DBRS Confirms Issuer Rating of Teck Resources Limited at BB (high), Trends Remain Negative

DBRS Limited (DBRS) has today confirmed the Issuer Rating of Teck Resources Limited (Teck or the Company) at BB (high). DBRS has also assigned a new Guaranteed Senior Unsecured Notes rating of BB (high), which applies to (1) the guaranteed notes issued in June 2016 and (2) the existing credit facilities. In addition, DBRS has downgraded the Company’s existing Senior Unsecured Notes rating to BB from BB (high) to reflect structural subordination. The trends remain Negative despite some evidence of zinc and steelmaking coal market improvement because of the weak financial profile and potential for further weakness in the global zinc, coal and copper markets. DBRS has also assigned a recovery rating of RR1 to the Guaranteed Senior Unsecured Notes and has downgraded the recovery rating on the Senior Unsecured Notes to RR4 from RR3.

The Company’s May 2016 decision to issue USD 1.25 billion of Guaranteed Senior Unsecured Notes and repurchase nearer-term maturities represented a prudent trade-off. While the coupon rates for the Guaranteed Senior Unsecured Notes issues of 8.0% and 8.5% are higher than Teck’s existing debt, the issuances ensure that the liquidity position will remain solid until the Fort Hills oil sands project achieves commercial production, possibly at the end of 2018.

The financial risk profile has continued to weaken due to unfavourable market conditions. Cash flow-to-debt and debt-to-EBITDA moved further down the B rating range, while EBITDA-to-interest moved further down the BB rating category. Debt-to-capital improved modestly after a debt repayment in Q4 2015.

DBRS projects that the worst may be almost over, with 2016 possibly representing the bottom of the credit-metrics-weakening trend that began in 2012. DBRS anticipates a modest improvement in operating performance in the second half of 2016 and a more noticeable improvement in 2017. Consensus expectations for better zinc and metallurgical coal prices are consistent with certain fundamental/structural drivers, such as significant mine closures and inventory depletions in the zinc market and capacity reductions both in North America and in China in the coal market. While the copper market remains oversupplied, a deficit may develop after 2017.

Based on consensus price forecasts, DBRS believes that Teck is likely to achieve its target of finishing 2016 with its USD 3 billion credit facility undrawn and over $500 million in cash. The Company would then be within 12 months of project completion at Fort Hills, should be able to finance the remaining Fort Hills capital expenditure ($1 billion from May 2016) internally and achieve noticeable diversified production benefits (including a natural oil price hedge) starting in 2019. Should the recoveries in zinc and steelmaking coal markets gain traction in the coming quarters, enabling the Company to demonstrate material improvement in key financial metrics, DBRS may consider removing the Negative trends. Alternatively, DBRS would consider downgrading if further significant weakness in commodity pricing clearly changes the currently more favourable outlook for financial performance.

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 methodologies are Rating Companies in the Mining Industry (October 2015) and DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers (March 2016), which can be found on our website under Methodologies.