DBRS Changes Teck Resources Limited’s Trends to Positive; Confirms Ratings at BB (high)/BB and Recovery Ratings at RR1/RR4

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. At the same time, DBRS confirmed the Recovery Ratings of the Guaranteed Senior Unsecured Notes at RR1 and the Senior Unsecured Notes at RR4. Additionally, DBRS changed the trends on all the ratings to Positive from Stable due to (1) the below-discussed debt reduction and (2) in expectation of the Company’s approval of its Quebrada Blanca Phase Two (QB II) copper expansion.

During the last 12 months (LTM) ended June 2018, Teck repaid only $80 million of debt. However, on August 13, 2018, Teck completed a cash tender for USD 1 billion of its Notes with maturities ranging from 2021 to 2023, which DBRS took account of in changing all trends to Positive. Due to strong operating cash flow and EBITDA, coupled with lower debt levels, Teck’s financial risk profile remains robust and the credit metrics remain at levels similar to LTM June 2017. While forecast to go lower to USD 139 per tonne (Bloomberg consensus as of September 11, 2018) in 2019, DBRS notes that steelmaking coal prices have reportedly risen above USD 200 per tonne in recent weeks due to slower rail service in the Bowen Basin in Queensland that has increased demurrage costs at Australian ports, which could moderate price declines to a level above Bloomberg consensus estimates.

Based on consensus price forecasts, DBRS believes that Teck should finish 2018 with its USD 3.0 billion credit facility undrawn and cash balances that DBRS expects should be higher than at June 30, 2018. The Company’s 21.3%-owned Fort Hills Oil Sands Project (Fort Hills) has reached commercial production and is no longer a net consumer of capital. Further, Fort Hills provides Teck with additional commodity diversification as well as a natural oil price hedge. Teck has received regulatory approval for QB II and is looking to sell between 20% to 30% of the project. The Company is focused on completing this process by December 2018 and announcing the funding structure for the USD 4.7 billion project by the end of 2018. Teck’s pro forma share of the funding requirements for QB II are estimated at approximately USD 3.1 billion, if 30% is sold before applying any sale proceeds to their funding requirements. If QB II is approved as expected, a funding strategy that does not involve significant re-leveraging could result in an upgrade. DBRS estimates that if the prices of Teck’s key commodities decline across the board by more than 40%, then a negative rating action could result.

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

The principal methodologies are Rating Companies in the Mining Industry (September 2018), DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers (February 2018) and DBRS Criteria: Guarantees and Other Forms of Support (January 2018), which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

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

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