DBRS Morningstar Confirms Teck Resources Limited at BBB, Maintains 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 confirmations are a result of (1) Teck repurchasing USD 650 million of debt with surplus cash and (2) the Quebrada Blanca Phase Two (QB2) expansion project that is likely to deliver additional copper production later this year or in early 2023. The Stable trends reflect DBRS Morningstar’s view that Teck’s debt levels remain manageable with (1) only $139 million in term debt due before 2030 and (2) expectations that cash flow from QB2 is sufficient to fund semiannual repayments of QB2 project debt beginning no later than June 2023.

During the last 12 months (LTM) ended June 30, 2022, Teck reported gross profit from its steelmaking coal operations alone of $6,672 million compared with $402 million for the LTM ended June 30, 2021. The main reason for record-high gross profit in the segment is a 186% increase to $445 per tonne in the realized price marginally offset by a 1% decline in shipments. This windfall in cash flow, in DBRS Morningstar’s view, is unsustainable as steelmaking coal prices have corrected sharply since June, mainly because of increased supply from China, Mongolia, and Russia. These supplies have reduced demand for North American steelmaking coal. DBRS Morningstar notes Chinese imports of Mongolian steelmaking coal will likely rise following the recent start-up of the 267-kilometre long Tavantolgoi–Gashuun Sukhait railway line that extends from Tavan Tolgoi in Mongolia to the Chinese border. Tavan Tolgoi is one of the world’s largest thermal and steelmaking coal deposits but is relatively underdeveloped. With the operating rail link, 30 million to 50 million tonnes of steelmaking coal could be shipped annually, doubling Mongolia’s production and potentially replacing a significant proportion of North America’s steelmaking coal exports to China. Additionally, because of the significant increase in energy costs in Europe following Russia’s invasion of Ukraine and lower hydroelectric power availability in China, steel production has fallen. This drop could cause demand and pricing for Teck’s steelmaking to come under pressure.

Based on Teck’s favourable business risk profile, DBRS Morningstar notes it would require an across-the-board commodity price decline of 50% through 2024, from current consensus forecasts, before Teck’s credit metrics deteriorate to the high end of the non-investment-grade category, which could cause a negative rating action. A positive rating action is possible if there is a clear defined path for improving the Company’s business risk profile through either organic growth opportunities or acquisitions.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

Environmental Factors
DBRS Morningstar considered carbon and greenhouse gas (GHG) costs as a relevant environmental factor for Teck. The Company owns an interest in the carbon-intensive Fort Hills oil sands operations that are subject to ever-increasing environmental regulations targeting the reduction of GHG emissions that will likely limit the growth potential and increase costs.

DBRS Morningstar also considered emissions, effluents, and waste as a relevant environmental factor for Teck. The Company has a long-term water treatment project at its operations in the Elk Valley in British Columbia to remove selenium, nitrates, and other deleterious elements and expects the project to cost approximately $200 million per year through 2025. But it will improve Teck’s ability to develop new coal mining areas.

There were no social, and governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

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

The methodology is Global Methodology for Rating Companies in the Mining Industry (August 30, 2022; https://www.dbrsmorningstar.com/research/402159), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022; https://www.dbrsmorningstar.com/research/396929).

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

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 not 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.

This is an unsolicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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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