DBRS Morningstar Confirms Teck Resources Limited’s Issuer Rating at BBB, Stable Trend and Discontinues Rating on Senior Unsecured Notes

DBRS Limited (DBRS Morningstar) confirmed Teck Resources Limited’s (Teck or the Company) Issuer Rating at BBB with a Stable trend. At the same time, DBRS Morningstar discontinued and withdrew its credit rating on the Company's Senior Unsecured Notes. The action to discontinue and withdraw the credit rating on the Senior Unsecured Notes is unrelated to the Company's credit profile.

The confirmation of the Issuer Rating is supported by (1) the completion of the Quebrada Blanca Phase Two (QB2) expansion project, which began delivering additional copper production at the end of Q1 2023; and (2) the continued favourable outlook for copper, zinc, and steelmaking coal prices in the near and medium terms, which should drive ongoing strong cash flow generation. The Stable trend reflects DBRS Morningstar’s expectation that Teck’s credit metrics will remain robust with (1) no term debt due before 2030; and (2) the increased cash flow from QB2 being deployed to fund semiannual repayments of QB2 project debt in Q2 2023, enabling the Company to lower the overall level of indebtedness.

During the last 12 months (LTM) ended June 30, 2023, Teck reported gross profit from its steelmaking coal operations alone of $4,462 million compared with $6,672 million for the LTM ended June 30, 2022. Although gross profit was down 33% year over year, the windfall in cash flow over the past two years has significantly improved Teck's credit metrics. In particular, the Company’s key lease-adjusted cash flow-to-debt metric for the LTM ended June 30, 2023, has improved to 70% from 21% for the LTM ended June 30, 2021. Although commodity prices have further corrected, they remain elevated relative to historical levels, which should allow the Company to generate robust EBITA and cash flow in the near and medium terms based on consensus estimates for commodity prices through 2025.

On February 21, 2023, Teck announced plans to separate its existing businesses (the Separation) into two publicly listed companies: Teck Metals Corporation (Teck Metals) and Elk Valley Resources Limited (EVR). According to the announced plan, EVR would hold all of Teck’s steelmaking coal operations and assets, and Teck would change its name to Teck Metals and would 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. Under a complex capital structure involving royalty payments and preferred share redemption amounts, Teck would still receive 90% of the free cash flow generated by EVR in the foreseeable future. However, on April 26, 2023, the Company terminated the proposal as it did not seem likely that it would receive shareholder approval for the Separation. DBRS Morningstar will continue to monitor the developments around the Company’s future plans to separate its coal assets under a more direct transaction structure.

Based on Teck’s favourable business risk profile, DBRS Morningstar notes it would require an across-the-board commodity price decline of 40% through 2025, from current consensus forecasts, before Teck’s credit metrics would deteriorate to the high end of the non-investment-grade category, which could cause a negative credit rating action. A positive credit rating action is possible if there is a clear defined path for improving the Company’s business risk profile through either organic growth opportunities or acquisitions.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
DBRS Morningstar considered emissions, effluents, and waste as a relevant environmental factor for Teck. The Company has a long-term water treatment project at its operations in the Elk Valley in British Columbia to remove selenium, nitrates, and other deleterious elements and expects the project to cost approximately $200 million per year through 2025. However, it will improve Teck’s ability to develop new coal mining areas.

There were no Social or 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/416784 (July 4, 2023).

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

DBRS Morningstar applied the following principal methodology:
-- Global Methodology for Rating Companies in the Mining Industry (August 16, 2023; https://www.dbrsmorningstar.com/research/419230)

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

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.

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].

The credit rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the credit rating process for this credit rating action.

DBRS Morningstar did not have access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is an unsolicited credit rating.

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

Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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