DBRS Morningstar Comments on Teck Resources Limited’s Announcement Regarding the Initiative to Separate into Teck Metals and Elk Valley Resources

DBRS Limited (DBRS Morningstar) notes the announcement by Teck Resources Limited (Teck or the Company; rated BBB with a Stable trend by DBRS Morningstar) of its plan to separate its existing businesses (the Separation) into two publicly listed companies: Teck Metals Corporation (Teck Metals) and Elk Valley Resources Limited (EVR).

EVR will hold all of Teck’s steelmaking coal operations and assets. Teck will change its name to Teck Metals and will hold all of the remaining assets, primarily Teck’s copper and zinc operations, its portfolio of development and exploration projects, and the majority of Teck’s liabilities including the existing debt. Teck shares will continue to be listed on the Toronto and New York stock exchanges, while EVR has applied to have its common shares listed on the Toronto Stock Exchange. The Separation is subject to a shareholder vote with 66.7% approval required. The vote is scheduled for April 26, 2023, and closing is anticipated by the end of May 2023.

Under the terms of the Separation, Teck shareholders will receive 0.1 EVR common share for every Teck common share plus $0.39 in cash, subject to a Dutch auction election process that will result in final proration amounts being issued and paid out, respectively. There will also be a transition capital structure established consisting of a 60% gross revenue royalty payable quarterly by EVR to Teck Metals out of free cash flow (but subject to minimum cash balances) until either December 31, 2028, or until the cumulative payout reaches $7.0 billion. Additionally, EVR will issue $4.4 billion in preferred shares with a 6.5% dividend to Teck Metals with a 20-year mandatory redemption provision. Collectively, the royalty payments and preferred share redemption amounts should equal approximately 90% of the free cash flow generated by EVR.

Additionally, as part of the creation of EVR, Nippon Steel Corporation will exchange its minority interests in the Elkview and Greenhills operations plus $1.025 billion in cash for a 10% interest in EVR. Similarly, POSCO will exchange its minority interests in the Elkview and Greenhills operations for 2.5% of EVR.

DBRS Morningstar notes that at Teck’s last annual review in September 2022, the Company’s financial risk profile was in the AA (low) range, which was very robust for the final BBB ratings. As a result, DBRS Morningstar believes that the proposed spin-out of Teck’s steelmaking coal operations is credit neutral based on Teck Metals continuing to receive 90% of EVR’s free cash flow for the foreseeable future. DBRS Morningstar will continue to monitor the developments around the proposed Separation.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no environmental, social, and governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

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

The principal methodology applicable to the rating is Global Methodology for Rating Companies in the Mining Industry (August 30, 2022; https://www.dbrsmorningstar.com/research/402159).

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

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

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577