Fitch Affirm's Teck's IDR at 'BBB'; Outlook Negative
NEW YORK -- March 21, 2014
Fitch Ratings has affirmed the Issuer Default Rating (IDR) of Teck Resources
Limited (Teck; NYSE: TCK; TSE: TCKb) at 'BBB' along with Teck's outstanding
debt. A full list of rating actions follows at the end of this release.
The Rating Outlook has been revised to Negative from Stable.
KEY RATING DRIVERS
The ratings reflect Teck's strong liquidity, modest 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
Globally, Teck is the second largest seaborne hard coking coal producer after
BHP-Mitsubishi Alliance and is in the second quartile on 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 49% and copper accounted for 36% of segment operating
EBITDA in 2013. Canada accounted for 62% of 2013 gross profit before
depreciation and amortization by region, while those in the U.S. accounted for
11%, Chile 10% and Peru 16%.
Teck guided to C$1.1 billion in new mine development for 2014 including C$850
million for the Fort Hills oil sands project in Canada, and C$105 million for
its other energy projects. 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 the project spending
is estimated at 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.
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$2.6 billion including C$700 million
of capitalized stripping and C$620 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 2014 and result in lower
profits and cash flow. Teck guides that a $1/tonne change in its coal
realizations impacts profits by C$19 million. For 2013, Teck realized
$149/tonne on its production on average. Fitch believes this could fall to
$135/tonne in 2014. Fitch expects operating EBITDA to fall to $2.8 billion in
2014 and result in negative free cash flow (FCF) generation of as much as
C$1.3 billion in 2014 after C$518 million in dividends.
At Dec. 31, 2013, liquidity remained strong with C$2.1 billion available under
the revolving credit facility maturing in July 2018 and C$2.8 billion in cash
on hand. The credit facilities require Teck to maintain a debt-to-total
capitalization ratio of not more than 0.5:1.0. At Dec. 31, 2013, the ratio was
Scheduled debt maturities over the next five years are C$59 million in 2014,
C$350 million in 2015, C$5 million in 2016, C$641 million in 2017 and C$534
million in 2018. Fitch expects the 2015 maturity to be refinanced in the near
FCF could be negative in 2015 and 2016 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 developed projects that are not producing that could
be monetized. Fitch does not expect substantial new borrowing given the level
of cash on hand. Fitch does not expect share repurchases or dividend increases
in advance of Fort Hills coming into production.
Negative Rating Outlook
Fitch expects funds from operations (FFO) adjusted leverage to be high for the
rating while coal prices are below $155/tonne. For the latest 12 months (LTM)
ended Dec. 31, 2013, FFO adjusted leverage was 2.9x and total debt of C$7.7
billion-to-operating EBITDA of C$3.4 billion was 2.3x. The company targets
Total Debt/EBITDA of less than or equal to 2.5x on average. The Negative
Outlook reflects the possibility that coal prices remain weak beyond 2014.
Fitch expects Teck to show good cost control and capital discipline
recognizing the stickiness of the Fort Hills spending.
Positive: Not anticipated but 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 expectation that
FFO adjusted leverage would be sustained above 2.5x at the end of and beyond
Fitch affirms Teck's ratings as follows:
--IDR at 'BBB';
--$2 billion bank credit facility at 'BBB';
--Senior unsecured notes at 'BBB'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (August 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
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Monica M. Bonar
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Christopher M. Collins, CFA
Sean T. Sexton, CFA
Brian Bertsch, +1-212-908-0549 (New York)
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