Teck Cut to Junk by Moody’s as Commodity Slump Dims Debt Outlook

  • Falling prices are coinciding with heavy spending commitments
  • Teck sees itself as an investment grade over the long term

Teck Resources Ltd., Canada’s largest diversified miner, was stripped of its investment-grade rating by Moody’s Investors Service as falling prices of everything from coal to zinc overshadow cost-cutting efforts.

Moody’s lowered Teck’s senior unsecured rating to Ba1, the highest junk classification, from Baa3, while maintaining the outlook at negative, indicating it may cut further. Standard & Poor’s and Fitch Ratings still have Teck on the lowest investment grade.

“We expect prolonged commodity price weakness and sizable investment spending will cause Teck’s financial leverage to remain well in excess of typical investment-grade thresholds through at least 2017,” Moody’s said in a statement Monday.

A global commodity rout has weighed on the prices of the most important commodities that Teck produces: metallurgical coal, copper and zinc. At the same time, the company is shouldering its 20 percent share of construction costs at Suncor Energy Inc.’s C$13 billion ($9.8 billion) Fort Hills oil-sands project in Alberta. Teck forecast in February it would spend C$850 million on Fort Hills this year.  

Return Possible

Moody’s said further downgrades are possible if Teck burns through more cash than expected, or its "robust" liquidity weakens. A return to investment grade status would be possible if commodity prices improved enough to lower debt, relative to its earnings and cash, for a sustained period, it said.

The $750 million in Teck bonds due 2023 have fallen to 77.1 cents on the dollar from 89.9 cents at the end of last year, pushing up yields to 7.92 percent. The gap between Teck yields and an index of investment-grade corporate debt in dollars widened to as much as 5.74 percent points on Aug. 24 from 2.35 percentage points at the end of last year.

Teck reiterated Monday that it has more than C$6.5 billion in cash and credit, that all operations remain cash-flow positive and that it’s taking the necessary steps to emerge stronger from the price slump.

“While our entire industry is currently being impacted by lower commodity prices, we believe that over the long term Teck is an investment grade credit rating company, given our diversified business model and focus on low risk jurisdictions and low cost assets,” it said in an e-mailed statement.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE