DBRS Confirms Teck Resources at BBB with a 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 trends 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. With the Company’s recent decision to begin construction of its 20% owned Fort Hills oil sands project, the Company is entering into an extended period of high capital expenditures, which are expected to add an important, long-life business to its existing operations in 2017.

Teck’s liquidity has improved markedly since the 2008–2009 recession, which began just as the Company completed its $13.6 billion Fording Coal acquisition creating significant financial risk and uncertainty for the Company. Nonetheless, due to strong commodity prices, Teck remained net free cash flow positive 2009–2012 despite an increasing level of capital expenditures and dividend outflows allowing it to reduce is net indebtedness by $6.8 billion since the end of 2008 and to strengthen its liquidity profile. Cash and unutilized credit capacity totalled $4.3 billion at September 30, 2013. That said, Teck’s operating earnings and cash flow have declined significantly in 2012 and to date in 2013 from record levels achieved in 2011. The uncertain outlook for economic growth and commodity markets combined with the Fort Hills project sanction place Teck in a new era of heightened risk over the medium term.

In response to lower commodity prices, the Company has already begun to initiate cost-savings programs and has announced delays to some key large-scale developments such as its Quintette coal mine reopening and its Quebrada Blanca Phase 2 (QB II) copper mine project to better match expenditures to market demands and its funding plans.
China remains the key for commodities important to Teck and there appears to be a resumption of 7% plus growth in China. Combined with a cutback in growth plans by copper and met coal producers, higher prices for those commodities may be seen in 2014 and beyond leading to stronger earnings for Teck. Nonetheless, DBRS expects Teck’s overall strong financial profile to weaken moderately in the near term due to lower operating cash flow.

The recent sanctioning of the Fort Hills oil sands project is expected to require $2.9 billion in outflows before mid-2017. Teck, as a minority partner, will not control the timing of these outflows. With a number of other major projects being examined including the reopening of Quintette and the QB II project, Teck will have to remain judicious in balancing growth initiatives, dividend levels and share repurchases with operating cash flow and other funding sources in order to sustain its financial strength.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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