Fitch Ratings has downgraded the Issuer Default Rating (IDR) of Teck
Resources Limited (Teck; NYSE: TCK; TSE: TCKb) to 'BB+' from 'BBB-'
along with Teck's outstanding debt. The Rating Outlook remains Negative.
About C$9.1 billion in debt and US$4.2 billion in senior unsecured
credit facilities are affected by these rating actions.
A full list of rating actions follows at the end of this release.
With the slowdown in China, Fitch believes there is an elevated risk
that metal and metallurgical coal prices will be lower for longer,
delaying Teck's ability to generate free cash flow (FCF) and reduce
financial leverage to levels where funds from operations (FFO) adjusted
leverage is less than 3x and FFO fixed charge coverage is greater than
6x through 2020.
KEY RATING DRIVERS
The ratings reflect Teck's elevated financial leverage, strong
liquidity, long-lived reserves, leading low cost position in zinc,
leading position in the seaborne metallurgical coal market, and solid
core position in copper. The ratings also reflect weak metallurgical
coal pricing and softness in copper and zinc, as well as our belief that
the company is likely to experience limited capex flexibility given
required spending for the Fort Hills project through 2017.
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). Teck is in the top 15 largest copper producers,
globally, with about average costs, and is the third largest zinc
producer, in the lowest quartile on costs. Mine lives are generally over
Coal accounted for 33% and copper accounted for 39% of segment operating
EBITDA in 2014. Canadian operations accounted for about 52% of 2014
gross profit before depreciation by region. Remaining operations are in
the U.S. (22%), Chile (10%) and Peru (16%).
Oversupply in Metallurgical Coal:
The outlook for metallurgical coal prices is weak given persistent
oversupply. Fitch expects this condition to persist through 2016 and
result in lower profits and cash flow. Teck guides that a US$1/tonne
change in its coal realizations impacts profits by C$21 million. For
2014, Teck realized US$115/tonne on its coal sales on average. For the
first six months of 2015, Teck realized US$101/tonne and Fitch believes
this could fall further before recovering in 2017. In May 2015, Teck
announced rotating shutdowns totalling three weeks in the third quarter
at their metallurgical coal mines. Further steps may be taken to reduce
production in the fourth quarter unless the supply-demand balance
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. (50.8%), Total E&P Canada Ltd.
(29.2%) and Teck (20%), was sanctioned in the fourth quarter of 2013.
Teck's share of the project spending from the date of project sanction
is estimated at about C$2.94 billion for the period 2014 through 2017.
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, excluding sustaining capex of
roughly C$3/barrel, and a 50-year mine life.
Total capital guidance for the year is C$2.3 billion including C$710
million of capitalized stripping and C$490 million of sustaining capital.
High Financial Leverage:
Fitch expects FFO adjusted leverage to be above 3x while coal prices are
below US$125/tonne. For the latest 12 months (LTM) ended June 30, 2015,
FFO adjusted leverage was 4.25x, FFO fixed charge coverage was about 5x,
and total debt of C$9.1 billion-to-operating EBITDA of C$2.5 billion was
3.6x. The company targets total debt/EBITDA of less than or equal to
2.5x on average.
--Production at reduced guidance and fairly flat after 2015;
--Coal and copper unit cost decline with currency and fuel impacts as
well as cost initiatives;
--Fitch's mid-cycle commodity price assumptions;
--Hard coking coal benchmark prices assumed to be US$95/tonne in 2016,
US$100/tonne in 2017, US$110/tonne in 2018, and US$115/tonne thereafter;
--Capital expenditures at guidance and fairly flat through 2017 given
Fort Hill's spending.
Positive: Future developments that may, individually or collectively,
lead to positive rating actions include:
--The metallurgical coal market returns to balance faster than expected.
--A sustainable meaningful reduction in debt and financial leverage.
Negative: Future developments that may, individually or collectively,
lead to negative rating actions include:
--Expectations of reduced economics on the Fort Hills project.
--Expectations that FFO adjusted leverage would be sustained above 4x
for an extended period.
At June 30, 2015, liquidity included US$3 billion available under the
revolving credit facility (RCF) maturing in July 2020, US$1.2 billion
available under the RCF maturing in June 2017, and C$1.3 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
On July 9, 2015, Teck announced that its 90%-owned subsidiary, Compania
Minera Teck Carmen de Andacollo, entered into a long-term gold off-take
agreement with a subsidiary of Royal Gold, Inc. generating net proceeds
of US$162 million.
On Oct. 7, 2015, Teck announced that it and a subsidiary entered into a
long-term streaming agreement with a subsidiary of Franco-Nevada
Corporation linked to production at the Antamina mine. According to the
announcement, Franco-Nevada will make an upfront payment of US$610
million to Teck and will pay 5% of the spot price at the time of
delivery for each ounce of silver delivered under the agreement.
As of Dec. 31, 2014, scheduled debt maturities over the next five years
are C$419 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
maturity to be repaid and 2017 maturities to be refinanced.
Fitch expects operating EBITDA to be about C$2.1 billion in 2015 and
negative FCF generation of as much as C$1 billion in 2015 after C$2.3
billion in capital expenditures and C$345 million in dividends.
Fitch expects FCF to be negative in 2016 and 2017 despite the cut in
semi-annual dividends per share from C$0.45 to C$0.15 announced in April
2015. 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.
Absent material recovery in commodity prices, Fitch anticipates asset
sales, additional cuts to the dividend or additional borrowings will be
required to fund Fort Hills by 2017. Fitch would not expect material
reduction of debt in advance of 2019.
FULL LIST OF RATING ACTIONS
--Issuer Default Rating (IDR) downgraded to 'BB+' from 'BBB-';
--Senior unsecured credit facilities downgraded to 'BB+' from 'BBB-' and
assigned a Recovery Rating of 'RR4';
--Senior unsecured notes downgraded to 'BB+' from 'BBB-' and assigned a
Recovery Rating of 'RR4'.
The Rating Outlook remains Negative.
Additional information is available on www.fitchratings.com.
--'Updating Fitch's Mid-Cycle Commodity Price Assumptions' (October
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
Updating Fitch's Mid-Cycle Commodity Price Assumptions
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