact of a strong Canadian dollar.

Teck’s liquidity and financial metrics have improved markedly since they were weakened by the 2008–2009 recession, which began just as the Company completed a $13.6 billion acquisition of the outside interests in its coal operations (October 2008), funded in large part by debt. Record operating income in 2011 of $4.4 billion was 76% higher than in 2007 (pre-acquisition) on the strength of more than double the coal sales, 28% higher copper sales and higher coal and copper prices, partially offset by a decline in zinc sales and prices. A downturn in commodity prices in H1 2012 has relinquished some of the post-recession gains with operating income of $1.5 billion, down 23% from H1 2011 but still well ahead of 2007 levels.

Since the Fording acquisition in October 2008, Teck’s earnings have become more dependent on earnings from its Coal unit (about 54% of EBITDA 2009–2011 versus 15% 2005–2007) than from its Copper and Zinc units even though coal shipments were well below capacity. Coal shipments improved in H1 2012 over H1 2011 as did copper shipments, but lower coal, copper and zinc prices along with a decline in zinc concentrate sales contributed to an 18% decline in EBITDA.

With the significant restoration of the Company’s balance sheet and liquidity profile, Teck has embarked on a program focused on increasing coal output by the end of 2013 by about 20%, and to over 30 million tonnes per year beyond that date, as well as a 25% increase in copper output. The Company is also examining a number of copper and oil sands mega projects. The recent slump in commodity prices and the ongoing uncertainty in Europe and in China’s growth story add a cautionary note to the outlook. Teck will have to be prudent in its cash outlays during its expansion phase if the Company wishes to retain its restored financial strength.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Companies in the Mining Industry (June 2011), which can be found on our website under Methodologies.