Fitch Downgrades Teck's IDR to 'BBB-'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has downgraded the Issuer Default Rating (IDR) of Teck Resources Limited (Teck; NYSE: TCK; TSE: TCKb) to 'BBB-' from 'BBB' along with Teck's outstanding debt. About C$8.4 billion in debt and US$3 billion in commitments are affected by these rating actions. A full list of rating actions follows at the end of this release.

The downgrade reflects financial leverage expected to remain higher than would be consistent with a 'BBB'. The Stable Outlook reflects Fitch's expectations that Teck will cut costs, cut capital expenditures, sell assets and/or cut dividends to reduce the size of free cash flow (FCF) burn should coal and copper prices remain weak.

The ratings reflect Teck's strong liquidity, elevated financial leverage, long-lived reserves, leading low cost position in zinc, its leading position in the seaborne hard metallurgical coal market, and solid core position in copper. The ratings also reflect weak metallurgical coal pricing and softness in copper somewhat offset by strengthening in zinc.

Globally, Teck is the second-largest seaborne hard coking coal producer after BHP-Mitsubishi Alliance and is at about the mid-point of the cost curve (FOB port). Globally, Teck is the tenth largest copper producer with about average costs and the third-largest zinc producer, in the lowest quartile on costs. Mine lives are generally over 20 years.

Coal accounted for 33% and copper accounted for 39% of segment operating EBITDA in 2014. Canada accounted for about 52% of 2014 gross profit before depreciation by region, with operations also in the U.S. (22%), Chile (10%) and Peru (16%).

Fort Hills:

Teck guides to C$1 billion in new mine development for 2015 including C$850 million for the Fort Hills oil sands project in Canada and C$60 million for its Frontier oil sands project. The Fort Hills project, a partnership among Suncor Energy Inc. (40.8%), Total E&P Canada Ltd. (39.2%) and Teck (20%), was sanctioned in the fourth quarter of 2013. Teck's share of project spending from the date of project sanction is estimated at about C$2.94 billion for the period 2014 through 2017, of which C$2.3 billion was left to spend at Dec. 31, 2014. Production is not anticipated to start before the end of 2017 but is expected to be at 90% capacity within 12 months.

Although oil prices remain under near-term pressure, Fitch acknowledges the diversification benefits of petroleum and recognizes the quality of the Fort Hills project. The project is expected to have cash costs in the range of C$20-C$24/barrel of bitumen and a 50-year mine life.

Total capital guidance for the year is C$2.3 billion including C$775 million of capitalized stripping and C$490 million of sustaining capital.

Oversupply in Metallurgical Coal:

The outlook for metallurgical coal prices is weak given persistent oversupply. Fitch expects this condition to persist through 2015 and result in lower profits and cash flow. Teck guides that a $1/tonne change in its coal realizations impacts profits by C$21 million. For 2014, Teck realized $115/tonne on its coal sales on average. Fitch believes this could fall to $110/tonne in 2015 before recovering to the $125 level in 2017. Fitch expects operating EBITDA to be about US$2.9 billion in 2015 and negative FCF generation of as much as C$1.1 billion in 2015 after C$2.3 billion in capital expenditures and C$518 million in dividends.

Adequate Liquidity:

At Dec. 31, 2014, liquidity included US$3 billion available under the revolving credit facility maturing in July 2019 and C$2 billion in cash on hand. The credit facilities require Teck to maintain a debt-to-total capitalization ratio of not more than 0.5x. At Dec. 31, 2014, the ratio was 0.31x.

Scheduled debt maturities over the next five years are C$428 million in 2015, C$7 million in 2016, C$701 million in 2017, C$584 million in 2018 and C$583 million in 2019. Fitch expects the 2015 and 2017 maturities to be refinanced.

FCF could be negative in 2016 and 2017 depending on commodity prices and the timing of development spending. Fitch expects that the company will continue to fund its share of Fort Hills and delay much of the other discretionary capital spending while the price environment is weak. The company has undeveloped projects and non-core assets that could be monetized. Absent material recovery in commodity prices, Fitch anticipates asset sales, cuts to the dividend or additional borrowings will be required to fund Fort Hills by 2017. Fitch would not expect material repayment of debt in advance of 2019.

High Financial Leverage:

Fitch expects funds from operations (FFO) adjusted leverage to be high for the rating while coal prices are below $140/tonne. For the latest 12 months (LTM) ended Dec. 31, 2014, FFO adjusted leverage was 4x and total debt of C$8.4 billion to operating EBITDA of C$2.5 billion was 3.3x. The company targets total debt/EBITDA of less than or equal to 2.5x on average.

Key Assumptions:

--Production at guidance and fairly flat after 2015;

--Coal and Copper unit costs decline with currency and fuel impacts as well as cost initiatives;

--Fitch's Mid-cycle Commodity Price Assumptions for commodities prices;

--Metallurgical coal realizations assumed to be US$110/tonne in 2015, US$120/tonne in 2016 and US$125/tonne in 2017;

--Capital expenditures at guidance, and fairly flat through 2017 given Fort Hill's spending.

Rating Sensitivities:

Positive: Future developments that may, individually or collectively, lead to positive rating actions include:

--A sustainable meaningful reduction in debt and financial leverage.

Negative: Future developments that may, individually or collectively, lead to negative rating actions include:

--A leveraged acquisition, substantial share repurchases, or expectations that FFO adjusted leverage would be sustained above 3.5x for an extended period;

--Failure to make progress toward reducing expected negative FCF to below C$500 million/year while building Fort Hills; this may come from reductions in dividends or asset sales with proceeds applied to deleveraging.

Fitch has downgraded the following ratings:

--Issuer Default Rating (IDR) to 'BBB-' from 'BBB';

--US$3 billion bank credit facility to 'BBB-' from 'BBB';

--Senior unsecured notes to 'BBB-' from 'BBB'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Relevant Research:

--'Corporate Rating Methodology' (May 2014).

--'Updating Fitch's Mid-Cycle Commodity Price Assumptions' (July 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Updating Fitch's Mid-Cycle Commodity Price Assumptions

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749419

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=983147

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Fitch Ratings
Primary Analyst
Monica M. Bonar
Senior Director
+1 212-908-0579
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Gregory Fodell
Associate Director
+1 312-368-3117
or
Committee Chairperson:
Mark C. Sadeghian, CFA
Senior Director
+1 312-368-2090
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
[email protected]
Elizabeth Fogerty, +1 212-908-0526
[email protected]

Source: Fitch Ratings

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