S&P Lowers Outlook on Teck Resources (TCK) to Negative; Notes Potential for Increased Leverage

Standard & Poor's Ratings Services said it revised its outlook on Teck Resources Ltd. (NYSE: TCK) to negative from stable, and affirmed its 'BBB' corporate credit and senior unsecured debt ratings on the company.

"The outlook revision reflects the company's weaker earnings and large capital expenditures in 2014 that potentially increase debt leverage above our threshold for rating pressure," said Standard & Poor's credit analyst Donald Marleau.

Our view of Teck's business risk profile as "satisfactory" reflects the company's position as one of the world's largest producers of seaborne hard-coking coal and zinc, as well as a significant copper producer. Teck's revenue and profitability streams are well-diversified for a mining company, with 13 operating mines and one metallurgical complex in four countries and no asset generating more than 15% of consolidated profitability.

We assess Teck's financial risk profile as "significant," reflecting the company's reduced cash flow and financial flexibility that may contribute to weaker credit metrics. We believe that financial ratios could deteriorate through 2014, although we expect that Teck will continue to reduce low-priority capital outlays and operating expenses to defend its credit profile.

The negative outlook reflects Standard & Poor's view that weaker earnings and cash flow, large capital expenditures, and rising net debt will push credit ratios beyond our key thresholds for rating pressure in 2014 or 2015 absent a rebound in metals prices. We believe the company's adjusted net debt to EBITDA could exceed 3x in 2014 if coal prices remain at currently very weak levels, with large capital expenditures for the strategically important Fort Hill oil sands joint venture extending until 2018.

We could lower the ratings on Teck if net debt to EBITDA remains persistently above 3x with weak prospects for improvement, which we believe could occur in 2014 if metallurgical coal prices remain below US$130 per tonne. Unlike most of its capital expenditures, Teck has little control over the timing of its capital commitments to the Fort Hills project by virtue of its minority position in the venture. As such, the company is unusually reliant on a rebound in metallurgical coal prices to preserve net leverage below 3x.

We could revise the outlook to stable if the company improves earnings such that leverage declines below 3x, which we believe would be underpinned by stronger met coal prices. The sharp drop in met coal prices this year is causing cash operating losses for numerous producers, which we believe indicates trough pricing, although the timing of better prices is unclear given persistently high inventories. Assuming steady capital expenditures for 2014, we estimate that Teck's leverage could remain below 3x with met coal prices of US$140-US$150/ tonne.

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