DBRS Morningstar Confirms Teck Resources Limited at BBB, Stable

DBRS Limited (DBRS Morningstar) confirmed Teck Resources Limited’s (Teck or the Company) Issuer Rating and Senior Unsecured Notes rating at BBB with Stable trends. The confirmations are a result of (1) the Quebrada Blanca Phase Two (QB2) expansion project having achieved 60% completion in August 2021 and remains on schedule for first production in H2 2022 despite the impact of the Coronavirus Disease (COVID-19) pandemic; (2) the favourable outlook for copper, zinc, and steelmaking coal prices in the near term, which should drive the ongoing strong cash flow generation in support of completing QB2; and (3) a relatively stable operating cost structure that has benefitted from Teck’s ongoing cost reduction programs as well as higher by-product prices for gold, silver, and molybdenum. The Stable trends reflect DBRS Morningstar’s view that Teck’s debt levels remain manageable with only $228 million coming due before 2030 and higher project finance debt levels being largely offset by robust cash flow generation. Additionally, DBRS Morningstar expects that the cash flow from QB2 should be able to fund the amortization payments due on the QB2 project finance facility. The major risk to Teck’s financial and business risk profiles is the risk of a disruption in operations and weakness in commodity prices that could be caused by further impacts related to the coronavirus pandemic.

The advent of the coronavirus pandemic had a mixed impact on the mining industry as many mining operations experienced lockdowns and other disruptions to normal business operations; however, the resultant reduction in the supply of these metal and mineral commodities coupled with robust demand from global economic stimulus initiatives drove the already strong performance of commodity pricing with copper, zinc, and steelmaking coal prices up approximately 40%, 21% and 46%, respectively, from September 21, 2020, to June 30, 2021. Additionally, steelmaking coal prices have risen dramatically in Q3 2021. Contract and spot prices are currently above USD 200 per tonne and USD 300 per tonne, respectively, compared with Bloomberg consensus 2021 and 2022 forecasts (as of September 1, 2021) of USD 147 per tonne and USD 136 per tonne, respectively, providing for potential windfall cash flow above DBRS Morningstar’s estimates. The high prices provide additional financial cushion toward completing QB2.

Based on Teck’s business risk profile remaining stable, DBRS Morningstar’s analysis indicates that it would require an across-the-board commodity price decline below the current consensus forecasts of approximately 35% until 2023 before Teck’s credit metrics would deteriorate to the low end of the non-investment-grade BB category, which in turn could trigger a negative rating action. While currently unlikely, a positive rating action could occur if the QB2 expansion is completed on time and successfully ramps up to full production or there is a clear path for improving the Company’s business risk profile through either organic growth opportunities or acquisitions.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology is Rating Companies in the Mining Industry (August 16, 2021; https://www.dbrsmorningstar.com/research/383106), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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 [email protected].

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 Morningstar 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.

This is an unsolicited credit rating.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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