Fitch Ratings said Oct. 13 that it has downgraded the Issuer Default Rating (IDR) of Teck Resources Ltd. (Teck; NYSE: TCK; TSE: TCKb), Canada’s largest producer of metallurgical coal, to ‘BB+’ from ‘BBB-‘ along with Teck’s outstanding debt.
The Rating Outlook remains Negative. About C$9.1 billion in debt and US$4.2 billion in senior unsecured credit facilities are affected by these rating actions.
With the economic slowdown in China, Fitch believes there is an elevated risk that metal and metallurgical coal prices will be lower for longer, delaying Teck’s ability to generate free cash flow (FCF) and reduce financial leverage to levels where funds from operations (FFO) adjusted leverage is less than 3x and FFO fixed charge coverage is greater than 6x through 2020.
The ratings reflect Teck’s elevated financial leverage, strong liquidity, long-lived reserves, leading low cost position in zinc, leading position in the seaborne metallurgical coal market, and solid core position in copper. The ratings also reflect weak met coal pricing and softness in copper and zinc, as well as a Fitch belief that the company is likely to experience limited capex flexibility given required spending for the Fort Hills oil sands project in western Canada through 2017.
Globally, Teck is the second largest seaborne hard coking coal producer after the BHP-Mitsubishi Alliance out of Australia and is at about the mid-point of the cost curve (FOB port). Teck is in the top 15 largest copper producers, globally, with about average costs, and is the third largest zinc producer, in the lowest quartile on costs. Mine lives are generally over 20 years.
Coal accounted for 33% and copper accounted for 39% of segment operating EBITDA in 2014. Canadian operations accounted for about 52% of 2014 gross profit before depreciation by region. Remaining operations are in the U.S. (22%), Chile (10%) and Peru (16%).
The outlook for metallurgical coal prices is weak given persistent oversupply. Fitch expects this condition to persist through 2016 and result in lower profits and cash flow. Teck guides that a US$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. For the first six months of 2015, Teck realized US$101/tonne and Fitch believes this could fall further before recovering in 2017. In May 2015, Teck announced rotating shutdowns totalling three weeks in the third quarter at its metallurgical coal mines. Further steps may be taken to reduce production in the fourth quarter unless the supply-demand balance improves, Fitch noted.
Fitch assumes hard coking coal benchmark prices to be US$95/tonne in 2016, US$100/tonne in 2017, US$110/tonne in 2018, and US$115/tonne thereafter.