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Met coal price recovery key to Teck maintaining its Baa3 rating – Moody’s

3rd June 2015

By: Henry Lazenby

Creamer Media Deputy Editor: North America

  

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TORONTO (miningweekly.com) – Canada’s largest diversified miner Teck Resources’ Baa3 credit rating and stable outlook would come under pressure if metallurgical (met) coal prices did not recover, an ‘Issuer in-depth’ report by ratings agency Moody’s Investors Service said this week.

Vancouver-based Teck’s adjusted leverage was expected to remain above 3x through 2016, even if met coal prices rose to $120/t, as expected.

“This leverage is high for the company’s rating, but acceptable in context of a cyclical downturn,” Moody’s analysts said in a report released Monday.

“Despite our expectation for improvement, spot met coal prices have continued to fall in recent weeks to about $85/t. Teck’s proforma adjusted leverage would approach 4.75x in 2016 if current spot prices persist, which would jeopardise its rating.”

Baa3 was the lowest investment grade rating of Moody's long-term corporate obligation ratings. Obligations rated Baa3 were subject to moderate credit risk, considered medium grade and, as such, might possess certain speculative characteristics. The rating one notch higher was A3 and one notch lower was Ba1.

Moody’s expected that supply adjustments from met coal producers would support higher prices. The firm believed that a meaningful portion of the about 300-million tonnes of global seaborne met coal output was uneconomical at current prices. Various producers, including Teck, had announced supply cuts and Moody’s expected that more cuts would occur. Once they were implemented, prices could move higher. 


Meanwhile, strong zinc prices, a lower Canadian dollar and weak oil prices were providing some relief. Spot zinc prices were modestly higher than Moody’s current base price assumptions, while cash flow benefits from the lower Canadian dollar and oil prices also partially offset by weak met coal prices. Copper prices remained near the firm’s current base case assumption. 


Despite controlling the controllable, capital spending for growth was consuming cash, Moody’s had found. While Teck had reduced operating costs, curtailed capital spending and slashed its dividend in response to weak commodity prices, there were by now only limited opportunities left for further operating and capital cost improvements.

Moody’s expected that the company would undertake other initiatives to protect its balance sheet should the commodity-price slump be protracted. Teck’s 20% share of the remaining development spending to complete the Fort Hills energy project, however, would cost about $2-billion and erode most of its surplus cash by late 2016. 


Teck's large scale and exposure to three principal products, coupled with its geographic diversity in stable and mining-friendly jurisdictions, were favourable attributes. Also, the company had sizeable reserves and its coal, copper and zinc operations were well positioned on global cost curves.

Meanwhile, Moody’s noted that the company's liquidity sources exceeded C$5-billion compared with about C$1.7-billion of expected uses through 2016, which provided significant flexibility to manoeuvre through the low commodity-price environment. 


Edited by Tracy Hancock
Creamer Media Contributing Editor

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