In part due to continued weakness in export metallurgical coal pricing, Fitch Ratings said April 17 that it has downgraded the Issuer Default Rating (IDR) of Teck Resources Ltd. (Teck; NYSE: TCK; TSE: TCKb) to ‘BBB-‘ from ‘BBB’ along with Teck’s outstanding debt.
About C$8.4 billion in debt and US$3 billion in commitments are affected by these rating actions. The downgrade reflects financial leverage expected to remain higher than would be consistent with a ‘BBB’. The Stable Outlook reflects Fitch’s expectations that Teck will cut costs and capital expenditures, sell assets and/or cut dividends to reduce the size of free cash flow (FCF) burn should coal and copper prices remain weak.
The ratings reflect Teck’s strong liquidity, elevated financial leverage, long-lived reserves, leading low-cost position in zinc production, its leading position in the seaborne hard metallurgical coal market, and solid core position in copper. The ratings also reflect weak metallurgical coal pricing and softness in copper somewhat offset by strengthening in zinc. Teck is Canada’s largest producer of met coal.
Globally, Teck is the second-largest seaborne hard coking coal producer after BHP-Mitsubishi Alliance (out of Australia) and is at about the mid-point of the cost curve (FOB port), Fitch noted. Globally, Teck is the tenth largest copper producer with about average costs and the third-largest zinc producer, in the lowest quartile on costs. Coal accounted for 33% and copper accounted for 39% of segment operating EBITDA in 2014.
The outlook for metallurgical coal prices is weak given persistent oversupply. Fitch said it expects this condition to persist through 2015 and result in lower profits and cash flow. Teck has given guidance that a $1/tonne change in its coal realizations impacts profits by C$21 million. For 2014, Teck realized US$115/tonne on its coal sales on average. Fitch believes this could fall to US$110/tonne in 2015 before recovering to the $125 level in 2017. Fitch expects operating EBITDA to be about US$2.9 billion in 2015 and negative FCF generation of as much as C$1.1 billion in 2015 after C$2.3 billion in capital expenditures and C$518 million in dividends.