Teck's Long Climb Out of Debt Puts Investment Grade in Sight

  • Canadian miner upgraded for a second time this year, to Ba2
  • ‘On the right path’ as it trims debt and boosts cash flow

Teck Resources Ltd.’s latest credit-rating hike could signal a path back to investment grade after nearly two years in the junk pile.

The Vancouver-based mining company was upgraded for the second time this year to Ba2, the second-highest level of junk, from Ba3 by Moody’s Investors Service on Tuesday. The company’s roughly C$2 billion ($1.6 billion) in expected free cash flow this year and its C$1.65 billion debt reduction year-to-date contributed to its improving credit profile, Moody’s said in a statement.

“They’re on the right path in terms of getting back to investment grade,” Carson Tong, senior investment analyst at CI Investments’ Signature Global Asset Management unit, said by phone from Toronto. “Maintaining a prudent financial-leverage metric -- which I think they’re already at, but maintaining that over several quarters -- would be helpful.”

Teck was cut to junk in September 2015 but an improving picture for commodities pushed it to the best performance for a Canadian stock in seven years, with its bonds returning more than 100 percent to investors, in 2016. Strengthening metallurgical coal, copper, and zinc prices have allowed it to increase cash flow and pay down debt.

The company has taken advantage of the improving commodity cycle to lower its debt and strengthen its financial position, Teck spokesman Chris Stannell said in an email.

“We believe that over the long term, our diversified commodity portfolio; our high-quality, long-life assets; along with our strong position on the cost curve are all characteristics of a company that warrants an investment-grade rating,” he said.

Moody’s estimates the company’s leverage ratio will be about 2.5 times adjusted debt to a measure of earnings by the end of 2018, but it could get close to five times if metal prices, especially volatile met coal, take a downward turn. Metal prices have been the deciding factor driving the company’s cash flows and ability to service its debt.

‘Evolving Story’

An upgrade to Ba1 would be considered if the company can reduce the volatility in its financial performance through product diversity, prudent liquidity and capital structure planning, according to Moody’s analyst Jamie Koutsoukis.

“Teck is an evolving story,” she said by phone from Toronto. “Management’s taken very proactive steps to reduce debt and we had to acknowledge that within the rating.”

The company has no material debt repayments until 2022, and has $3.3 billion in available credit facilities, she said. It has C$6.2 billion in debt outstanding, according to data compiled by Bloomberg. Teck is expected to receive C$1.2 billion after closing the sale of its interest in the Waneta Dam, which is positive for the credit rating, she said.

The Fort Hills oil-sands project, a joint venture led by Calgary-based Suncor Energy Inc. in which Teck owns a stake, is expected to produce its first oil at the end of this year. The company is also evaluating an investment in Quebrada Blanca Phase 2, a copper project in South America, and is expected to make a decision early next year, Chief Executive Officer Don Lindsay said on its first-quarter earnings call.

“They’re doing the right things in terms of having ample liquidity, having conservative, low leverage, and diversifying that cash-flow base,” CI Investments’ Tong said.

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