DBRS Comments on Impact of Sanctioning of Fort Hills Project on Teck Resources

DBRS notes that Teck Resources Limited (Teck or the Company), rated BBB with a Stable trend, has announced, along with its partners Suncor Energy Inc. (rated A (low), Stable) and Total E&P Canada, a subsidiary of Total S.A. (Commercial Paper rated R-1 (middle), Stable) its intention to proceed with the construction of the Fort Hills oil sands project in the Athabasca region of Alberta.

The Fort Hills project proponents estimate the remaining cost of building the Fort Hills project to be $13.5 billion (100% basis), with oil production to start as early as the fourth quarter of 2017, ramping up to 90% of planned production capacity of 180,000 barrels per day (b/d) of bitumen within 12 months. Teck’s share of expected capital costs is estimated at $2.94 billion, including $240 million of earn-in payments required for the Company to earn its 20% interest in Fort Hills. Teck’s share of production is expected to be 36,000 b/d.

DBRS views the Fort Hills project as an expected but major undertaking for Teck that will provide the Company the opportunity to diversify and expand its existing operating base in coal, copper and zinc. That said, Teck’s capital spending has averaged about $1.1 billion per year (depreciation has averaged $835 million) and its average annual operating cash flow has been $3.0 billion per year over the last five years to the end of 2012, illustrating the material impact Teck’s Fort Hills commitment will have on the Company’s funding needs over the next few years. As well, Teck has sustaining capital needs at its existing operations and other large-scale projects in consideration, including the re-opening of its Quintette metallurgical coal operation in British Columbia and its Quebrada Blanca Phase 2 copper mine development in Chile. As a minority partner in the Fort Hills project, the Company will have less flexibility in expenditure timing than in cases where it is the majority or sole owner.

Teck’s existing businesses face volatile commodity prices and earnings in 2013 that are significantly lower than they were in 2012. Even though the Company’s current financial metrics are strong for its rating, DBRS expects Teck will have to be prudent in its expenditure and funding programs to maintain that strength.

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

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