(The following statement was released by the rating agency)
NEW YORK, May 24 (Fitch) Fitch Ratings has assigned a 'BB-/RR3' rating to Teck
Resources Limited's (Teck; NYSE: TCK; TSE: TCKb) issue of senior unsecured notes
guaranteed by certain Teck subsidiaries. The new notes will rank pari passu with
the company's revolving credit and bilateral facilities, and ahead of the senior
unsecured notes that are not guaranteed. Proceeds of the new notes are to be
used to fund the cash tender offers to purchase up to $1 billion aggregate
principal amount of the 3.15% notes due 2017, 3.85% notes due 2017, 2.50% notes
due 2018 and 3.0% notes due 2019 announced May 23, 2016.
Fitch has also upgraded the $3 billion revolving credit facility (RCF) due 2020
and the $1.2 billion RCF due 2017 to 'BB-/RR3' and downgraded Teck's unsecured
non-guaranteed notes to 'B-/RR6'.
In addition, Fitch has affirmed Teck's Issuer Default Rating (IDR) at 'B+'. The
Rating Outlook remains Negative. A full list of rating actions follows at the
end of this release.
About C$9.6 billion in debt and $5.2 billion in RCFs is affected by these rating
actions.
The ratings reflect expectations for sizable cash burn, elevated financial
leverage, weak demand growth and excess supply in metallurgical coal and to a
lesser degree in copper and zinc. Teck has been focused on reducing costs and
capital spending to preserve cash while funding Fort Hills during a weak
commodity price environment. The company has also been monetizing precious
metals streams, cut its dividends and stated that it could monetize
infrastructure assets but that it would not raise equity finance.
KEY RATING DRIVERS
Liquidity
Fitch estimates cash burn for 2016 and 2017 could exceed C$2 billion in
aggregate. Near-term debt maturities are C$28 million in 2016 and C$855 million
in 2017 (comprised primarily of two $300 million notes). In addition, Fitch
estimates that Teck could require an additional C$457 million of letters of
credit (LOCs) in 2016 and an additional C$100 million in 2017 in connection with
the Fort Hills project. Fitch estimates Teck will end 2017 with C$3 billion in
liquidity given the transactions announced May 23 and assuming no asset sales
and no diminution of the bilateral facilities.
At March 31, 2016, liquidity included $3 billion available under the RCF
maturing in July 2020, $415 million under the $1.2 billion RCF maturing in June
2017, and C$1.5 billion in cash on hand. Fitch estimates minimum required cash
to be C$400 million. Teck has announced that it has received commitments to
amend the $1.2 billion RCF, extending $1 billion of commitments to June 2019.
The credit facilities require Teck to maintain a debt-to-total capitalization
ratio of not more than 0.5x. Teck reported that the ratio was 0.35x at March 31,
2016. Fitch does not expect this covenant to be breached, but notes that the
covenant calculation does not add-back non-cash impairments.
In addition, as of March 31, 2016, Teck has C$1.45 billion in LOCs issued under
$1.65 billion in uncommitted bilateral facilities, some of which can be
cancelled with 90 days' notice.
The subsidiary guarantees supporting the proposed new notes also support the
revolving credit and bilateral facilities.
Recovery Analysis
Fitch assumes a going-concern EBITDA of C$1.5 billion which compares to 80% of
the LTM EBITDA of C$1.9 billion, a going-concern enterprise value of 5x the
going-concern EBITDA for $7.7 billion, and 10% of enterprise value for
administrative claims. Fitch assumes that the guaranteed facilities and notes
will have priority over the non-guaranteed notes, and that in times of distress,
the full amount of the committed facilities would be used and the uncommitted
and undrawn facilities would be cancelled. The result of this analysis shows
good ('RR3') recovery for the guaranteed facilities even after using full
availability under secured and guaranteed debt baskets, but poor recovery
('RR6') for the unguaranteed facilities. Prior analysis showed average recovery
('RR4') for all notes and facilities given that these ranked equally.
The amendment to the $1.2 billion facility will limit the amount of secured and
guaranteed debt. The maximum amount of secured debt will be equal to the greater
of 4% of consolidated net tangible assets and $1 billion. The maximum amount of
guaranteed debt (including secured debt) will be equal to the greater of 9% of
consolidated net tangible assets and $2.25 billion. There are carve-outs to each
of the restrictions.
Negative pledge clauses under the company's existing debt indentures prohibit
granting of security on principal property and shares of restricted subsidiaries
unless the notes are equally and rateably secured with standard exemptions
including indebtedness up to 10% of consolidated net tangible assets.
