DBRS Confirms Teck’s Ratings at BB (high) and BB, Changes Trends to Stable from Negative

DBRS Limited (DBRS) confirmed the Issuer Rating of Teck Resources Limited (Teck or the Company) at BB (high). DBRS also confirmed the rating of the Guaranteed Senior Unsecured Notes issued June 2016 at BB (high) and the rating of the Senior Unsecured Notes at BB to reflect structural subordination. Additionally, DBRS changed the trends to Stable from Negative as a result of the significant improvement in the pricing of the Company’s key commodities that has resulted in a material recovery of Teck’s key credit metrics and is expected to continue in the near term. At the same time, DBRS confirmed the Recovery Ratings of the Guaranteed Senior Unsecured Notes at RR1 and the Senior Unsecured Notes at RR4.

During the last 12 months (LTM) ended June 2017, Teck repaid $2.8 billion of debt that was funded from cash balances on hand and the surplus in net free cash flow. The main driver for the robust free cash flow was significantly higher metallurgical (met) coal prices that averaged USD 190 per tonne during that period, peaking at USD 314 per tonne in April 2017 following Cyclone Debbie that disrupted Australian production. As a result of the higher operating cash flow and EBITDA and lower debt levels, Teck’s financial risk profile has improved materially compared with both 2016 and the LTM ended June 2016. However, met coal prices are expected to weaken because of concerns about lower demand if the Chinese government follows through on plans to reduce pollution by temporarily idling steel plants and other heavy industry in the regions surrounding its large cities, including Beijing, during the coming winter. As a result, in 2018, met coal prices are expected to average USD 122 per tonne (Bloomberg consensus as at September 6, 2017); however, DBRS expects that Teck’s key credit metrics should remain above their recent lows in the medium term, as the Company’s other key commodities — zinc and copper — are expected to perform well.

Based on consensus price forecasts, DBRS believes that Teck should finish 2017 with its USD 3.0 billion credit facility undrawn and cash balances of between $900 million and $1,200 million, subject to further cash tenders for debt reduction. The Company’s 20%-owned Fort Hills Oil Sands Project (Fort Hills) is scheduled to begin initial production in Q4 2017, with Teck’s share of remaining capital expenditures being $376 million in H2 2017. Fort Hills is expected to achieve full commercial production by the end of 2018, providing Teck with additional commodity diversification as well as a natural oil price hedge. Teck is currently in the permitting stage for the Quebrada Blanca Phase 2 (QB II) expansion, which could be sanctioned in 2018 subject to the receipt of permits. QB II’s capital cost is USD 4.7 billion, and Teck has a 76.5% ownership interest and an 85% funding commitment (Enami’s 10% is carried). The QB II expansion would extend QB’s operating life by at least 25 years and materially grow its copper production. If QB II is approved as expected, a funding strategy that does not involve significant re-leveraging could result in a positive rating action. If the prices of Teck’s key commodities decline significantly more than expected, a negative rating action could result.

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 principal methodologies are Rating Companies in the Mining Industry (August 2017) and DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers (February 2017), which can be found on dbrs.com under Methodologies.

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the rating process. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities.

This is an unsolicited credit rating.

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