Teck Outlook Is Stable
The credit rating company, Fitch, has assigned a BBB- to Canadian miner and shipper, Teck Resources.
A BBB- rating is in the ‘lower medium’ rating, the 10th of Fitch’s 20 rating ranks.
Fitch says in its report that Teck’s ratings output is stable, reflecting Teck's leading positions in zinc, in the seaborne hard metallurgical coal market, and its solid core position in copper. Q4 2009 operating profits before depreciation and pricing adjustments were 39% coal, 39% copper and 22% zinc.
Adjusting the balance sheet for the sale of Teck’s one-third interest in the Wanata Dam hydroelectric facility in British Columbia, debt at Dec. 31, 2009 would be C$6.7 billion or 1.9 times 2009 operating EBITDA of C$3.4 billion. Pro forma for the transaction, Teck's cash balance would have been C$1.3 billion and scheduled debt maturities would have been C$453 million in 2010, C$432 million in 2011 and C$494 million in 2012.
Fitch expects free cash flow (operating cash flow less capital expenditures less dividends) in 2010 to be less than the C$2.7 billion generated in 2009, despite stronger earnings, on higher capital spending (C$1 billion guidance in 2010 versus C$590 million spent in 2009). Free cash generation should be at least C$ 1.1 billion in 2010 and funds from operations (FFO) adjusted leverage should decline from the actual level of 2.1 times at Dec. 31, 2009 given the focus on debt repayment coupled with stronger earnings. Teck repaid nearly C$5 billion in debt in 2009. Fitch does not expect FFO adjusted leverage to exceed 2.5x on average over the next 24 months.
Liquidity is strong with cash on hand of C$1.3 billion, internally generated cash flow and roughly C$1 billion available under credit facilities.
The report points out that Teck does have several development opportunities and therefore capital spending is expected to remain high if the outlook for commodities prices remains favorable. The company has sufficient flexibility to curtail production and delay capital spending.
Fitch points out that Teck is facing headwinds from an appeal to Red Dog's National Pollutant Discharge Elimination System Permit (the NPDES Permit). Red Dog in Alaska accounts for the bulk of zinc production and generated C$473 million in operating profit before depreciation in 2009. Until the U.S. EPA issues the notice, Teck will not know whether and to what extent access to Aqqaluk, the next deposit to be mined at Red Dog, will be affected by the appeal. The current operating plan calls for continuing to mine the Main Deposit under existing permits until mid 2011. However, in order to maintain efficient production rates, Main Deposit ore will eventually need to be supplemented with ore from Aqqaluk. If permit delays extend beyond May 2010, the transition plan will be affected and production at Red Dog would likely be curtailed in October 2010. Production would not be expected to resume until the appeal is resolved and the mine can be restarted, which could take up 18 months unless the appeal is withdrawn. Fitch does not believe a temporary curtailment of Red Dog would affect the rating.
The Stable Outlook reflects Fitch's view that Teck will continue to focus on debt reduction and resume dividends at a modest level in the second half of 2010.
A negative rating action could follow from a leveraged acquisition or other recapitalizing event. A positive rating action could follow further sustainable reduction in financial leverage.
Teck owns, or has interests in, 13 mines in Canada, the U.S., Chile and Peru, as well as one metallurgical complex in Canada.