Principal property includes the Elkview Mine, the Fording River Mine, the
Highland Valley Copper Mine, the Red Dog Mine and any other mineral property and
other fixed assets located in Canada or the U.S. which is greater than 10% of
consolidated net tangible assets. Restricted subsidiaries are those with
substantially all assets or operations in Canada or the U.S. and which own or
lease a principal property or primarily own or hold securities of restricted
subsidiaries. Teck reports that as of March 31, 2016, consolidated net tangible
assets were C$32 billion, 10% of which is approximately C$3.2 billion.
De-Levering
Absent asset sales, Fitch expects leverage to increase with borrowing to finance
the Fort Hills construction and ramp-up. At March 31, 2016, total debt-to-EBITDA
was 4.7x and this figure could rise to over 6x before gradually dropping to
below 4x by the end of 2019 with output from Fort Hills and the aid of improved
commodity prices.
Commodity Price Exposure
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 $1/tonne change in its coal realizations
impacts profits by C$23 million. For 2015, Teck realized $93/tonne on its coal
sales on average. Fitch expects the average hard coking coal benchmark to be
$85/tonne in 2016, down from $102/tonne on average in 2015. Teck guides to a
range of total cost per tonne of C$91-C$97 ($65-$69 at an exchange rate
assumption of C$1.4=$1) compared with C$99 ($76 at the exchange rate of
C$1.3=$1) in 2015. Total costs in the first quarter of 2016 were C$101/tonne.
Teck reports that a $0.01/lb. change in copper prices impacts profits by C$6
million. Average copper realizations were $2.50/lb. in 2015 compared with the
year to April 29, 2016 average of $2.14/lb. and Fitch's 2016 assumption of
$2.18/lb.
Teck reports that a $0.01/lb. change in Zinc prices impacts profits by C$9
million. Average zinc realizations were $0.87/lb. in 2015 compared with the year
to April 29, 2016 average of $0.78/lb. and Fitch's 2016 assumption of $0.78/lb.
Fort Hills
Teck guides to C$960 million in spending on the Fort Hills oil sands project in
Canada in 2016 out of a total remaining spend of C$1.3 billion (C$1 billion
remaining as of April 25, 2016). The Fort Hills project is a partnership among
Suncor Energy Inc. (50.8%), Total E&P Canada Ltd. (29.2%) and Teck (20%).
Production is not anticipated to start before the end of 2017 but is expected to
be at 90% capacity within 12 months.
The project is expected to have cash costs in the range of C$20 -C$24/barrel of
bitumen, excluding sustaining capex of roughly C$3/barrel, and a 50-year mine
life. Fitch estimates break even at $45/barrel WTI oil price compared with the
year to April 29, 2016 average of $35.24 and Fitch's 2018 assumption of $55/bbl.
Total capital guidance for the year is C$1.98 billion including C$540 million of
capitalized stripping and C$305 million of sustaining capital.
KEY ASSUMPTIONS
--Production at guidance and fairly flat after 2016;
--Coal and copper unit cost decline with currency and fuel impacts as well as
cost initiatives;
--Fitch's mid-cycle commodity price assumptions for commodities prices;
--Capital expenditures at guidance, and fairly flat through 2017 given the Fort
Hill spending.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to
positive rating actions include:
--Leverage expected to be below 4.3x by the end of 2018.
--The metallurgical coal market returns to balance faster than expected.
--A sustainable, meaningful reduction in debt and financial leverage.
Negative: Future developments that may, individually or collectively, lead to
negative rating actions include:
--Expectations of reduced economics of the Fort Hills project.
--Expectation that available liquidity declines below C$2 billion.
--Expectations that FFO Adjusted leverage would be sustained above 5x for an
extended period.
CORPORATE PROFILE
The credit benefits from Teck's 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 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 37%, zinc accounted for 33% and copper accounted for 30% of
segment operating EBITDA in 2015. Canada accounted for about 55% of 2015 gross
profit before depreciation by region and there are also operations in the U.S.
(21%), Chile (2%) and Peru (14%).
FULL LIST OF RATING ACTIONS
Teck Resources Limited
--Issuer Default Rating (IDR) affirmed at 'B+'/Negative Outlook;
--Senior unsecured guaranteed credit facilities upgraded to 'BB-/RR3' from
'B+/RR4';
--Senior unsecured guaranteed notes assigned a 'BB-/RR3' rating;
--Senior unsecured notes downgraded to 'B-/RR6' from 'B+/RR4'.
Contact:
Primary Analyst
Monica M. Bonar
Senior Director
+1-212-908-0579
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Secondary Analyst
Gregory Fodell
Associate Director
+1-312-368-3117
Committee Chairperson:
Mark C. Sadeghian, CFA
Senior Director
+1-312-368-2090
Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email:
alyssa.castelli@fitchratings.com.
Additional information is available on www.fitchratings.com.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and
Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub.
05 Apr 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879564
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr
_id=1005020
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005020
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&det
ail=31
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING
DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE
AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF
CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE
SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS
SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED
ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH
WEBSITE.