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Related Issuers
Rating Action:

Moody's assigns Baa3 rating to Teck Resources' new notes

23 Jun 2020

Toronto, June 23, 2020 -- Moody's Investors Service, ("Moody's") assigned a Baa3 rating to Teck Resources Limited 's ("Teck") new $550 million of senior unsecured notes due 2030. Proceeds will be used to repay a portion of Teck's outstanding corporate bond indebtedness and for general corporate purposes, which may include reducing amounts outstanding under Teck's revolving line of credit. Teck's existing ratings are unchanged, including its Baa3 senior unsecured note rating. The ratings outlook remains stable.

Assignments:

..Issuer: Teck Resources Limited

....Senior Unsecured Regular Bond/Debenture (Foreign Currency), Assigned Baa3

RATINGS RATIONALE

Teck (Baa3 stable) benefits from 1) good scale (CAD11.9 billion revenue), 2) excellent liquidity, including a large portion of secured funding for its Quebrada Blanca II (QB2) copper project, 3) product and geographic diversity (met coal, copper, zinc, and energy at 14 operating sites), 4) good average cost positions, 5) low geopolitical risk (Canada, Chile, Peru and US), and 6) a more conservative approach to project development and liquidity risk than in the past. Teck is constrained by 1) its exposure to volatile commodity prices (met coal in particular, but also copper and zinc) which can result in large swings in leverage and cash flow 2) execution risk for QB2, and 3) expected elevated leverage (between 4x to 5x) through 2022 as a result of its spending on QB2 and lower commodity prices.

With met coal production expected to be lower in 2020 (21 million tonnes ("mt") compared to 25mt in 2019) and current pricing at about $115 per tonne, Teck is expected to generate materially lower adjusted EBITDA of about CAD1.3 billion in 2020 (CAD4.1 billion in 2019). Combined with an increase in debt to fund QB2 project construction, Teck's leverage will be above Moody's expectations for the rating (about 5x in 2020). As well, QB2 project construction remains partially suspended due to COVID-19 delaying the in service date and increasing costs (the initial four-week construction suspension will cost $75 to $125 million with an eight-week schedule delay, plus an additional $25 to $50 million per month of suspension). Despite these challenges, Teck's good liquidity position and Moody's expectation that leverage will rapidly fall once QB2 begins production support the current rating.

As is typical in the mining industry, Teck is exposed to environmental risks. This includes, but not limited to wastewater discharges, site remediation and mine closure, waste rock and tailings management, and air emissions. The company is subject to environmental laws and regulations in the areas in which it operates. The mining sector overall is viewed as a very high-risk sector for soil/water pollution and land use restrictions and a high-risk sector for water shortages and natural and man-made hazards.

Teck's liquidity is good. Sources of liquidity over the next year total about CAD5.6 billion. Sources include 1) cash of about CAD220 million at March, 31 2020, and 2) CAD5.4 billion available on its US$4 billion committed credit facility (matures November 2024). Teck also has a US$2.5 billion limited recourse project financing facility to fund the development of the QB2 project which closed in November 2019. As at March 31, 2020, the amount drawn under the facility was US$50 million.

Uses of liquidity are Moody's estimate about CAD $2.8 billion of negative free cash flow (using Moody's price sensitivities, including stripping costs, and net of Sumitomo's expected funding at QB2 for the year). There are no material debt maturities until 2030. Moody's expects that Teck will maintain ample cushion to its net debt/capitalization debt covenant.

The stable outlook reflects Moody's expectation that Teck has sufficient funding and liquidity in place to develop its QB2 project through a range of commodity prices with limited financing risk. It also incorporates our expectation that the company will maintain financial discipline regarding expansion capital expenditures and shareholder distributions and maintain good liquidity to mitigate commodity price volatility and project spending risk.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

An upgrade to Baa2 would be considered if Teck is able to reduce its concentration in met coal, which is more volatile than copper or zinc, progress its development of QB2 and maintain strong liquidity even in adverse market conditions. An upgrade would also require (CFO-Dividends)/debt to be consistently at or above 40% (43% at Q1/20) and adjusted debt/EBITDA maintained at or below 2x (1.6x at Q1/20).

The ratings could be downgraded if adjusted debt /EBITDA is sustained above 2.75x (1.6x at Q1/20) and (CFO-Dividends)/debt is sustained below 35% (43% at Q1/20), or if liquidity weakens materially, most likely during adverse market conditions coupled with project spending.

The principal methodology used in this rating was Mining published in September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1089739. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Vancouver, Canada, Teck Resources Limited is a diversified mining company with assets in Canada, the U.S., Peru and Chile. The company is a leading producer of metallurgical coal, operates one of the world's largest zinc mines (Red Dog in Alaska) and also produces a meaningful amount of copper. Revenues were CAD11.9 billion in 2019.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jamie Koutsoukis
Vice President - Senior Analyst
Corporate Finance Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Donald S. Carter, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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