DBRS Upgrades Teck Resources Limited to BBB with Stable Trends

DBRS Limited (DBRS) upgraded Teck Resources Limited’s (Teck) Issuer Rating and Senior Unsecured Notes rating to BBB from BBB (low). The trends remain Stable. The upgrade is as a result of (1) Teck’s procuring the financing (in a sufficient amount and on favourable terms) for the Quebrada Blanca Two (QB II) expansion by way of a USD 2.5 billion limited recourse project financing facility expected to close by the end of Q3 2019 and (2) Teck’s redeeming its 8.5% June 2024 Senior Unsecured Notes as early as possible on June 29, 2019, thereby reducing its debt by USD 600 million and leading to an improvement in its credit metrics. The Stable trends have been maintained because Teck’s credit metrics remain strong for the ratings and, while the prices of Teck’s principal commodities have weakened over the past few months, operating cash flow and EBITDA are expected to remain comfortably above the 2014-2015 trough during the approximate 30-month construction period until QB II begins ramping up to commercial production beginning in the second half of 2021. DBRS notes that with the redemption, Teck now has only $539 million of debt coming due prior to 2035 with the maximum maturity in any year being $220 million in 2022. Additionally, revenue from QB II is expected to be able to fund the amortization payments due on the project finance facility.

The ongoing trade war between the United States and China continues to weigh negatively on the global economy, and the recent inversion of the U.S. Treasury yield curve, albeit briefly, along with weaker manufacturing data have increased concerns that a global recession is imminent. This negative market sentiment has led to financial actors increasing speculative selling pressure on commodities in anticipation of weaker demand. As a result, since the end of Q1 2019, the prices of Teck’s principal commodities -- steelmaking coal, copper and zinc -- have fallen by 25%, 10% and 20%, respectively, and are now trading approximately 13%, 8% and 8%, respectively, below Bloomberg consensus estimates (as of September 4, 2019). As such, DBRS no longer expects Teck to benefit from potential “windfall” cash flow from higher-than-consensus prices in the near term. That said, assuming Teck’s business risk profile remains stable (which is what DBRS expects), DBRS’s analysis indicates that it would take an across-the-board price decline below current Bloomberg consensus of approximately 40% before Teck’s credit metrics would deteriorate sufficiently to set the stage for a negative rating action. While currently unlikely, a positive rating action could occur if there is a resolution of the U.S.-China trade war or other catalyst that stabilizes the global economy and improves the sustained demand for Teck’s principal commodities.

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

The principal methodology is Rating Companies in the Mining Industry (August 2019), which can be found on dbrs.com under Methodologies & Criteria.

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.

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

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.

For more information on this credit or on this industry, visit or contact us at info@dbrs.com.

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