DBRS Changes Trend on Teck Resources Ratings to Negative from Stable

DBRS Limited (DBRS) has today changed the trends on Teck Resources Limited (Teck or the Company) to Negative from Stable, and has also confirmed the Company’s Issuer Rating and Senior Unsecured Notes rating at BBB. The Negative trends reflect the intersection of deteriorating operating cash flow, primarily due to sharply reduced coal and copper prices and Teck’s high level of capital expenditures, including a significant commitment to the Fort Hills oil sands project, which have led to a weakening of its credit metrics that may well continue into 2015/2016. Teck’s BBB rating reflects the Company’s solid business profile as one of the world’s leading producers of internationally traded steelmaking (metallurgical or coking) coal, a significant copper producer as well as the world’s third-largest zinc producer.

A 54% decline in Teck’s average realized coal prices as well as a 21% decline in market copper prices from record levels in 2011 combined with ongoing cost pressures have led to a decline in the Company’s operating cash flow, as adjusted by DBRS, of almost two-thirds to date (annualized). Along with high capital expenditures, investments and increasing dividends, Teck’s net debt has increased by $3.6 billion since the end of 2011, reducing the cash hoard of $4.4 billion held at the end of 2011 to $1.9 billion at September 30, 2014. The cyclical downturn in coal and copper prices combined with high cash outflows, only partially offset by cost reduction programs, have resulted in a steady decline in the Company’s financial metrics since 2011 to levels that are currently weak for its ratings.

Although Teck’s operating cash flow has declined from record levels in 2011, the Company has enhanced its existing businesses by investing in the upgrade of several of its major operations, including its existing coal and copper mines. The sanctioning of the Fort Hills oil sands project in October 2013 and its construction, to be completed by Q4 2017, will require a significant outflow of funds, the timing of which the Company will not directly control, given Teck’s minority interest in the project, even though Fort Hills can be expected to eventually add another major asset to Teck’s business profile. Teck also has a number of other projects under consideration in its Copper and Coal business units that will serve to complement those businesses but, if built, will require additional major investment.

DBRS recognizes that Teck’s currently weak credit metrics reflect the cyclical nature of its key products. However, in the event that coal and copper prices remain weak and credit metrics deteriorate further, or if the Company’s liquidity is strained, its ratings could be downgraded. Still, the trend could revert to Stable should there be a significant recovery of coking coal, copper and, to a lesser extent, zinc prices that result in one or more of the following: (1) restoration of sustained positive net free cash flow, (2) ongoing maintenance of a prudent level of debt in the Company’s capital structure and (3) restoration of coverage metrics to levels more commensurate with a BBB rating level.

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 (September 2014), which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.