NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the Issuer Default Rating (IDR) of Teck Resources Limited (Teck; NYSE: TCK; TSE: TCKb) at 'BBB' along with Teck's outstanding debt. A full list of rating actions follows at the end of this release.
The Rating Outlook has been revised to Negative from Stable.
KEY RATING DRIVERS
The ratings reflect Teck's strong liquidity, modest financial leverage, long-lived reserves, leading low cost position in zinc, its leading position in the seaborne hard metallurgical coal market, and solid core position in copper.
Globally, Teck is the second largest seaborne hard coking coal producer after BHP-Mitsubishi Alliance and is in the second quartile on the cost curve (FOB port). Globally, Teck is the tenth largest copper producer with about average costs and the third largest zinc producer, in the lowest quartile on costs. Mine lives are generally over 20 years.
Coal accounted for 49% and copper accounted for 36% of segment operating EBITDA in 2013. Canada accounted for 62% of 2013 gross profit before depreciation and amortization by region, while those in the U.S. accounted for 11%, Chile 10% and Peru 16%.
Teck guided to C$1.1 billion in new mine development for 2014 including C$850 million for the Fort Hills oil sands project in Canada, and C$105 million for its other energy projects. The Fort Hills project, a partnership among Suncor Energy Inc. (40.8%), Total E&P Canada Ltd. (39.2%) and Teck (20%), was sanctioned in the fourth quarter of 2013. Teck's share of the project spending is estimated at C$2.94 billion for the period 2014 through 2017. Production is not anticipated to start before the end of 2017 but is expected to be at 90% capacity within 12 months.
Fitch acknowledges the diversification benefits of petroleum and recognizes the quality of the Fort Hills project. The project is expected to have cash costs in the range of C$20-C$24/barrel of bitumen and a 50-year mine life.
Total capital guidance for the year is C$2.6 billion including C$700 million of capitalized stripping and C$620 million of sustaining capital.
Oversupply in Metallurgical Coal
The outlook for metallurgical coal prices is weak given persistent oversupply. Fitch expects this condition to persist through 2014 and result in lower profits and cash flow. Teck guides that a $1/tonne change in its coal realizations impacts profits by C$19 million. For 2013, Teck realized $149/tonne on its production on average. Fitch believes this could fall to $135/tonne in 2014. Fitch expects operating EBITDA to fall to $2.8 billion in 2014 and result in negative free cash flow (FCF) generation of as much as C$1.3 billion in 2014 after C$518 million in dividends.
At Dec. 31, 2013, liquidity remained strong with C$2.1 billion available under the revolving credit facility maturing in July 2018 and C$2.8 billion in cash on hand. The credit facilities require Teck to maintain a debt-to-total capitalization ratio of not more than 0.5:1.0. At Dec. 31, 2013, the ratio was 0.29:1.
Scheduled debt maturities over the next five years are C$59 million in 2014, C$350 million in 2015, C$5 million in 2016, C$641 million in 2017 and C$534 million in 2018. Fitch expects the 2015 maturity to be refinanced in the near term.
FCF could be negative in 2015 and 2016 depending on commodity prices and the timing of development spending. Fitch expects that the company will continue to fund its share of Fort Hills and delay much of the other discretionary capital spending while the price environment is weak. The company has undeveloped projects and developed projects that are not producing that could be monetized. Fitch does not expect substantial new borrowing given the level of cash on hand. Fitch does not expect share repurchases or dividend increases in advance of Fort Hills coming into production.
Negative Rating Outlook
Fitch expects funds from operations (FFO) adjusted leverage to be high for the rating while coal prices are below $155/tonne. For the latest 12 months (LTM) ended Dec. 31, 2013, FFO adjusted leverage was 2.9x and total debt of C$7.7 billion-to-operating EBITDA of C$3.4 billion was 2.3x. The company targets Total Debt/EBITDA of less than or equal to 2.5x on average. The Negative Outlook reflects the possibility that coal prices remain weak beyond 2014. Fitch expects Teck to show good cost control and capital discipline recognizing the stickiness of the Fort Hills spending.
Positive: Not anticipated but future developments that may, individually or collectively, lead to positive rating actions include:
--A sustainable meaningful reduction in debt and financial leverage.
Negative: Future developments that may, individually or collectively, lead to negative rating actions include:
-- A leveraged acquisition, substantial share repurchases, or expectation that FFO adjusted leverage would be sustained above 2.5x at the end of and beyond 2015.
Fitch affirms Teck's ratings as follows:
--IDR at 'BBB';
--$2 billion bank credit facility at 'BBB';
--Senior unsecured notes at 'BBB'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (August 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage