Morningstar DBRS Confirms Teck Resources Limited's Issuer Rating at BBB With a Stable Trend

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating on Teck Resources Limited (Teck or the Company) at BBB with a Stable trend.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmation is supported by (1) the successful completion of the Quebrada Blanca Phase Two (QB2) expansion project, which began delivering additional copper production in early 2023, and (2) the continued favourable outlook for the copper price in the near and medium terms as well as a stable outlook for the zinc price, which should drive ongoing strong cash flow generation. The Stable trend reflects Morningstar DBRS' expectation that Teck's credit metrics will remain robust with (1) no term debt due before 2030; (2) the $2.75 billion debt reduction program under way; and (3) the increased cash flow from QB2 being deployed to fund semiannual repayments of QB2 project debt, which began in Q2 2023, enabling the Company to lower the overall level of indebtedness.

CREDIT RATING DRIVERS
Based on Teck's favourable business risk profile, Morningstar DBRS notes that it would require an across-the-board commodity price decline of 50% through 2026, 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.

EARNINGS OUTLOOK
Based on the Bloomberg consensus estimates and the midpoint of the Company's guidance, Morningstar DBRS expects Teck's 2024 revenue to be between $12.5 billion and $15.0 billion, compared with $15.0 billion in 2023, and for 2025 to be also in a range of $10.5 billion to $11.5 billion after the sale of its coal assets. Morningstar DBRS also expects Teck's EBITDA in 2024 to be lower at approximately $4.0 billion, compared with $6.3 billion in 2023, before declining modestly in 2025 to approximately $3.5 billion. For 2024, Morningstar DBRS expects Teck to report net income of approximately $0.7 billion to $0.9 billion, compared with the 2023 net income of $2.3 billion, and for 2025 to be in the $1.0 billion to $1.2 billion range.

FINANCIAL OUTLOOK
Morningstar DBRS expects strong adjusted operating cash flow and EBITDA in 2024 because of the robust price for copper, with total cash from operations between $2.3 billion and $2.8 billion and improving moderately to between $2.7 billion to $3.2 billion in 2025. Morningstar DBRS expects Teck to resume generating free cash flow surpluses beginning in 2025 of approximately $0.3 billion, as capital spending on the QB2 project has now been completed.

CREDIT RATING RATIONALE
Teck's business risk profile is assessed in the middle of the BBB category based on the Company's robust reserves, low operating cost structure, and position as an established global diversified mining producer.

During the last 12 months (LTM) ended June 30, 2024, Teck's key financial metrics all deteriorated compared with the LTM ended June 2023, mainly because of weaker commodity prices as well as higher overall interest expenses as any interest expense related to the QB2 project is no longer being capitalized. As a result, both the adjusted cash flow-to-debt ratio and debt-to-EBITDA ratio declined to the "A" category and the EBITDA-to-interest ratio declined to the BBB category. However, the debt-to-capital metric remained in the AA category. Morningstar DBRS expects Teck's credit metrics to be in the "A" category in 2024, largely because of commodity prices remaining elevated relative to historical levels.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS   
Environmental (E) factors
Since the last credit rating action, the relevance or significance of the following Environmental factor(s) changed: 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. With the sale of its coal assets to Glencore plc (Glencore), the environmental liabilities have been passed to Glencore.

There were no Social or Governance factors that had a significant or relevant effect on the credit analysis.
 
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings at https://dbrs.morningstar.com/research/437781 (August 13, 2024).

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors 
In the analysis of Teck, the relative weighting of the BRA factors was approximately equal. 

(B) Weighting of FRA Factors 
In the analysis of Teck, the relative weighting of the FRA factors was approximately equal. 

(C) Weighting of the BRA and the FRA 
In the analysis of Teck, the BRA carries greater weight than the FRA. 
 
Notes:
All figures are in Canadian dollars unless otherwise noted.

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in the Mining and Forest Products Industries (June 27, 2024), https://dbrs.morningstar.com/research/435122.

Morningstar DBRS credit ratings may use one or more section of the Morningstar DBRS Global Corporate Criteria (April 15, 2024; https://dbrs.morningstar.com/research/431186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology has also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781.

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

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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@morningstar.com.

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.

Morningstar DBRS 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. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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