DBRS Morningstar Confirms Teck Resources Limited at BBB with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed Teck Resources Limited’s (Teck or the Company) Issuer Rating and Senior Unsecured Notes rating at BBB with Stable trends. The confirmation is as a result of (1) Teck’s business risk assessment remaining robust for the ratings as the Company advances its Quebrada Blanca Phase Two (QB2) expansion toward completion, notwithstanding the delay caused by the Coronavirus Disease (COVID-19) pandemic and (2) Teck’s manageable funding structure for the QB2 project that includes a USD 2.5 billion limited recourse project financing facility that as at June 30, 2020, had been drawn down by USD 438 million and Teck’s debt levels remaining manageable with only $353 million coming due before 2030. The Stable trends have been confirmed because Teck’s credit metrics remain in line with the ratings despite the weakness in steelmaking coal prices and the incremental debt from the QB2 project. As well, 2020 operating cash flow and EBITDA are expected to remain moderately above the 2015 trough before recovering in 2021 on expectations of higher commodity prices. Additionally, DBRS Morningstar expects that the cash flow from QB2 is expected to be able to fund the amortization payments due on the project finance facility.

The advent of the coronavirus pandemic has had a mixed impact on the mining industry as many mining operations have experienced lockdowns and other disruptions to normal business operations while the resultant reduction in supply of these metal and mineral commodities has driven the strong recovery in prices from the lows seen March 2020, with copper and zinc specifically up approximately 45% and 40%, respectively. The exception has been steelmaking coal, which has seen benchmark Australian prices bottom at just over USD 100 per tonne in May 2020 before recovering moderately through the summer. The impact of the lower steelmaking coal prices has been one of Teck’s biggest financial challenges with the gross profit from the steelmaking coal segment declining by $1.9 billion or 67% in the last 12 months (LTM) ending June 30, 2020, compared with LTM June 30, 2019. The Bloomberg consensus steelmaking coal price forecast (as of September 3, 2020) is for prices to remain at approximately USD 115 per tonne through the rest of 2020 and to move moderately higher in 2021 to the USD 125 per tonne range. Under this pricing scenario, DBRS Morningstar expects Teck’s credit metrics to remain supportive of the current rating before improving moderately in 2022.

That said, based on Teck’s business risk profile remaining stable, DBRS Morningstar’s analysis indicates that it would require an across-the-board commodity price decline below current consensus of approximately 25% for a year before Teck’s credit metrics would deteriorate to a level that could trigger a negative rating action. While currently unlikely, a positive rating action could occur if there is a clear path for improved, sustained demand for Teck’s principal commodities.

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Mining Industry (August 17, 2020) and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019) , which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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